Senator HATCH. We will now call as our next witnesses Mr. Kenneth Reed, assistant attorney general of the State of Arizona; Mr. Corrin Shields, the director of the Arizona Consumers Council; and Mr. Lex Hawkins who is the lead plaintiff's attorney in the various cattle cases. We are happy to have you here and delighted to have you with us to enlighten us with your viewpoints regarding this piece of legislation. Mr. Reed? STATEMENT OF KENNETH R. REED, DIRECTOR, ANTITRUST SECTION, OFFICE OF THE ATTORNEY GENERAL, STATE OF ARIZONA Mr. REED. Senator Hatch and members of the subcommittee, thank you very much for allowing me to testify here this morning in support of Senate bill 1874. I am director of the antitrust section of the office of the Arizona attorney general. Our antitrust section has been particularly active in prosecuting antitrust matters in the penal field, in proprietary actions on behalf of the State of Arizona, and also in bringing actions on behalf of consumers in Arizona under rule 23 and the recently enacted parens patriae provision of the Hart-Scott-Rodino Act. I come, then, with some experience and expertise in this area and I hope I can benefit the committee with that. In addition, I have been particularly active in consideration of the Illinois Brick question. Our office, on behalf of 48 of the States, submitted an amicus curiae brief to the Supreme Court in connection with the Illinois Brick decision. I have been a member of the National Association of Attorneys General Committee dealing with this question. I have also been appointed a member of the American Bar Association task force which likewise has been grappling with the Illinois Brick question. In view of the time constraint this morning I would like to confine my remarks to three points. First, the urgency of overruling Illinois Brick and with it in terms of even handedness and fairness also Hanover Shoe. Second, I would like to respond to some of the limiting suggestions presented by opponents of this legislation, most particularly those presented during the April 7 hearing. The third point is that I would like to raise two technical questions addressed to section 4 of the proposed Senate bill 1874. The antitrust treble damage remedy-I think all will concede-is intended to serve two primary purposes. First, the compensation of those injured: to repay the people injured by reason of antitrust violations the amount of injury that they sustained. Second, it also serves a deterrent effect the resources of the FTC, and the resources of the Department of Justice simply are not sufficient to ferret out and prosecute all of the anticompetitive acts affecting our Nation's economy. We must, therefore, rely on private enforcement in order to see that the competitive ideal is furthered. The holding in Illinois Brick that recovery in antitrust cases depends on the formality of privity of contract rather than on the more basic question whether someone was actually injured sacrifices fairness at the altar of expediency. More importantly and more basically, this deserves both the basic purposes underlying the treble damage remedy. To the extent that compensation of injured parties is one of the purposes underlying the treble damage remedy, it is obvious that an approach which depends upon the formality of privity of contract rather than upon injury in fact throws out from the realm of consideration the question of compensation. Moreover and more importantly, the Illinois Brick holding undercuts the fundamental purpose of deterrence. Any across-the-board rule which says either all direct purchasers may sue or all direct purchasers may not sue necessarily will reduce the number of plaintiffs that bring suits to enforce and vindicate the economic principles underlying the Sherman Act. Relying solely upon direct purchasers to vindicate these economic interests is a limitation which detracts from the purpose of deterrence. First, direct purchasers in some cases, not all, may well profit from the ongoing conspiracy. In cases where direct purchasers resell after adding a markup, those purchasers may benefit by the fact that they paid too much because they are able to add a percentage markup on the price they pay. That was a consideration mentioned by the U.S. Court of Appeals for the Ninth Circuit in the Western Liquid Asphalt case when the court commented on the fact that direct purchasers had not joined in that lawsuit to any significant degree. Second, direct purchasers may very well be afraid of the possibility of retaliation if they were to initiate suits against their suppliers. In a number of the cases that our office has prosecuted recently, direct purchasers did receive threats, and were cut off from their suppliers when they brought lawsuits against the supplier. To be sure, there is a remedy here. The remedy would be to hold the supplier in contempt of whatever injunctive order the court may have entered. It may, in fact, increase the damage remedy that the direct purchaser may be able to prosecute. But in the day-to-day sense of operating an ongoing business, the relief by way of damages may be far in the future and the retaliation is immediate to be cut off by the supplier. That kind of retaliation is real and does keep some direct purchasers out of the court house. Finally, there is the question whether the direct purchaser may or may not be part of the conspiracy. If in fact a direct purchaser is a member of two-level conspiracy, he hardly can be expected to bring suit against the supplier. We have seen this phenomenon in at least two cases in our office that we recently prosecuted. One is against the dairy industry in Arizona where we have alleged that the conspiracy involved not only the dairy companies-Borden, Foremost, Carnation, and a local company named Shamrock-but also the chain grocery stores. In that case, which was a class action, over half of the grocery stores opted out of the class for reasons which they did not state but for reasons which I surmise to be the fact that they think they are in the conspiracy. When you are dealing with the possibility of a two-level conspiracy you are not getting much deterrent when you place the burden of enforcement on people who may be members of that conspiracy. The need for repealing Illinois Brick is, therefore, an urgent one. I think in the testimony that you previously heard from Assistant Attorney General Shenefield, he indicated that approximately $205 million of Federal damage claims are endangered by the Illinois Brick decision. The testimony you previously heard from members of the National Association of Attorneys General, an estimate of $200 to $300 million in single damage claims being asserted by State attorneys general are endangered by the Illinois Brick decision. Both of these numbers are very conservative. Further, it is urgent to overturn Illinois Brick in order to revitalize the parens patriae provision House Scott-Rodino Antitrust Act. While the parens patriae provision was not technically before the Supreme Court in the Illinois Brick decision, the Court went out of its way to indicate that that provision was a nullity. In footnote 14 of the Illinois Brick decision, the Court said that Congress did not know what it was doing when it enacted that remedy. That remedy, insofar as damage claims on behalf of indirect purchasers and consumers was concerned, was nullity. The opponents have suggested what I understand to be basically three limitations on the proposed remedy. One, they would suggest limiting it to goods which are resold as such. Second, they would limit it to price-fixing claims. Third, it is suggested that it be limited to parens patriae actions. None of these suggestions make good commonsense and they should all be rejected by the Congress. The limitation to goods resold as such is an artificial limitation. Whether an overcharge on a component of an end product is in fact incurred by the ultimate purchaser depends on the matter of proof and not simply on whether the component remains in the same box or remains unaltered from the original manufacturer all the way through to the consumer. For example, the Western Liquid Asphalt case involved price fixing in the sale of liquid asphalt. By the time that the asphalt reached the State and local governments, the asphalt had been combined with aggregates and formed into highways. It had gone through some measure of transformation. Nonetheless, by examining the contractors and by examining the middlemen, our State, the State of Arizona, and the States of California, Oregon, and Washington were able to prove that the middlemen simply took the price, the overcharge that they paid for liquid asphalt, added a markup on it and the other components and passed on whatever overcharge there was to the States and the local governments. As a result of that we were able to recover in that litigation approximately $30 million. Much the same occurred in another litigation that we are presently involved in. In Cement and Concrete Antitrust litigation, we have alleged an unlawful price fix among the cement producers in the United States to increase the price of cement 10 percent effective January 1, 1974, agreement which remained in effect at least until the commencement of the litigation. As a part of that conspiracy, the Portland Cement Association, prepared a study showing how in fact that 10 percent overcharge was passed on to increase the cost per mile of highway and, to increase other costs incurred, not by the middleman but rather by the end user. That analysis by the Portland Cement Association is included as a supplementary portion of my testimony before the House committee. So the limitation should not depend on whether the goods reach the ultimate consumer in the same form that they left the defendant, rather it should depend upon whether the pass on of the overcharge is susceptible to proof. This is preserved in Senate bill S. 1874 by endorsing existing notions of proximate cause, existing notions of target area, and should not be further limited to the notion of whether the goods were resold as such. The second limitation is whether remedial legislation should be limited to particular types of complaints. This is a question considered by the American Bar Association task force on Illinois Brick. Both the majority and the minority of that task force the limitation should not be simply on the type of complaint because that is an artificial limitation. The question is one of overcharge. Has an overcharge been passed through to the ultimate consumer? Now whether it be a monopoly case as with Hanover Shoe, a market allocation case, a customer allocation case, or a simple agreement to adhere to a price list, in each case the measure of damages is an overcharge on goods or services sold and resold. So the price-fixing limitation is an artificial one. The question is whether an overcharge has been passed on. Again, the present Senate bill 1874 accommodates that and the limitation to price-fixing claims would be unnatural. I think it would be too narrow a view of what we are talking about here. The final suggestion is to limit any remedial legislation to the parens patriae remedy. Certainly the parens patriae remedy must be revitalized, that is by no means the only area where remedial relief is appropriate. The proprietary claims of the State, local, and Federal governments are tremendously injured here. Again, I refer back to the testimony of Assistant Attorney General Schenefield, the Federal, State, and local governments have conservatively been injured by $500 million in single damages in pending lawsuits which are threatened if there is not immediate remedial legislation. The legislation should not be limited to parens patriae actions and anyone who is able to prove that he or she was injured-albeit indirectly-should be entitled to recovery. Finally, I would like to address what I consider to be two technical suggestions dealing with section 4 of S. 1874. Section 4 is a provision dealing with the effective date of the legislation and also placing some limitation on the legislation. I have reviewed the testimony of Mr. Handler. There is much of it with which I do not agree. I think he makes what may be a valid point with regard to the constitutionality of the present provision relating to the effective date, however I think this act should only reach actions which are pending on or after the date of enactment. This is the language included in the House version, H.R. 8359. The Senate version as presently drafted would, however, go back and rejuvenate cases which have been dismissed and which have become final on appeal. I think the appropriate distinction that Congress should make is whether cases are still pending as of the date of enactment. I think that would meet Mr. Handler's question on constitutionality. Finally, there is the provision in section 4 which would place some limitations on consumer class actions while allowing parens patriae actions by State attorneys general. It appears not to be authorized other actions on behalf of natural persons. First of all, I think that this is too narrow a view. Our State and other States have brought rule 23 class actions to obtain recovery for consumers |