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Formula for success: standing of indirect purchasers under the Florida Deceptive and Unfair Trade Practices Act.

During the 1980s, the three dominant U.S. manufacturers of infant formula--Abbott Laboratories, Bristol-Myers Squibb Company, and American Home Products Corporation--raised their prices repeatedly, in lockstep, and at a rate far exceeding the rate of increase in the cost of the product's ingredients. The three manufacturers were sued in federal court for price-fixing under the Sherman Act by a nationwide class of retail grocery and drug stores which purchased infant formula directly from the defendants, and by several substantial retail grocery chains which chose to pursue similar claims outside the class.(1) Under the Supreme Court's decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), only "direct purchasers" like the retailers in the infant formula case have standing to sue an antitrust defendant for price-fixing under federal law, even when it is clear that those direct purchasers have passed on the economic effects of an unlawfully inflated price to consumers.

In Mack v. Bristol-Myers Squibb Co., 673 So. 2d 100 (Fla. 1st DCA 1996), the First District Court of Appeal accepted an argument that has been advanced repeatedly in recent years as a means of avoiding the sometimes harsh effect of Illinois Brick: while indirect purchasers may lack standing to sue for price-fixing under either federal or state(2) antitrust law, they can sue to recover damages for the same conduct under state deceptive and unfair trade practices laws. In Florida, the statute of choice for indirect purchasers is the Florida Deceptive and Unfair Trade Practices Act (DTPA), F.S. [sections] 501.201, et seq. The Mack case holds that consumers have standing to sue for price-fixing under DTPA despite their lack of standing to sue under either federal or state antitrust law.(3)

Faced with an indirect purchaser lawsuit for price-fixing under state unfair trade practices law, defendants typically have resorted to the argument that such a case is "really" or "in substance" an antitrust case and should be governed by the standing rules developed in antitrust law. What never has been satisfactorily explained is why a price-fixing case should be categorized as "really" an antitrust case when the conduct it challenges is a violation of both antitrust law and a broader body of consumer-protection law.(4) As the First DCA put it in Mack, the question before the appellate court was as follows:

[W]hether a consumer-purchaser's standing to sue for price-fixing under the Florida DTPA is governed (i) by the language of the Florida DTPA, which expressly authorizes a consumer to bring an action for damages for violation of DTPA, or (ii) by a policy adopted from Illinois Brick that would bar an indirect purchaser from bringing an action under the Florida DTPA based upon a claim which is in substance an antitrust action to encourage efficient private antitrust enforcement by direct purchasers and to avoid conflict between the Florida DTPA and the Florida Antitrust Act.

Mack, 673 So. 2d at 103.

For reasons discussed below, the First DCA chose to follow the language of DTPA rather than the judge-made standing rule of Illinois Brick.

Hanover Shoe and Illinois Brick

The status of indirect purchasers and the issue of "passing on" first came to the U.S. Supreme Court in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). In Hanover Shoe, the defendant was alleged to have monopolized the market for shoe manufacturing equipment through various anticompetitive acts. When sued by one of its customers, a shoe manufacturer, United Shoe Machinery defended itself by alleging that the plaintiff simply had passed on the illegally inflated price of the defendant's shoe machinery to the plaintiff's own customers and therefore had suffered no injury from the defendant's acts. The Supreme Court rejected this "passing on" defense, finding that recognition of such a defense would require "additional long and complicated proceedings" to determine how much of an illegal overcharge was absorbed by the direct purchaser and how much was passed on to indirect purchasers, and would dilute the economic incentive of direct purchasers to enforce the antitrust laws. Id. at 493-94. The Court recognized that the ultimate burden of anticompetitive conduct at the manufacturing level may be borne by consumers, each of whom has only a "tiny stake in a lawsuit and little interest in attempting a class action." Id. at 494. The Court concluded that the remedial purposes of the antitrust laws would best be served by adopting a presumption that monopolistic overcharges are borne entirely by the direct purchaser.

In Illinois Brick, the Court was faced with the offensive use of a "passing on" claim, and so could not justify the presumption recognized in Hanover Shoe based solely on a remedial or pro-enforcement view of the antitrust laws. The State of Illinois brought a civil antitrust action for price-fixing against several manufacturers of concrete block used in construction projects. The block was incorporated into masonry structures by masonry contractors; those structures were then purchased by general contractors and incorporated into government buildings purchased by the state. The state alleged that the prices it paid for such buildings were unlawfully inflated by the concrete block manufacturers' price-fixing conspiracy.

All parties and the Supreme Court agreed that whatever pass-on rule was finally adopted "should apply equally to plaintiffs and defendants--that an indirect purchaser should not be allowed to use a pass-on theory to recover damages from a defendant unless the defendant would be allowed to use a pass-on defense in a suit by a direct purchaser." Illinois Brick, 431 U.S. at 729. The Court was thus faced with a choice between overruling Hanover Shoe and barring the state's price-fixing claim. It chose the latter. The Court noted pessimistically that permitting antitrust suits by indirect purchasers "would transform treble-damages actions into massive efforts to apportion the recovery among all potential plaintiffs that could have absorbed part of the overcharge--from direct purchasers to middlemen to ultimate consumers." Id. at 737. Aside from the perceived problems of apportioning damages, the Court expressed a concern that permitting indirect purchasers to sue would diminish the effectiveness of private antitrust actions by increasing the costs of recovery and reducing the award to each injured party. Id. at 745. While acknowledging that the direct purchaser rule "denies recovery to those indirect purchasers who may have been actually injured by antitrust violations," id. at 746, the Court was willing to pay that price to achieve the goals of simplicity and efficiency in private antitrust litigation.

ARC America

Since the Supreme Court's decisions in Hanover Shoe and Illinois Brick, a number of states have enacted legislation or produced judicial rulings which allow indirect purchasers to sue for antitrust violations under state antitrust statutes. In California v. ARC America Corp., 490 U.S. 93 (1989), the Court held that such standing rules are not preempted by federal law.

In ARC America, several states which were plaintiffs in a price-fixing case against concrete and cement manufacturers sought distributions from a settlement fund on behalf of indirect purchasers whose claims were recognized under state antitrust law. The district court and the court of appeals ruled that the Illinois Brick and Hanover Shoe prohibition on indirect purchaser claims preempted state indirect purchaser laws, thus preventing the states from sharing in the settlement fund to the extent they were not direct purchasers.

The Supreme Court reversed, holding that the federal bar's use of the "passing-on" theory announced in Hanover Shoe and Illinois Brick does not preempt state antitrust statutes that create private remedies for indirect purchasers. ARC America, 490 U.S. at 103. There is no federal policy against providing antitrust remedies to indirect purchasers, although no such remedy exists under federal law. According to the Court, such state antitrust remedies would not overly complicate federal antitrust suits, id. at 103, and would not reduce the direct purchasers' incentive to sue under federal law. Id. at 104. While a defendant might be subject to multiple liability if indirect purchaser claims were recognized under state law, the Supreme Court held that federal law did not forbid such a result and thus allowed states to make their own choice unimpeded by federal law. Id. at 105.

First DCA's Decision in Mack

Given the Florida Legislature's command to give "due consideration and great weight" to federal case law in interpreting state antitrust law, F.S. [sections] 542.32, Florida courts have generally denied standing to indirect purchasers who sue under the Florida Antitrust Act. In Mack, the First DCA held that the rule of Illinois Brick does not apply to suits brought under the DTPA. The decision rests on several related considerations.

First, the DTPA evidences an unmistakable legislative intent to afford standing to consumers. The purpose of the act is "[t]o protect the consuming public . . . from those who engage in unfair methods of competition, or unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce." F.S. [sections] 501.202(2). The Florida Legislature decreed that its provisions "shall be construed liberally to promote [such] policies." F.S. [sections] 501.202. The act creates an express right of action in favor of any "consumer" who suffers a loss as a result of a violation of the act, F.S. [sections] 501.211(2), and its substantive provisions expressly proscribe "unfair methods of competition," including any such methods targeted by the Federal Trade Commission in rules promulgated under [sections] 5 of the FTC Act. F.S. [subsections] 501.203(3), 501.204(1).(5) Traditional antitrust violations such as price-fixing also constitute unfair methods of competition under the FTC Act.(6) These propositions lead to the conclusion that consumers who can prove they have been injured by a violation of the federal antitrust laws are proper parties to maintain an action under the Florida DTPA.

Second, the First DCA was unpersuaded by the argument that, in light of the act's direction to follow federal case law interpreting the FTC Act, F.S. [sections] 501.204(2), Florida courts interpreting the DTPA should follow the rule of Illinois Brick. The court of appeal recognized that the legislature's reference to federal law developed under the FTC Act was a reference to the substantive issue of what conduct constitutes an "unfair method of competition" under the DTPA rather than a reference to the procedural issue of who has standing to sue. Indeed, although the court's opinion in Mack does not mention it, there are no rules of standing in cases brought under [sections] 5 of the FTC Act, because there is no private right of action for violations of the FTC Act.(7) The Federal Trade Commission is the only entity with standing to enforce the FTC Act. Standing rules in federal antitrust cases have been developed by interpreting [sections] 4 of the Clayton Act, 15 U.S.C. [sections] 15(a)--a statute not mentioned in the DTPA.

Third, the court of appeal noted with approval the Supreme Court's holding in ARC America that Illinois Brick does not preclude the states from adopting more generous rules of standing under state antitrust law. If Illinois Brick does not preempt a state indirect-purchaser antitrust statute, as the Supreme Court held in ARC America, then it certainly cannot preclude a state from affording indirect purchasers a remedy for price-fixing under state deceptive trade practices law.

Fourth, the court of appeal rejected the contention that its decision to recognize indirect-purchaser standing would nullify the Florida Legislature's decision not to enact an Illinois Brick repealer as part of the Florida Antitrust Act. As the opinion in Mack points out, recognition of indirect-purchaser standing under the DTPA has no effect on state antitrust law, which remains tied by legislative direction to federal law. Ultimately, the court found that any apparent inconsistency between state antitrust law and the DTPA could not override the clear expressions of legislative intent embedded in the DTPA.

Finally, the Mack court observed that permitting indirect purchasers to sue for price-fixing under Florida's DTPA would not contravene any legislative or judicial policies underlying state antitrust law. As the U.S. Supreme Court held in ARC America, there is no antitrust policy which forbids indirect purchasers from suing price-fixers who are remote from them in the distribution chain. Recognition of indirect-purchaser standing under the DTPA no more conflicts with the denial of indirect-purchaser standing under state antitrust law than recognition of indirect-purchaser standing under state antitrust law would conflict with denial of such standing under federal law.

Indirect Purchaser Cases From Other States

Three decisions from other states--all of them infant formula cases--address an indirect purchaser's standing to sue for price-fixing under state consumer protection laws.

In Boos v. Abbott Laboratories, 925 F. Supp. 49 (D. Mass. 1996), an indirect purchaser of infant formula sued for price-fixing under Massachusetts' antitrust and unfair competition statutes. Although the state antitrust act did not expressly cover an indirect purchaser's standing to sue, it did require courts to construe that law in harmony with judicial interpretations of comparable federal antitrust statutes. Id. at 51, 56. The court ruled that, since Illinois Brick precludes federal indirect purchaser antitrust claims, Massachusetts' antitrust law similarly does not allow such claims.

The district court recognized that whether an indirect purchaser has standing under state consumer protection law is a more difficult question. Several factors militated in favor of recognizing such standing. In 1979, two years after Illinois Brick was decided, Massachusetts' consumer protection law was amended to eliminate the requirement of privity between the consumer claimant and the defendant. Id. at 55. That amendment thus expanded the category of potential claimants to include indirect purchasers. Id. Moreover, although the state antitrust statute required by its terms that it be harmonized with federal antitrust law, the consumer protection statute contained no such restriction. Id. at 57. Because the issue was one of first impression under Massachusetts law, the district court certified the issue to the state's highest court.

In Abbott Laboratories, Inc. v. Segura, 907 S.W.2d 503 (Tex. 1995), a divided Texas Supreme Court barred indirect purchasers from suing under the state's consumer protection act for antitrust violations.

The majority opinion in Segura "is not based on any determination of standing under the [Texas consumer protection act]." Segura, 907 S.W. 2d at 507. Rather, it is based on the view that permitting an indirect purchaser claim for an antitrust violation under the Texas consumer protection law would constitute "an end run around the [Illinois Brick] policies allowing only direct purchasers to recover under the [Texas] Antitrust Act." Id. at 506. A concurring opinion sidestepped the Illinois Brick issue and ruled on the merits that there was insufficient evidence that defendants' conduct constituted a violation of the Texas consumer protection law. Id. at 509-10. Another concurring opinion joined in the dismissal of the indirect purchasers' claims on the grounds that antitrust claims are not "cognizable" under the Texas consumer protection act. Id. at 511; see also id. at 512-13.

The dissenters in Segura would have upheld the standing of the indirect purchasers to sue for damages under the consumer protection law based on antitrust violations. They reasoned that the state antitrust and consumer protection statutes did not conflict by their terms, Segura, 907 S.W.2d at 514; that the remedies in the two statutory schemes were cumulative, id. at 514-15; and that permitting indirect purchaser claims promoted the state's interest in protecting consumers against unfair trade practices. Id.

Finally, in Blake v. Abbott Laboratories, Inc., 1996 WL 134947 (Tenn. App. 1996), a consumer sued the infant formula companies for price-fixing and monopolization in violation of state antitrust and consumer protection statutes. The trial court dismissed the complaint for failure to state a claim, but the court of appeals reversed, reasoning that price-fixing is an unfair trade practice which can be challenged by indirect purchasers both under state antitrust law and under the cumulative remedies of the state consumer protection statute.

Conclusion

The antitrust laws are designed to maintain competitive markets and thereby prevent economic injury to firms and individuals who buy from or sell into those markets. When the antitrust laws are violated, the reduction in competition and the resulting increase in market prices injure not only those who purchase directly from the violators, but also those who pay inflated prices for goods and services farther down the distribution chain.(8) There are sound reasons underlying the U.S. Supreme Court's decision in Illinois Brick, but--as the Supreme Court held in ARC America--those reasons do not preclude a state legislature from adopting a contrary rule in cases governed by state law. As the First DCA recognized in Mack, the Florida Legislature adopted such a rule when it enacted the DTPA.

Mack is now Florida law. Until another district court of appeal or the Florida Supreme Court decides the issue differently, it is binding on trial courts throughout the state(9) as well as on federal courts deciding cases that arise under Florida law.(10) In light of the First DCA's decision, Florida law now affords to indirect purchasers a remedy for price-fixing which they lack under traditional antitrust law.

(1) In re Infant Formula Antitrust Litigation, MDL Docket No. 878 (N.D. Fla.). The authors' firm represented a group of direct purchasers in MDL 878.

(2) The state antitrust statutes of many states, including Florida, direct state judges to follow federal case law in construing state antitrust law. FLA. STAT. [sections] 542.32. In Mack v. Bristol-Myers Squibb Co., 673 So. 2d 100 (Fla. 1st D.C.A. 1996), the trial court held that indirect purchasers lack standing to sue under the Florida Antitrust Act of 1980, FLA. STAT. ch. 542, and that ruling was not appealed. Mack, 673 So. 2d at 103.

(3) Recognizing the potential significance of its ruling, the First DCA certified its holding to the Florida Supreme Court as involving a question of great public importance. The parties subsequently settled the case, and we are advised that Bristol-Myers' appeal to the Florida Supreme Court will be dismissed.

(4) It is not uncommon for the same conduct to give rise to at least two different causes of action under state law. For example, a misrepresentation in connection with the sale of securities may constitute common law fraud and a violation of FLA. STAT. [sections] 517.301.An insurance company's bad faith failure to pay an insured's claim may be actionable under FLA. STAT. [sections] 624.155 and also constitute a breach of its common law duty of good faith and fair dealing. Misappropriation of a trade secret may be actionable under FLA. STAT. [sections] 688.004 and also constitute common law breach of contract or breach of fiduciary duty. The unauthorized use of a trademark may constitute infringement under FLA. STAT. [sections] 495.131 and dilution under [sections] 495.151. Theft may be actionable under FLA. STAT. [sections] 812.014 (theft, robbery and related crimes) as well as FLA. STAT. [sections] 772.111 (civil remedies for criminal practices).

(5) The 1993 amendments eliminated the limiting definitions of "supplier" and "consumer transaction" that had restricted the scope of the act. See FLA. STAT. [sections] 501.203(1), (3) (1973). Those amendments also expanded the substantive provisions of the act to include violations of any rules or standards promulgated under the Federal Trade Commission Act, 15 U.S.C. [sections] 41, et seq., and any laws, rules, or statutes proscribing unfair methods of competition. FLA. STAT. [subsections] 501.203(3), 501.204(2).

(6) See Federal Trade Comm'n v. Indiana Fed'n of Dentists, 476 U.S. 447, 454-55 (1986); Federal Trade Comm'n v. Cement Institute, 333 U.S. 683, 693-94 (1948).

(7) See., e.g., Fulton v. Hecht, 580 F.2d 1243, 1249 n.2 (5th Cir. 1978), cert. denied, 440 U.S. 981 (1979).

(8) In the simplest case, where the supply and demand curves are linear, each has an elasticity of one and there is a single set of intermediaries between the price-fixers (or monopolist) and consumers, 50 percent of an illegal overcharge will be passed on to the ultimate consumer. Such an overcharge has the same economic effect as an industry-wide tax on the intermediaries, which both raises prices and reduces output. The situation can be depicted graphically as follows:

[ILLUSTRATION OMITTED]

In this example, a monopolistic overcharge imposed at the manufacturing level shifts the intermediaries' supply curve from S to [S.sup.1] and thereby shifts the equilibrium point from A to B. If the size of the overcharge is $1, then, under the simplified conditions described above, the equilibrium point will move up $.50 in price and down .5 units in quantity. See generally Harris & Sullivan, Passing on the Monopoly Overcharge: A Comprehensive Policy Analysis, 128 U. PA. L. REV. 269 (1979).

(9) See Pardo v. State, 596 So. 2d 665, 666 (Fla. 1992) (absent interdistrict conflict, decisions of district courts of appeal bind all Florida trial courts).

(10) See Twiss v. Kury, 25 F.3d 1551, 1557 (11th Cir. 1994) (absent some indication that state supreme court would decide issue differently, federal courts are required to follow decisions of state intermediate appellate courts).

William J. Blechman is a shareholder with Kenny Nachwalter Seymour Arnold Critchlow & Spector, PA., in Miami, where he has a trial practice concentrated in antitrust, government false claims litigation, and other complex commercial cases. He received his B.A., cum laude, from Harvard College and his J.D., cumlaude, from the University of Miami. He formerly clerked for U.S. District Judge Jose Gonzalez.

Scott E. Perwin is a shareholder with Kenny Nachwalter Seymour Arnold Critchlow & Spector, P.A., in Miami, where he concentrates in antitrust litigation. He received his B.A., magna cum laude, from Harvard College, an M.A. from Princeton University, and his J.D. with distinction from Stanford University.

This article is submitted on behalf of the Business Law Section, Philip B. Schwartz, chair, and Mindy Mora, editor.
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Author:Blechman, William J.; Perwin, Scott E.
Publication:Florida Bar Journal
Date:Mar 1, 1997
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