STATEMENT OF HAROLD PETROWITZ, PROFESSOR OF LAW, WASHINGTON COLLEGE OF LAW, AMERICAN UNIVERSITY, WASHINGTON, D.C.

Mr. PETROWITZ. Good morning, Mr. Chairman and Senators.

If you please, I would like to have my written statement incorporated in the record.

Senator THURMOND. Without objection, it will be included at this point.

Mr. PETROWITZ. My intention is just to make a few brief remarks and then answer any questions that may be asked. The antitrust laws, generally, must necessarily be directed at broad policy leaving the courts to work out the details. I guess what we have to do is to test the various approaches and then finetune the system to achieve the maximum effectiveness.

The emphasis, particularly with respect to section 4 of the Clayton Act, it seems to me, should be on injury; who got injured? It is here that the maximum incentive to implement the deterrent and compensatory objectives of the antitrust laws will be found. It is on injury that the remedial aspects of the antitrust laws are best based. I think that the rule in Hanover Shoe, as far as damages are concerned, leaves many unanswered questions relative to exactly what the recovery of the party dealing with the violator can be. In many instances, it is possible that this plaintiff will be able to assess against the defendant only a small part of the actual damage created by the wrongdoer. This seems to me to be a rather substantial limitation of the Hanover rule as it presently applies. If I may, I would now like to comment very briefly on some of the statements by Professor Handler.

I think that some of the comments made, in a sense that they draw assumptions, are not justifiable. The paragraph at the top of page 2 of his statement illustrates that problem.

As far as the empirical information that he mentions in his statement is concerned, the present climate is scarcely calculated to achieve a very good balance of litigation between direct and indirect purchasers considering all of the handicaps that presently face indirect litigants. I am not as concerned as Professor Handler about the dire effects on existing litigation of adoption of S. 1874. It must be recalled that in order to achieve any passing-on against a direct dealer with the violator, the violator would have to prove pass-on. The burden is on the violator to do so. There are many existing principles that place sensible restraints on the ability to pass-on. I worry a little about Professor Handler's statement on page 18 that there have been no cases of litigated pass-on with respect to an indirect purchaser. The cases of Bray v. Safeway, Armco Steel v. State of North Dakota, and Southern General Builders v. Molly Industries seem to refute that statement.

Mr. Chairman, that concludes my comments. I would be glad to answer any questions you may have.

Mr. CHUMBRIS. I believe that Mr. Handler referred to those cases that you just mentioned in his statement.

Mr. PETROWITZ. Yes, he did comment on them. I am not certain in what manner he commented on them, but I was just addressing myself to the specific conclusion that was on page 18 of his statement.

Mr. CHUMBRIS. On page 14 he begins the explanation.

We will submit some questions to you in writing for response, within a reasonable period of time.

Senator THURMOND. Without objection, they will be included in the record.

Are there any further questions?

Mr. BOIES. I have one question. The question that I asked Professor Posner troubles me. This was in reference to the effect of the Illinois Brick rule. What do we do with the windfall profits that the direct purchasers receive when they really have not been injured? Is that something that troubles you as a matter of judicial administration?

Mr. PETROWITZ. Yes, it does. Possibly, that aspect of it might not be of such great concern to the economist who looks upon the full recovery by the direct purchaser as the measure of deterrent against the violator. I simply believe that, as a matter of equally valid economic theory, the remedy should be placed where the injury is and not someplace else. I am advocating that as a genuine motivation for implementation of section 4. I think that is the best motivation. There is, of course, some difference of opinion about that. Maybe we just have to try it out and see how it works. I am of the opinion that section 4 is not functioning presently under the rules of Hanover and Illinois Brick in the most efficient manner. I would like to see something else tried to see if we cannot get more effectiveness out of that section.

My educated guess which I think everyone else is guessing too is that the proposed legislation would come as close as anything I have thought of to achieving that objective.

Mr. BOIES. When you say, "try something else," in terms of allowing indirect purchasers to sue, it is the case, is it not, that prior to the Illinois Brick case, you had as a matter of judicial administration tried the situation of allowing indirect purchasers to sue, and it seemed to work? That is, people did sue; they did recover when it was appropriate; and the courts were able to manage the complexities.

Mr. PETROWITZ. That is true.

Mr. BOIES. We are not trying something new in the sense of this being an untried experiment?

Mr. PETROWITZ. No, indeed. I do not mean to imply that. We have had a lot of experience, of course, with direct purchasers suing. We have even had some with indirect dealers, both buyers and sellers, before that was essentially cut off by Illinois Brick. Actually, I think some of those decisions ignored the precise rule laid down by Hanover Shoe. Nevertheless, they are there. They are in the record. We have the example of them.

Mr. BOIES. Based on that experience, would you be fairly confident that the courts would be able to deal with whatever complexities are involved in handling both direct and indirect purchaser suits, and proportioning whatever damages are involved?

Mr. PETROWITZ. I am inclined to be rather optimistic on that point, especially because the adoption of S. 1874 would restore to this type of litigation the opportunity to evaluate proof on its merits and to evaluate the cases of the various plaintiffs strictly on their merits. This can be done on the basis of adduced facts, or it

can be done by applying economic theory. I think that valid economic theory can be the answer in many of those cases as far as allocating the injury is concerned. I think it can be very effective. What was the condition of the market? What was the flexibility of demand and of supply?

I think that economic tools can give us some very potent answers to those questions without a great deal of difficulty. I would very much like to see some of those tools applied, rather than an artificial rule such as was formulated by the court in Hanover Shoe with the primary objective, it seemed to me, of trying to keep things simple but perhaps oversimplifying a little in the bargain. Mr. BOIES. Thank you very much.

Senator THURMOND. Thank you very much, Professor.
Again, we appreciate your fine statement.

[The prepared statement of Harold Petrowitz follows:]

PREPARED STATEMENT OF HAROLD PETROWITZ

I appreciate the invitation from the subcommittee to appear here today and discuss what has apparently become a rather controversial amendment to the antitrust laws. My name is Harold C. Petrowitz and I am professor of law at the Law School of the American University, specializing in antitrust and administrative law.

Let me make it clear at the outset that I do represent clients in antitrust cases. My testimony regarding S. 1874 today is solely on my own behalf as a professor of law and is not representative of or on behalf of any other person or entity.

In its essence this legislation would modify the rulings of the United States Supreme Court in Hanover Shoe Inc. v. United Shoe Machinery Corp. (392 U.S. 481, 1968) and Illinois Brick Co. v. State of Illinois (431 U.S. 720, 1977) by making it clear that parties seeking a remedy under section 4 of the Clayton Act would not be foreclosed from recovery simply because they had not dealt directly with the defendant accused of violating the antitrust laws. It would thus remove the existing technical limitations on the ability of parties to recover under section 4 simply because they were indirect, rather than direct, purchasers from the alleged violator when, in fact, the indirect purchaser may be the party suffering most or all of the injury.

The Supreme Court dropped the first shoe on this problem when it held in Hanover Shoe that the parties dealing directly with a violator of the antitrust laws could recover for the full extent of the injury inflicted by such violator except in circumstances where the violator had passed on the injury to others by means of a cost-plus type contract or similar device. The effect of this decision was to greatly restrict the ability of defendants to use the passing-on theory in defending against section 4 actions by planitiffs that had dealt directly with them. Thus, the directdealing plaintiff would recover the full amount for which the defendant was found liable even though most of the injury might have fallen on someone else.

Then, in Illinois Brick, the Court dropped the other shoe and held that indirect purchasers could assert the passing-on theory as a weapon to secure recovery where they were the real victims only under the same circumstances that defendants could use passing-on as a defense under Hanover Shoe. The effect of this decision was, of course, to deprive most indirect purchasers of the possibility of damages recovery under section 4. This ruling also virtually emasculated title 3 of the Hart-ScottRodino Antitrust Improvement Act (Pub. L. 94-435) by thwarting parens patriae actions by ultimate consumers.

Section 4 of the Clayton Act providing for private and Government civil damage actions was incorporated into the antitrust laws for two primary purposes. The first purpose was to provide a powerful deterrant to those contemplating violation of the antitrust laws. The second purpose is to provide compensation for injury suffered as the result of violation of the antitrust laws.

The unfortunate thing about the rules laid down in Hanover Shoe and Illinois Brick is they almost totally separated the application of section 4 remedies from these two important purposes because of failure to apply one very important test. That test is: Who is the party most likely to bring a section 4 action against an alleged violator of the antitrust laws? The clear, practical and unequivocal answer to this question is: The party that suffers most of the injury.

It is obvious that if the party who dealt directly with the violator suffered only minor injury in comparison to indirect purchasers, there will be very little incentive on the part of such direct purchaser to invoke the deterrant and compensatory effects of section 4. This can, and has, resulted in a serious miscarriage of the legislative purpose Congress had in enacting the antitrust statutes as they are today.

The proposed legislation (S. 1874) is designed to restore the proper balance of incentive in the application of section 4 of the Clayton Act to antitrust enforcement. It will not allow antitrust violators to escape from legitimate section 4 actions brought by direct purchasers by the device of some specious defense allegation. In order to escape liability, the defendant must prove that the direct purchaser plaintiff passed the injury along to someone else. The amendment rejects the artificial and often accidental defense specified in Hanover Shoe for a more realistic approach to the proof of passing on by factual evidence and economic theory. At the same time, the amendment will restore to indirect purchasers that have been seriously injured by the illegal acts of the defendants, a meaningful opportunity of proving damages and entitlement to recovery under section 4 by means accepted as part of antitrust procedures.

The passing-on defense as articulated in Hanover Shoe has proved difficult for courts to interpret and apply. Lower court decisions ranging all the way from strict application of the "cost plus" approach to unrestrained use of passing-on as an offensive tactic have created much confusion that Illinois Brick will do little to eliminate. The proposed amendment of section 4 (S.-1874) is well designed to reestablish section 4, coupled with title 3 of the Hart-Scott-Rodino Antitrust Improvement Act, as an effective deterrent and compensatory device.

I should like to reserve the privilege of adding to this rather brief statement should testimony at the hearing indicate the desirability of so doing.

Senator THURMOND. Our final witness this morning will be Mr. Glenn Freie representing a cattlemen's group which he will identify.

Mr. Freie's name was not on the witness list. He was in town today and would not be able to be here on the day for which he was scheduled, so we have squeezed him in this morning.

It is good to see you, Mr. Freie.

STATEMENT OF GLENN FREIE, CHAIRMAN, MEAT PRICE
INVESTIGATORS ASSOCIATION

Mr. FREIE. Good morning, Senators.

I will submit a written statement to the subcommittee. I found out about this late last night. You know we old farmers are “early to bed and early to rise, and you know how we go, we do not really get along very well. [Laughter.]

Senator THURMOND. Without objection, that statement will be incorporated in the record.

Mr. FREIE. Very quickly, I would like to speak of the matter of Illinois Brick. When I went to school the professors were very brilliant men. You have to remember that I have not been to school very much, although I did finally make it through high school. How, I do not know. Our professors and teachers would tell me the theories that were supposed to work when I got out on the farm. I have tried those theories many times. I have sat back in my tractor in front of a pond and said, "Well now, this tractor has x number of horsepower, and if I put it in fifth gear it goes 19 miles per hour, and that pond is x number of feet long, and I can make it." so I rev up that tractor, and I say, "OK, theory says I am going to make it." But you know, it is kind of disgusting when you get halfway across that pond and the theory gives out, and you have to take off your shoes and roll up your pantlegs to make it the rest of the way on foot.

So, today as I sit here and talk to you about the problem that we in the cattle industry face, I do not want to sit here as a man who knows the theories, but I want you to know that I have been in that pond. I have taken my shoes off and got my feet wet and my pants too. I want to speak from that angle. I am a cattleman from Iowa. I operate a medium-size farm which we call a family farm. I represent a group of people called Meat Price Investigators Association. This association was formed in about 1975 because we, as cattlemen, watched and studied the market situation very carefully. There was no rhyme or reason to us for what was happening in the marketplace.

We feel very isolated out there sometimes because we, as individuals, do not know how to attack the problems that we face. Se we formed this group with one idea, fully investigating the marketplace in the marketing of meat to try to determine if somebody was monopolizing and fixing the price of the product that we were selling.

Five hundred of us cattlemen from 18 States decided that we wanted to do it in a proper way. We went out and hired for ourselves some of the best counsel we could find, the best economists, the best computer people, the best analysts, investigators, and people like that, so that we could do a responsible job of investigating the market system from the producer up to the consumer. That is how MPIA was formed.

You must also remember that in 1974 there was a case against A. & P. out in California where they were found guilty of pricefixing in the marketplace for the marketing of beef. A $32 million judgment was ruled against those people if I remember the figure right. I stand to be corrected if I am off a little bit.

As we looked at that, we wondered whether that practice could not still be going on in our industry. So we formed this group. We could not understand the markets, and we decided that something had to be done. The group then elected me as chairman. Let me tell you what I did for the next 90 days, because I have heard the theory once or twice today in this meetingroom that the commissions and the people in Washington in the different agencies would handle the project for me. I traveled for about 4 to 5 months. I was in and out of every door in this grand city of ours. When I came away from all of the committees and all of the agencies-remember that I am a greenhorn and had just come into town-I had the idea that nobody would ever fully do the job of investigating the marketing of meat in the United States unless somebody like ourselves put our own hard-earned money into it and went out to do it. So that is where we started, and that is where we went.

We tried to be responsible. A lot of people have filed lawsuits and then went out and looked for the evidence. Let me tell you, gentlemen, we spent 8 solid months and hundreds of thousands of dollars investigating the complete marketing of beef from the time it left the producer to the time you ate it in town. We tried to find out whether price-fixing was going on and how it was being done and what we could do about it.

Again, after about 8 months, we decided, after finding the evidence, that we would file some suits against some of the major chains, against four of the large packers, against the price-setting