seller and, accordingly, the seller absorbs the costs of the use of These brokers and agents are not another step in the

such persons.

chain of distribution.

When viewed in the light most favorable to the plaintiffs, all pleaded factual allegations in the complaints being deemed true, all reasonable inferences and intendments from the facts being drawn in favor of the plaintiffs, and all assertions of the defendants being deemed false, two conclusions are apparent, either of which defeat defendants' motions to dismiss:

(1) The use of an identifiable, common and explicit formula and base pricing mechanism by the food chains and the slaughterers and packers constitutes a situation recognized to be an exception to the rule announced in The Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968) --directly analagous to a pre-existing "cost-plus" contract--so that the defendant chain stores could employ a passing-on defense in any suits brought by packers and slaughterers, because the packer/slaughterers have suffered no injuries or damages under 5 4 of the Clayton Act, and,

(2) the knowing use of a common formula and base pricing device by the defendant food chains and the packers and slaughterers constitutes a two-level combination and conspiracy in restraint of trade aimed at the cattle feeder.

Neither of these conclusions is exclusive of or inconsistent with the other. Each of the conclusions would support a judgment that the plaintiff cattlemen were directly injured through the violations of the antitrust laws of the United States by the defendant chain stores within the meaning of S 4 of the Clayton Act and of The Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), (hereinafter "Hanover Shoe") and Illinois Brick Co. v. Illinois, 52 L.Ed.2d 707, 97 S.Ct. 2061 (1977) (hereinafter "Illinois Brick").

III.

IF APPLICABLE AT ALL, HANOVER SHOE WOULD NOT BAR DEFENDANTS
FROM ASSERTING PASS-ON DEFENSIVELY AGAINST BEEF
SLAUGHTERERS AND PACKERS BECAUSE THE PACKER/SLAUGHTERERS
HAVE SUFFERED NO DAMAGES

Although the beef packer/slaughterers stand between the plain

tiffs and the defendant food chains in the chain of distribution of beef, the packer/slaughteres do not have a cause of action against the defendant food chains under S 4 of the Clayton Act because they have not suffered any damages of any kind as a result of the food chains' illegal conduct. The food chains could and would assert pass-on defensively in any suit brought by packer/slaughteres arising out of the facts pleaded in the MPIA and Becker amended complaints. There is no claim by packer/slaughterers against food

chains in these consolidated proceedings.

There is no problem here

of double recovery, unlike the situation in Illinois Brick. There is no problem of attempting to allocate damages among different links of the chain of distribution; accordingly, there are no complex problems of proof in that regard.

The factual situation of these instant cases is roughly the analytical reverse of the factual situations in Hanover Shoe and Illinois Brick. Illinois Brick characterizes the holding of Hanover

Shoe as follows:

"In Hanover Shoe this Court rejected as a matter of law this defense that indirect, rather than direct purchasers were the parties injured by the antitrust violation. The Court held that, except in certain limited circumstances, a direct purchaser suing for treble damages under $ 4 of the Clayton Act is injured within the meaning of S 4 by the full amount of the overcharge paid by it and that the antitrust defendant is not permitted to introduce evidence that indirect purchasers were in fact injured by the illegal overcharge." (Emphasis added)

Illinois Brick, supra., 52 L.Ed.2d at 712, 97 S.Ct. at 2064. Hanover Shoe and Illinois Brick dealt with buyers purchasing price-fixed goods. There was no mention in either opinion of any proof problems that might be encountered in suits by sellers. In these instant cases, we have the situation of producers selling into a rigged market. The two situations are not analogous. Different problems are encountered when discussing market power on the buyers' side; the full nature and extent of many of these problems are unknown presently. See F. Scherer, Industrial Market Structure and Economic Performance, 239-52 (1970). Because of the possible impact of many of these unknowns on the pass-on issue, the Court should allow full discovery of the facts before resolving the issue. Plaintiffs submit that because significant analytical differences will be shown to

exist between market power on the sellers' side and market power on the buyers' side, Illinois Brick and Hanover Shoe cannot apply to these instant cases at all.

Defendants' Motions to Dismiss and, indeed, all of defendants' moving papers fail to address themselves to the most important component of the holding in Illinois Brick. The Supreme Court held that the plaintiffs in Illinois Brick could not assert passing-on offensively against the defendant conspirators because the defendants would be barred from asserting passing-on defensively against their direct purchasers under the doctrine of Hanover Shoe. Illinois Brick, supra., 52 L.Ed.2d at 718, 97 S.Ct. at 2068-69.

"We thus decline to construe § 4 to permit offensive use of the pass-on theory against an alleged violator that could not use the same theory as the defense in an action by direct purchasers."

Illinois Brick, supra., 52 L.Ed.2d at 718, 97 S.Ct. at 2069.

"First, we conclude that whatever rule is to be adopted regarding pass-on in antitrust damage actions, it must apply equally to plaintiffs and defendants. Because Hanover Shoe would bar petitioners from using respondents' pass-on theory as a defense to a treble-damage suit by the direct purchasers (the masonry contractors), we are faced with the choice of overruling (or narrowly limiting) Hanover Shoe or of applying it to bar respondents' attempt to use this pass-on theory offensively." Illinois Brick, supra., 52 L.Ed.2d at 714, 97 S.Ct. at 2066. Accordingly, the initial theorum that the defendants in these cases must establish is that Hanover Shoe would bar them from asserting a pass-on defensively in an action by beef slaughterer/packers against them.

In their instant motions, defendants have not asserted that Hanover bars their defensive use of pass-on for at least two reasons: (1) the allegations in plaintiffs' Amended and Substituted Complaints (and the facts of these cases) would not support such an assertion, and (2) such an assertion would be an open invitation for beef packer/ slaughterers to sue the defendants. In fact, the defendants would assert passing-on defensively in a suit brought by beef packer/ slaughterers, because the use of formula base point pricing under the facts of these cases constitutes an exception to Hanover Shoe substantially identical to the "pre-existing cost-plus contract" ехсер

27-396 O - 78 - 11

tion announced in that ruling. The packer/slaughterers have not been damaged by the antitrust violations of the defendant food chains. Hanover Shoe states that the defense of pass-on is available to a defendant only when it can meet the "normally insurmountable" burden of proving (1) that the direct buyer "raised his price in response to, and in the amount of, the overcharge; " (2) "that his margin of profit and total sales had not thereafter declined;" and (3) that he "could rot or would not have raised his prices absent the overcharge or maintained the higher price had the overcharge been discontinued." Hanover Shoe, supra., 392 U.S. at 492-93. The Court recognized that the difficulties of proof may not be sufficiently great to preclude successful use of the "passing-on" defense "for instance, when an overcharged buyer-plaintiff has a pre-existing 'cost-plus' contract, thus making it easy to prove that he has not been damaged." Hanover Shoe, supra., 392 U.S. at 494. HERE, THE PACKERS HAVE SUFFERED NO DAMAGES. The three criteria of the Hanover Shoe exception can be established under the facts pleaded in the amended MPIA and Becker complaints.

A. Under plaintiffs' amended complaints, they could establish that the beef packer/slaughterers uniformly lower their prices in response to, and in the amount of, the underpayment imposed by the defendant food chains. The Amended and Substituted Complaints state: "Cattle buyers for beef slaughterers figure the percentage of dressed meat on the live animal and give the cattle feeder a price for the live animal based upon the value of the dressed carcass according to a formula based on the Yellow Sheet or its west coast counterpart the 'Safeway price.' (MPIA and Becker paragraph 28) Under the pleadings, the plaintiffs could establish that the standard of the industry is the carcass of a U.S.D.A. Choice Yield Grade 3 steer (or its equivalent prior to yield grading). Packer buyers know (and often have a card showing) the different percentage yields of various different quality grade and yield grades of animals whose yields will vary from the choice yield grade 3 carcass. Plaintiffs allege that the price stated by packers and slaughterers to cattlemen for their live animals is a percentage of the prevailing Yellow Sheet price and is calcula

ted by formula based upon the packer-buyers determination of the actual carcass yield of the live animal. The facts could well show that this percentage formula is invariable and follows the price for carcasses dictated by the defendant food chains and reflected in the Yellow Sheet and the west coast "Safeway price" from day-to-day exactly.

Looking at this practice from the perspective of the cattleman, the packer/slaughterer gives the cattleman for his live animal whatever price the chain store will give the packer for the slaughtered carcass. From the packers perspective, he procures the animal, slaughters it, and gives away the carcass at the price he paid for it. The packer does not lose from this deal, however, because he has taken the rest of the animal away from the cattleman for nothing and, accordingly, makes his profit from the sale of the by-products.

B.

The beef packer/slaughterers' margin of profit in total sales does not decline because of the underpayment coming from the chain stores. In this regard, the plaintiffs have asserted in their Amended and Substituted Complaints:

"Most slaughterers and packers have standing agreements with various receivers, including the defendant chain stores and other co-conspirators, for certain quantities of beef each week. With knowledge of their weekly requirements and of the prices quoted in the Yellow Sheet or the 'Safeway price, the packers and slaughterers directly pass down the price established by the defendant retail food chains. The packers and slaughterers in aggregate do not suffer any dimunition of sales, purchases, margins or profits as a result of this artificially low price. (MPIA and Becker paragraph 34) (Emphasis added)

Further in this regard, the plaintiffs have alleged:

"A fat steer or heifer is required to be sold within a three-week period of time when the animal reaches choice grade. The cattleman must accept whatever price is given at that time, because retention of the animal results in overfattening and significant loss of value. Supply of cattle and beef in the short-term is known throughout the industry and is inelastic." (MPIA and Becker paragraph 27)

Under these allegations, the plaintiffs could establish this factual proof: Because cattlemen in the aggregate have a finite amount of fat cattle ready for market at any given time and because there is a very limited time in which they can sell the cattle at an optimum condition and finish for market, the supply of cattle is highly inelastic in the short run. In other words, the amount of fat