are not changed as they pass along in the marketplace. To put this somewhat more clearly, if you are dealing with cattle or if you are dealing with some other commodity or product where there is price fixing and the price fixing increment is passed along, then if the new statute is confined to that it would present less problems than what happens when you are dealing with a commodity where different components are put into it as the marketplace expands. For example, let's say you are dealing with a piece of machinery and as it is sold down the line, kits for installation are added to it and things like that. It creates a lot of problems which are inherent in any attempt to overrule these particular two cases. But if you stick to something as simple as cattle, then it would be the least offensive way of proceeding in light of the problem that I and other witnesses see in the overall situation. Even that may not be much comfort because I am not sure that the cattlemen would necessarily recover that much money even if Illinois Brick and Hanover Shoe were overturned. I am not sure of that, of course, because I don't know that much about the case but I would doubt that their recovery of damages would be that great down the line. Senator HATCH. Let me ask you this. The proponents of S. 1874 contend that this bill will bring about fair and effective enforcement of the antitrust laws. However, some witnesses have stated along the following approach: As correctly stated by Mr. Justice. White the Illinois Brick principle limiting private antitrust claims to the first or direct purchaser from the alleged antitrust violator will in fact simplify and expedite antitrust litigation and make antitrust enforcement more rational, practical and effective without creating antitrust enforcement gaps. How do you react to the above contentions of proponents and opponents of S. 1874? Mr. TYLER. I disagree with that, Mr. Chairman. I don't think that that would be what would happen at all. I admit there is a certain siren appeal to that argument. But if you analyze what happens, experience teaches that about the only people that would benefit when you go down the line to indirect purchases far removed from the original transaction in which there is the basic anticompetitive effect, then the only people who benefit are the relatively small band of lawyers. I am not just referring to plaintiff lawyers, I am referring to defendents' lawyers too. The recovery of each individual member of the class tends to be almost the minimum. Second of all, you have all of the complications and procedures which are in some measured discussed by Mr. Justice White in the majority opinion in Illinois Brick. Finally, you have the horrible problem of avoiding double recovery which certainly is not fair or consonant with due process as we understand it. So, I am not impressed with those arguments at all. Senator HATCH. Let me ask you this: A number of State attorneys general have been here in the past week and their complaints about Illinois Brick consist primarily of the fact that they don't have a way of solving some of the price-fixing problems regarding building highways or maintaining highways, the delivery of materials, et cetera, and they are going to be in real rough shape. I am not sure that their arguments are that valid but I would like to have your point on that. They feel like Illinois Brick has to be overturned in order to protect the States from major problems. Mr. TYLER. In talking to some of their representatives I believe that view of theirs is simply based on their notion that I referred to before that somehow Illinois Brick directly or indirectly overturns the parens patriae title of the 1976 statute. I do not believe it does. I do not think the Supreme Court held that. Senator HATCH. In others words, you are saying that there is nothing to stop them as attorneys general from bringing parens patriae action to protect the State and that Illinois Brick does not need to be overturned in to give protection to those people? Mr. TYLER. That is right, that is put very succinctly. Senator HATCH. Judge Tyler, we appreciate your testimony here today. You certainly are a very respected member of the bar and were respected at the time you were on the bench. We have been particularly appreciative that you would take time to come down and chat with us about this problem. Mr. TYLER. Thank you, Mr. Chairman. It is nice to be here. [The prepared statement of Mr. Tyler follows:] STATEMENT OF HAROLD R. TYLER, JR. My name is Harold R. Tyler, Jr. I am a member of the law firm of Patterson, Belknap, Webb & Tyler in New York City. As the members of this subcommittee know, previously I was the Deputy Attorney General of the United States and, before that, a U.S. District Judge in New York City. I am here in response to an invitation by the Acting Chairman and the staff to testify about possible legislative action in response to the Supreme Court decision in June 1977 in the case of Illinois Brick Company v. Illinois, 431 U.S. 720, as read in light of the earlier case of Hanover Shoe Co. v. United Shoe Machinery Corporation, 392 U.S. 481 (1968). In Illinois Brick, the Supreme Court declined to overturn its earlier ruling in Hanover Shoe. The latter decision severely restricted the circumstances in which the pass-on of illegal overcharges may be established. Hanover Shoe, of course, dealt with the defensive use of pass-on by a defendant attempting to show that plaintiff, the first purchaser, had sustained no actual injury. Illinois Brick applied the same reasoning to preclude the offensive use of pass-on by an indirect purchaser seeking to establish that it, and not the first purchaser, was the damaged party. Thus, the high court rejected both the offensive and defensive uses of the pass-on theory. In October 1977, I testified on the same problem before the House Judiciary Committee, Subcommittee on Monopolies and Commercial Law. In the course of that testimony dealing with H.R. 8359, I suggested that legislative proposals such as the House bill and the bill currently under discussion here in the Senate, although appearing to be a step in favor of strong enforcement, in fact might work to undermine and weaken truly effective antitrust enforcement in this country. Since last fall, I have had time to reflect on the problem further. Although I sympathize with and understand to a significant degree the political reasons which require scrutiny of the problem, I appear here today reenforced in my view that S. 1874, though well intended, may actually harm antitrust law enforcement. S. 1874 would permit suits by persons injured "in fact directly or indirectly" by an antitrust violation. Unfortunately, as I see it, the phrase "directly and indirectly" is subject to serious misinterpretation or misunderstanding. Among other things, it may be read to overrule the long line of cases establishing the direct injury test of standing under which various classes of plaintiffs injured by an antitrust violation cannot for strong and important policy reasons assert further claims on their own behalf. Furthermore, try as I might to conceive of reasons to the contrary, I am increasingly convinced that direct purchasers or competitors are in the best possible position to bring treble damage actions against defendant violators. After all, direct purchasers actually do business with the alleged violators; for this simple reason alone, they are the most likely persons or firms to discover actionable violations. Thus, one can plausibly argue that Illinois Brick and Hanover Shoe together are likely to improve antitrust enforcement by strengthening the hand of direct purchasers who historically have brought the most effective cases in the private anti trust field. Put differently, Illinois Brick tends to increase the likelihood that direct buyers will sue simply by eliminating most of the uncertainties as to their right of recovery. Furthermore, as has been recently argued by Professor Milton Handler in light of Illinois Brick, both shareholders of a plaintiff and, where applicable, its regulatory agencies will be more likely to put pressure upon any direct purchaser who does not sue where the facts warrant litigation. (77 Columbia Law Review 979, at 1001 (1977).) In addition, I point once again to a problem raised by Justice White in the majority decision of the Court in Illinois Brick. There, the Justice set forth at length the inevitable effect of allowing proof of pass-on claims. In brief, Justice White demonstrated that such proof would turn private antitrust suits into difficult and complex battles among classes of conflicting claimants. (431 U.S. at 736-38.) Moreover, the burdens upon the Federal trial courts to untangle the multitudinous individual disputes involved and the cost and difficulty of passing out the dollar (or cents) increments of pass-on almost inevitably will discourage effective law enforcement. Indeed, so far as I know, since the amendment of the Federal class action rule in 1966, there has not been a single reported case where pass-on of overcharges has actually been proved even in an "individual lawsuit", not to mention a class action. Given the ingenuity of modern lawyers in the plaintiff antitrust field, I think this paucity of cases should give the Congress cause in endeavoring to pass such legislation S. 1874. Finally, I would like to respectfully call to the attention of this subcommittee that, notwithstanding the arguments of the majority and the dissent in Illinois Brick, almost all commentators agree that there is nothing in the parens patriae title of the Antitrust Improvements Act of 1976 which can be read to overturn Hanover Shoe or confer any substantive rights upon indirect purchasers in the antitrust filed. Put in the negative sense, the holding of Illinois Brick in no way changes or undermines the parens patriae title or the class action rule. Therefore, in conclusion, contrary to one of my suggestions before the House Judiciary Committee last fall, I now think that no useful purpose would be served in the Congress pursuing further any such bills such as S. 1874 in an attempt to overrule Illinois Brick and Hanover Shoe. Senator HATCH. Our next two witnesses are Dr. Betty Bock, director of the Antitrust Research Conference Board from New Yord City and Peter D. Standish, Esquire, of Weil, Gotschal, and Manges of New York City. Please come forward and we would be delighted to hear your testimony. We did mention at the beginning of our hearing this morning that we would like you to summarize your testimony and make it as brief as you can, then we will have some questions. I don't want to have you feel like you are being rushed or hurried. We think this is an important issue and you should have as much time as we can give you this morning to express your particular viewpoints concerning this piece of legislation which is before us. We are delighted to have both of you with us and we appreciate your taking time to come down. Mr. Standish, may we hear from you first? STATEMENT OF PETER D. STANDISH, PARTNER, WEIL, Mr. STANDISH. Thank you, Mr. Chairman. I am an antitrust lawyer from New York City and I am currently chairman of the committee on trade regulation of the association of the bar in the city of New York. I appreciate the opportunity to appear before this subcommittee to testify on the issues presented by the various proposals to overrule the Illinois Brick decision. I would like to briefly summarize the report of the committee on trade regulation, which I am submitting in full text, and make some general observations regarding the problems raised. I should note that the committee on trade regulation report was prepared 27-396 O-78-6 in October of last year in connection with H.R. 8359, and the committee has not subsequently taken a position regarding more recent legislation. Consequently, although I will summarize the committee's report, other observations will be my personal views rather than the committee's. If there was one theme to the committee's report it is that the issues are too complex for simple solutions. This is reflected by the fact that our committee, like most other groups which have considered the problems in this area, could not come to a unanimous conclusion. Thirteen members of the committee supported the majority position which in essence was "do not overrule Illinois Brick or Hanover Shoe." Five members of the committee supported legislation to reverse Illinois Brick and Hanover Shoe. The majority of the committee based its views on a concern over the substantial problems of managing and administering the type of litigation which would be spawned by reversing Illinois Brick and Hanover Shoe; the potentially unfair and punitive effects of reversal, which the committee did not believe had been adequately considered, the escalation of the "balance of terror" which already exists between alleged antitrust violators and treble damage plaintiffs, which forces settlement rather than the litigation of the issues by defendents who may have substantial defenses, the entanglement of nonparty or class representative middlemen and other intermediaries in pretrial discovery, and the almost unlimited potential impact on standing which the language of H.R. 8359 would have had. The committee was concerned about what was perceived at that time as a failure to carefully parse out of the full implications of wholesale reversal. Since that time, I should note, I believe that there has been a great level of appreciation of the problems involved. The solutions and the social and legal tradeoffs are not so easy, however. The minority position emphasized the unfairness of foreclosing injured indirect purchasers; the windfall anomaly for direct purchasers; the concern that direct purchasers would not sue, and the concern that parens patriae legislation had been undermined. The committee did not attempt to cover all of the arguments which have been discussed but rather tried to focus on several examples of the kinds of discovery and damage calculation problems which reversal of Illinois Brick would necessarily produce. The committee felt that the problems of complexity in antitrust litigation, particularly large multiparty, multidistrict class actions, have been improperly discounted and are, after all, one of the key bases of the Supreme Court's decision in Illinois Brick. In any multilevel distribution system the problems of analyzing absorption_verus passing on of overcharge at each level will, except in the clearly denominated exceptions in Illinois Brick, present problems which, if they are capable of resolution, will be done at best by "frontier justice' rather than by any true apportionment of damages. Calculation of overcharges in a simple price-fixing case is itself not easy. An agreement among competitors to increase prices 5 percent does not mean there was a 5-percent overcharge. It may be that prices would have risen 2 percent, 5 percent, or even 7 percent in the absence of an unlawful agreement, and it may be prices would have dropped, "but for" the agreement. Economists would generally agree that many assumptions have to be made regarding supply, demand, and the nature of a market before any damage assessment can be made. Substantial disagreement will arise as to the weight to be given to various assumptions; schools of thought diverge, opinions vary. A number of economists will concede that there is no way to calculate what a price would have been "but for" the price-fixing agreement. Theories can be developed, arguments can be made, but unanimity of opinion or even a preponderance of opinion in simple price-fixing cases is difficult at best to arrive at. This task in non-price-fixing cases is equally awesome. Apply the economic analysis problem to even a simple multilevel system of distribution with 5 suppliers accused of price fixing, 30 wholesalers and 500 retailers. Trying to calculate which wholesalers absorbed all or part of an overcharge, which wholesalers passed on all or part of the overcharge, and which wholesalers were not in fact overcharged in the first place, requires, in most instances, an individual analysis. We must remember that wholesalers, intermediaries, or middlemen are not nameless, faceless, homogeneous building blocks. They are companies and people of varying size and varying relationships with suppliers; they often purchase at varying prices, depending on all of the vital, commercial negotiating factors of the marketplace. So we may have 1, 10, 20, or 30 different purchasing and pricing relationships between the supplier and their wholesalers. Now, let's turn to the 500 retailers. Again, they are not all the same size, not all having the same bargaining position, not all competing for the same business trade. Here again, a level of distribution, absorbing, passing on, negotiating lower prices. I'm not a mathematical expert but even in this simple situation with only 30 wholesalers the permutations are enormous. Some suggest that statistical sampling methods can be applied. Such methods applied to a group of wholesalers consisting of some who did not even pay the 5-percent overcharge, some who passed it on, some who absorbed it, and some who not only passed it on but marked it up would not even provide frontier justice. Dealing with the retail level by such methods in this context would only compound the arbitrary nature of the result. The wholesaler who absorbed the overcharge would be shortchanged; the retailer who bought from that wholesaler would receive the windfall. On the other hand, individual analysis in a marketplace which consists of changing competitive conditions, differing price levels, differing reasons for pricing and purchasing decisions, and differing types of customers to whom a wholesaler resells is a task which even with the most sincere litigators and the strongest judges could go on for years and years. A second aspect of our committee's report highlights the concerns expressed regarding inconsistent results and duplicative recoveries. The committee believed at that time that insufficient attention had been given to the serious problems of coordinating all action filed in various districts and in State courts. If changes are made in venue, transfer, consolidation, and other Federal rules and statutes, it may be possible to move all cases by all possible plaintiffs under one roof. However, I don't know where a roof can |