The bill's proponents assume, wrongly, that it is the indirect rather than direct purchasers who play the instrumental role of private attorneys general. Indeed, they have claimed that direct purchasers have no incentive to sue their suppliers because they have not in fact been injured and because in addition they may be fearful of disrupting relations with their suppliers. The bill's supporters also assert that the preponderance of antitrust actions are brought by indirect purchasers. We know, based on our own experience in representing a great many antitrust plaintiffs as well as defendants over the years, that this simply isn't so. In the Electrical Equipment litigation alone-where we represented the lead group of utility plaintiffs-more than 2,000 suits were brought by direct purchasers of some 17 different kinds of products. There have also been many other major antitrust litigations-Hanover Shoe itself, the Grinnell litigation, the Oil Jobber cases, the Aluminum Wire and Cable and Brass Tube litigations, and numerous others-where the plaintiffs were direct purchasers. Indeed, in connection with our previous testimony, we examined the decisions in my casebook, the opinions reviewed in my twenty-five annual lectures and the cases reported in the 1975 and 1976 CCH Trade Regulation Reports and concluded that the vast majority of price-fixing actions are brought by direct purchasers.

In view of the critical importance of this issue, however, we decided to go beyond our own experience and personal knowledge. We undertook to gather for this committee the indisputable facts from the public record as to the numbers of pending antitrust suits brought by direct as compared with indirect purchaser plaintiffs.

To do this, we first obtained from the Administrative Office of the U.S. Courts a computer printout listing the 3,182 antitrust cases before the courts in all 91 judicial districts. We decided to make a pilot study of the 203 nongovernment actions which the printout showed were pending in the Southern District of New York. We sent a team of research assistants down to the courthouse at Foley Square in New York, and, with the cooperation and assistance of the Clerk of the Court, they set out to examine the complaints in the listed actions. It turned out that some of the pleadings were in judges chambers or were otherwise unavailable, and that some of the cases shown on the printout had been closed. There were, however, 116 actions in which the complaints were available and these were carefully studied. The results of our examination were illuminating. We found a total of 69 cases brought by purchasers or sellers of goods or services. Of these, 66 suits-including 16 class actions-were brought by direct buyers or sellers.' These included suits by purchasers of lumber, chemicals, and other raw materials; suits by distributors of gasoline, packaged foods, motion pictures, newspapers, paper products and books and magazines; suits by retailers of clothing, automobiles, furniture, radios and groceries; suits by theatre owners and motion picture exhibitors; suits by various kinds of franchisees; and suits by consumers who had bought goods or services directly from travel agents, airlines or department stores. In short, our study showed that suits by various kinds of direct buyers or sells make up the overwhelming bulk of day to day antitrust litigation in this district.

Furthermore, of the 47 actions in the Southern District of New York which were brought by persons other than purchasers or sellers, 38 were suits by competitors. (The other nine were actions by shareholders or by employers suing unions.) This confirmed our own experience that it is generally the persons who are in direct contact with a dependent who sue under antitrust laws.

Finally, while three of the pending suits in the Southern District of New York were brought on behalf of indirect purchasers, we found that even these three suits would be undermined if the proposed bill were to become law. That is because, in each of those cases, although the plaintiffs purchased indirectly, they later resold the product in suit or used it to make and sell something else. (In one case, the plaintiffs were manufacturers of clothing; in another, they were auto brokers; in the third suit, the plaintiff was an electric utility.) Thus, in each one of these suits, the indirect purchaser plaintiffs would be subject to the pass-on defense if the proposed bill were adopted. The legislation being considered by this committee could thus result in the elimination of all of the indirect purchaser suits pending in the Southern District of New York as well as almost all of the direct purchaser suits. If the pattern we found in the Southern District of New York applies in the other 90 judicial districts-and we have no reason to believe that it doesn't-then the enactment of S. 1874 as revised could subvert thousands of direct and indirect purchaser actions across the country. To cite just one example, one suit that would be undermined would be the presently pending action by the Tennessee Valley

A list of all 116 actions broken down into categories of direct purchaser suits, indirect purchaser suits, and other actions, is attached to this statement as exhibit A.

Authority against the uranium suppliers based on an alleged massive price-fixing cartel affecting nuclear fuel. TVA in this instance is in the same position as private investor utilities who were direct purchasers of the price-fixed fuel, all of whom would be subject to the pass-on defense sanctioned by the bill. Other suits in critical sectors of the economy could also be adversely affected. Are we exaggerating when we say that the wholesale defeat of such important actions would be a body blow to the administration of the antitrust laws?

We are not suggesting that the Congress accept on faith the data we have collected or our estimates. To the contrary, we think that, in a matter of this importance, the subcommittee staff should conduct its own study-or have one conducted by the Justice Department, the FTC or the Administraive Office of the U.S. Courts-that would cover not just the Southern District of New York but all of the various judicial districts. At the very least, such a study should be made in the San Francisco, Chicago, Los Angeles and Philadelphia district courts, since these, together with the Southern District of New York, account for about a third of the pending antitrust cases. What would be intolerable in our view would be for the Congress inadvertently to undercut thousands of antitrust suits and thus nullify the private remedy, simply because no one bothered to gather and examine the available evidence.

We do not believe that it is any answer to speculate that parens patriae suits may replace the private treble damage remedy as the principal method of enforcing the antitrust laws. As we have noted, as of June 1977, there were 3,141 antitrust cases in the Federal courts. Only 113 of those-or .04 percent-were Government actions. Assistant Attorney General John Shenefield testified in July 1977 that there were less than 10 parens patriae actions initiated under the 1976 Act.

It is obvious from these figures that there is no way that Government suits in general and state parens patriae suits in particular can possibly take the place of private actions. The states do not have anything approaching the resources that would be needed for that task. Even if they did, there is no reason to believe that taking the burden of antitrust enforcement away from the private sector is either necessary or desirable. The statistics show that private treble damage suits have been a viable and increasingly effective instrument for enforcing the antitrust laws. In the 12 months preceding June 1977, 1,611 private antitrust suits were commenced, an increase of 7.3 percent over the year before and of over 700 percent as compared to the 228 suits commenced in 1960.2 During the period from 1960 to 1977, about 14,000 such actions were filed in the Federal courts. Is there any real possibility that the states can take over this task of bearing the brunt of antitrust enforcement that is now being well performed by private litigants without any Government expense at all? What possible reason can there be for undermining our present methods of antitrust enforcement-which are both efficient and workable-in the dubious hope that they may be replaced by the untried parens patriae remedy? 3 At the very least, it a bill to allow proof of pass-on is enacted, it should be limited to cases where the price-fixed item is resold as such and not cover cases where the price-fix is on a piece of equipment or a supply item that is used to make something else. This is consonant with the stated purpose of the proposed bill, which is: . . . to prevent windfall recoveries by limiting the recovery of a middleman to the damage incurred and not to permit recovery by the middleman for damage passed on by the middleman to others. [Sec. 2(b)(2).] [emphasis added]

The shoe manufacturer in Hanover was hardly a "middleman" of shoe making equipment. A steel producer is not a "middleman" of the chromite sand used to make molds for steel ingot. TVA is not a "middleman" of uranium. A dress manufacturer who ships his merchandise in a folding carton is not a "middleman" of the box. Yet the proposed bill as presently drafted would allow the pass-on defense to be asserted in each of these cases.

In a study which we published in the April 1976 Yale Law Journal (85 Yale L.J. 626 (1976)) we found there were many similar cases-price fixing in diamond grit used for industrial grinding, on nylon netting used by fisheries or herbicides used to grow food products-where the existence of a series of pass-ons through to the consumer level is at best problematical and clearly impossible to prove. Other examples are shown by the presently pending folding carton litigation. The term "folding carton" refers to different kinds of paper packaging that are used by

A table based on data from the Administrative Office of the U.S. courts showing the number of Govenment and private antitrust cases commenced in each year from 1960 to 1975 is attached to this statement as exhibit B. We have every reason to believe that direct purchaser suits represent the vast majority of the cases shown on that table, just as they do with respect to the actions pending in the Southern District of New York.

"We shall not repeat here the point made in our prior testimony that there are far more workable and effective procedures available for helping consumers than parens patriae.

manufacturers of a great variety of products, from dresses to cough drops. To get some idea of the problems of proving the pass-on of an overcharge on such an item, consider, for example, how a consumer who purchases a pack of cigarettes could possibly go about proving that he paid an overcharge that is traceable to the price which the manufacturer of the cigarettes paid for the carton. Yet the proposed bill would allow the pass-on defense to be raised against the direct purchaser plaintiffs in some 70 pending folding carton actions, including thousands of the alleged class members in one class action.

It is obviously an oversimplification to assume as the proponents of the bill evidently do that a manufacturer who purchases a price-fixed piece of equipment or supply item suffers no injury and that all overcharges on such products are passed-on to ultimate consumers. In the cases we have been considering, the manufacturer of shoes, the steel producer, the manufacturer of dresses and the cigarette company all sell their products in unrestrained markets where prices are determined in varying degrees by supply and demand. Their products then pass through multiple levels in various chains of distribution where, at each level, a new pricing decision is again made in an unrestrained market. In such cases, it is pure speculation to assume that a price paid by an ultimate consumer would have been any different had the original manufacturer not been overcharged. At the very least, it is an insuperable task to try to trace an overcharge in such a case from the price paid by the manufacturer for one of its numerous cost items, through numerous unrestrained markets, to the prices paid by ultimate consumers for the goods or services they purchase.

The approach which we suggest of at least limiting proof of pass-on to cases where the price-fixed item is resold as such is essentially the same position as that urged by the plaintiff in Illinois Brick. In his petition for rehearing (at p. 10) that plaintiff "acknowledged that the Hanover Shoe rule [barring proof of pass-on] should apply to situations involving the use of raw material or machinery for manufacture of other products [emphasis added.] This is also the position which has been endorsed by virtually all of the courts that have favored proof of pass-on.*

What is more, limiting proof of pass-on in this way is consistent with the purposes of the 1976 parens patriae statute. Indeed, in the hearings on that bill, Congressman Rodino used the hypothetical case of a price-fixing conspiracy on ball bearings which are used in popcorn machines which in turn make popcorn for consumers in movie theaters, as an example of the very kind of case to which the 1976 parens patriae statute was not meant to apply."

In order to limit the present proposed bill to what we believe is its intended scope, we suggest that in lieu of the present provisions, a new section be added to the Clayton Act which would read:

"In any price-fixing action under section 4, 4A or 4C in which a direct purchaser has resold the price-fixed item as such, neither the defendents nor subsequent purchasers shall be barred as a matter of law from proving a pass-on of overcharges resulting from the price-fixing agreement."

While issues may arise in future cases as to whether price-fixed items have been resold "as such", such questions should not be difficult to resolve. Indeed, the identical issue has already been dealt with in a number of pre-Hanover cases in which the availability of the pass-on defense was made to depend on whether the plaintiff was deemed a "consumer" or a "middleman" with respect to the price-fixed item. Purchasers of equipment, for example, have been treated as "consumers" of such items against whom no pass-on defense may be proved; distributors who buy and then resell products such as fruit and gasoline, on the other hand, have been deemed to be "middlemen" who can be shown to have passed-on.

So far as we can tell, no one has come forward with any argument or evidence as to why the bill should not be limited as we have proposed. Instead of denuding our limited enforcement resources, this would enhance them. Thus TVA would not have to face a pass-on defense that might defeat any recovery. Hanover Shoe would continue to serve its salutary purpose of precluding any pass-on defense in cases involving purchases of equipment and manufacturing supplies. On the other hand, where products are resold as such-for example, where consumer products such as packaged foods, household supplies and appliances are involved-pass-on could be proved. Such a bill would accomplish all of the intended purposes of the present bill while avoiding much of the destructive effect on antitrust enforcement that restoring the pass-on defense is likely to have.

See e.g., Boshes v. General Motors Corp., 59 F.R.D. 589, 597 (N.D. Ill. 1973); West Virginia v. Chas. Pfizer & Co., 440 F.2d 1079 (2d Cir. 1971), affg. 314 F. Supp. 710 (S.D.N.Y. 1970), cert. denied, 404 U.S. 871 (1971).

September 16, 1976, Cong. Rec. H.10295.

We would now like to address ourselves to certain statements that have been made before this subcommittee and in the House to the effect that, if Illinois Brick is not overruled, it will cost the Government some $205 million in damages in cases in which it is supposedly suing as an indirect purchaser of price-fixed goods. In order to find out whether this was in fact so, we called the Department of Justice to inquire precisely which cases were being referred to. We were told that there are four:

In the first, United States v. Armco Steel Corp., various states are claiming damages because they contracted for the consturction of highways containing pricefixed steel reenforcement bars. The Federal Government's claim is that it, rather than the states, is entitled to the damages because it provided the states with highway construction funds. In other words, the Federal Government's dispute is with the state governments who are asserting conflicting claims to the same damages. The issue therefore is not whether the Government's claims are barred by Ilinois Brick-since the Government here is not a purchaser at all, direct or indirect-but rather whether an entity that provides funds for a purchase has a claim under the antitrust laws. It would not appear on the face of the proposed bill that it even deals with this issue.

Two of the other pending Government suits-United States v. Bristol Myers Co., and United States v. Chas. Pfizer & Co.-involve claims with respect to ampicillin and tetracycline. In each case, the Federal Government made some direct purchases and has some claims based upon its reimbursement of medicare and medicaid patients. Thus, again, the Government's nondirect purchaser claims are being asserted in its capacity as a reimburser or insurer.

The fourth case, United States v. Alton Box Board Co., is part of the folding carton litigation. There, the United States is suing on the basis of both direct and indirect purchases for damages which will have to be proved and are presently not ascertainable.

A related matter which we think should be clarified is the apparent misconception among some proponents of the bill that, as presently drafted, it merely restores the status quo in the law that existed prior to the June 9, 1977 Illinois Brick decision. In fact, the proposed bill would introduce a radically different antitrust regime which has never previously existed.

Proof of pass-on was first rejected by Justice Holmes in a 1906 antitrust case brought by the City of Atlanta against Chattanooga Foundry and Pipe Works. He allowed the city to recover trebel damages for overcharges in the prices it had paid for iron water pipe even though those overcharges were arguably passed on to the rate paying customers of the municipal water system. Some 12 years later, in a related case, Justice Holmes made it clear that the rationale for his decision was based on "the endlessness and futility of the effort to follow every transaction to its ultimate result."7

8

In subsequent years, numerous courts rejected both the offensive and the defensive use of pass on, particularly in suits involving utilities and purchasers of equipment. On the other hand, proof of pass-on was allowed in the so-called Oil Jobber cases, where the product (gasoline) was resold as such and at a fixed markup. The Supreme Court's unanimous 1968 decision in Hanover Shoe rejecting proof of pass-on in the case of a purchaser of shoe manufacturing equipment was thus completely consistent with the prior case law.

Subsequent to Hanover Shoe the great majority of courts that have considered the issue have rejected the offensive as well as the defensive use of pass-on. There have

"Chattanooga Foundry and Pipe Works v. City of Atlanta, 203 U.S. 390 (1906). "Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 534 (1918).

See, e.g., Ohio Valley Elec. Corp. v. General Elec. Co., 244 F. Supp. 914 (S.D.N.Y. 1965); Atlantic City Elec. Co. v. General Elec. Co., 226 F. Supp. 59, 68-70 (S.D.N.Y. 1964); Commonwealth Edison Co. v. Allis-Chalmers Mfg. C., 225 F. Supp. 332 (N.D. Ill. 1963), aff'd., 335 F. 2d 203 (7th Cir. 1964); Hanover Shoe, Inc. v. United Shoe Mach. Corp., 185 F. Supp. 826, 831 (M.D. Pa.) (Goodrich, J.), aff'd per curiam, 281 F. 2d 481 (3d Cir.), cert. denied, 364 U.S. 901 (1960). See also, e.g., Commonwealth Edison Co. v. Allis-Chalmers Mfg. Co., 315 F.2d 564, 566-67 (7th Cir.), cert. denied, 375 U.S. 834 (1963) (denying intervention by Illinois as parens patriae on behalf of consumers); Philadelphia v. Westinghouse Elec. Corp., 1961 Trade Cas. 70,143, at 78,557 (E.D. Pa. 1961, aff'd. on other ground sub nom. Philadelphia Elec. Co. v. Westinghouse Elec. Corp., 308 F.2d 856 (3d Cir. 1962), cert. denied, 372 U.S. 936 (1963) (denying intervention by public utility commission on behalf of consumers).

9

See, e.g., Philadelphia Hous. Auth. v. American Radiator & Standard Sanitary Corp., 50 F.R.D. 13 (E.D. Pa. 1970), aff'd sub nom. Mangano v. American Radiator & Standard Sanitary Corp., 438 F.2d 1187 (3d Cir. 1971) (disallowing claims by purchasers of homes based on alleged overcharges on plumbing fixtures); Philadelphia Hous. Auth. v. American Radiator & Standard Sanitary Corp., 323 F. Supp. 381 (E.D. Pa. 1970) (dismissing claims of public bodies which had

Continued

only been a few courts that have allowed proof of pass-on as a matter of law-and most of those held that such proof is permissible only where the price-fixed article was resold as such.10 It is not to be overlooked that in no case has the alleged passon of a price-fixing overcharge in an unrestricted market actually been proven. In sum, a rule allowing proof of pass-on in all cases is one that the courts of this country have collectively refused to adopt for more than 70 years.

Finally, we referred in our earlier testimony to the constitutional problems of having the bill apply retroactively to all cases pending on June 9, 1977. Now that more than seven additional months have passed, these constitutional difficulties are all the more severe. We don't know how many of the more than 3,000 antitrust cases that were pending in June 1977 have subsequently ended in judgments or settlements granting relief to direct purchasers or dismissing the claims of indirect purchasers; but the number is, no doubt, appreciable. Retroactive application of the proposed bill to upset those judgments or settlements is obviously going to deprive the recovering parties of vested rights and that is clearly unconstitutional.

Last year, in connection with the parens patriae statute, the Congress rejected a proposal to make the bill retroactive on the ground that such ex post facto applications would violate "elementary constitutional requirements of fairness and due process of law." We suggest the same considerations require that the present bill be similarly modified to apply solely to future conduct and future cases.

We believe the subcommittee should pause to consider the havoc that would be wrought by a retroactive application of the bill. Motions to dismiss or to introduce a pass-on defense will be made in thousands of suits. Federal judges all over the country will be hearing argument and writing opinions on whether retroactive operation of this kind of statute comports with constitutional requirements. It may take years of trial to determine in a given case whether or not there was a pass-on in fact. In many cases, by the time such a determination is made, final purchaser claims may be barred by the statute of limitations. If, in such cases, the pass-on defense is retroactively allowed, will this not have the effect of immunizing the wrongdoers from any recovery? Is that really the result this subcommittee wants to achieve?

Constitutional law is not an exact science and no one has a crystal ball disclosing how five of the nine justices will vote on any issue. It is our conviction that retroactivity on the set of facts to which the bill will apply will be held unconstitutional. Because of this and because of the inequity that will result from retroactive application, we respectfully urge that the subcommittee do in regard to this legislation what the Congress did in respect to the Hart-Scott bill, and make it prospective in application only.

To sum up, it appears that the proposed bill is prompted by a number of serious misconceptions:

(Continued from p. 23)

purchased plumbing fixtures from intervening sellers); Donson Stores, Inc. v. American Bakeries Co., 58 F.R.D. 481 (S.D. N.Y. 1973); United Egg Producers v. Bauer Int'l. Corp., 312 F. Supp. 319 (S.D.N.Y. 1970); Boshes v. General Motors Corp., 59 F.R.D. 589 (N.D. Ill. 1973).

Numerous cases have also refused to allow indirect purchaser claims in class action contexts. E. g., Dorey Corp. v. E.I. duPont de Nemours & Co., 1975-2 Trade Cas. 60,576, at 67,528 (S.D.N.Y. 1975) (excluding from settlement class those who purchased products which merely included allegedly price-fixed dyestuffs as an ingredient); Bill Minielli Cement Contracting, Inc. v. Richter Concrete Corp., 62 F.D.R. 381, 389 (S.D. Ohio 1973) (excluding from class indirect purchasers of cement not "marketed in the same form that it was sold by the alleged antitrust violators." [emphasis in original]); City and County of Denver v. American Oil Co., 53 F.R.D. 620 (D. Colo. 1971) (denying class which included indirect purchasers who acquired allegedly price-fixed asphalt as one item in the contractor's paving bid). Cf. Balmac, Inc. v. American Metal Prod. Corp., 1972 Trade Cas. 74,235, at 93,062 (N.D. Cal. 1972).

10 The court in Boshes v. General Motors Corp., 59 F.R.D. 589 (N.D. Ill. 1973), took the position that retail purchasers of automobiles might be able to prove injury resulting from price-fixing and monopolization at the manufacturer level because they bought the product in the same form as the defendant sold it and not (like the homeowners in Plumbing Fixtures) "as a small component or derivative of something else." Id. at 597. Similarly, Judge Miles W. Lord, in In re Antibiotic Anti-trust Actions, 333 F. Supp. 310 (S.D.N.Y. 1971), concluded there was no pass-on where price-fixed antibiotics were mixed with animal feed. He reasoned:

"[T]he facts suggest that the antibiotic product, once incorporated in the finished feed, passed through a second market composed of apparently competitive sellers, obscuring any effect the alleged antibiotic drug conspiracy might have had on the price of finished feed. The difficulty of plaintiff's case is greatly increased by the problems of competition, price determination, advertising and merchandising in the finished feed market, all of which enter into any determination of whether they felt the impact of the conspiracy." [Id. at 312.]

"S. Rep. No. 94-803, pt. II, 94th Cong., 2d sess. 8 (1976). An early version of the bill would have provided: "This title shall apply to all civil actions filed under the antitrust laws * including those in which the cause of action accrued before the date of enactment of this title "[S. 1284, 94th Cong., 2d sess. section 405 (1976).]