CONTEMPORARY ANTITRUST FEDERALISM:
CLUSTER BOMBS OR ROUGH JUSTICE?
By: Richard Wolframm
Spencer Weber Wallerr*
The period spanning 1992-2000 was a time of significant federal and state antitrust
activity. A major contribution to this activity was the proliferation of high-profile antitrust cases
in which a single nexus of facts and conduct spawns multiple actions at both the state and federal
levels. Chief Judge Richard Posner of the Seventh Circuit Court of Appeals has disapprovingly
called this "the cluster bomb effect." This development has dramatically increased potential
antitrust liability for defendants and it raises complex questions about the interrelationship of
federal, state and private enforcement actions and about the line between "duplicative" and nonduplicative litigation.1
This phenomenon -- the subject of this chapter -- is one manifestation of antitrust
federalism. Antitrust federalism is the judicial recognition of multiple sources of enforcement
authority:
the federal antitrust agencies (the Department of Justice and the Federal Trade
Commission), the states and private litigants. Each may sue, under federal and/or state law, and,
increasingly -- or at least over the past eight years -- they have been suing over the same facts
*
Mem ber of New Y ork Bar.
**
Professor and Director, Institute for Consumer Antitrust Studies, Loyola University Chicago School of
Law; Of Counsel, Kaye Scholer LLP.
1
If there is a retrenchment in federal antitrust enforcement over the next several years, then the "cluster
bomb effect" -- that is, in effect, "messy" antitrust federalism -- will be less pronounced, with the federal
authorities yielding through inactio n to increased state and private enforc ement. See discussion of "positive
antitrust federalism" in note 2, below.
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and conduct. Rules of order have to be devised; without a hierarchy of rights, it may be that no
one gets anything, or the undeserving get something and the deserving get nothing. 2
The potential enforcers lining up at -- or pushing their way to -- the "bar" in any given
case are either the DOJ or the FTC, a state or states suing as both direct purchasers and parens
patriae3 on behalf of their natural citizens, and both direct and indirect purchasers bringing their
own private treble damage suits under federal and state law. Some or all of these parties may
sue in any given action. The potential conflicts among plaintiffs and the opportunities for
multiple recovery have become an important feature of a number of recent cases. Examples
include the monopolization suit against Microsoft by the DOJ and 19 state attorneys general,
followed by multiple private treble damage suits under both state and federal law; the Mylan suit
2
Another facet of antitrust federalism, not discussed in depth herein, is the ability of one sovereign to act
when the other has chosen not to act. This has been called "positive antitrust federalism." See Jean
W egman B urns, Embracing Both Faces of Antitrust Federalism: Parker and ARC America Corp., 68
Antitrust L .J. 29 (2000); see also Spencer W eber W aller, Bringing Globalism Home: Lessons from
Antitrust and Beyond, 32 Loy. U. Chi. L. J. 113, 134-136 (20 00). Hence states can challenge mergers
which have received the blessing of the federal government and states may permit indirect purchasers to sue
unde r state antitrust law even though fed eral antitrust case law pro hibits such suits. See California v. ARC
America, 495 U.S. 271 (1990); see also Michael S. Jacobs, Lesson s from the P harm aceutical Antitrust
Litigation: Ind irect Purch asers, Antitrust Standing , and A ntitrust Federa lism, 42 S t. Louis L .J. 59 (1998).
During the Reagan administration, state enforcement was credited with keeping alive the enforcement of
resale p rice maintenance and merger cases at a time wh en the federal government brought few such cases.
If the Bush administration retrenches on antitrust enforcement, "positive antitrust federalism" will once
again be ascendant, with the states again increasing their antitrust enforcement activity in order to take up
slack at the federal enforcem ent level.
Yet another facet of antitrust federalism, also not discussed herein, is the state action doctrine, in which a
state (or municipality acting pursuant to state delegation) can substitute regulation for c omp etition if it is
sufficiently clear in its legislative or administrative mandate. In ad dition, the state can further insulate
private parties from antitrust liability if it supervises the antico mpe titive conduct it has man dated . See
Burns, supra, characterizing this form of antitrust fed eralism as "ne gative antitrust fede ralism."
3
Und er Sect. 4(c) o f the Clayton Act, a state can sue for treble dam ages in its parens patriae capacity on
behalf of its natural person residents. Section 4(c) states in part: "Any attorney general of a State may
bring a civil action in the name of such state, as parens patriae on behalf of natural persons residing in such
State . . .for injury sustained by such natural persons to their property by reason of any violation of the
Sherman Act. The court shall exclude from the amount of monetary relief awarded in such action any
amount of monetary relief (A) which duplicates amounts which have been awarded for the same injury, or
(B) which is properly allocable to (i) natural persons who have excluded their claims pursuant to subsection
(b)(2) of this section, and (ii) any business entity."
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NY B 1 189 857 .1
brought by the FTC and various state enforcers, followed by private litigation; the Nine West
resale price maintenance cases brought by the FTC, the states and private litigants; the Vitamins
Inc. price-fixing case brought by the DOJ, the states and various private parties; and numerous
other pending and recently resolved cases.
The multiplicity of actors, with their differing motivations and incentives, has become a
thorny litigation issue and a controversial policy issue. Judge Posner, perhaps as a result of his
participation as a mediator in the Microsoft litigation, has decried the "cluster bomb effect" of
multiple enforcement as detrimental to antitrust enforcement and criticized the states as
inefficient enforcers and free riders on the efforts of the federal agencies.4 In Judge Posner's
view, the result is too many enforcers and the "effect is to lengthen out the original lawsuit,
complicate settlement, magnify and protract the uncertainty engendered by the litigation, and
increase litigation costs."5
The states and private parties suing under state law understandably view things quite
differently. Historically, state enforcement substantially preceded the enactment of the Sherman
Act itself.6 The states' ability to sue on their own behalf and on behalf of their citizens is
enshrined in federal legislation. Their ability to enact their own state antitrust statutes and
empower their officials and private parties to sue under them flows from their sovereign status
under the Constitution. The states factually dispute, and resent, the free-rider label, pointing to
important antitrust litigation where either the states acted before the federal government or where
4
Richard Posner, "Antitrust in the New Economy," Remarks at Sept. 14, 2000 AU /ABA conference,
reprinted in 68 Antitrust L.J. 925 (2201).
5
Id.
6
See James M ay, Antitrust Practice and Procedure in the Formative Era: The Constitutional and
Conceptual Reach of State Antitrust Law, 1880-1918 , 135 U. Pa. L. Rev. 495 (1987).
3
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the federal government took no action at all.7 They also point to the efficiency enhancing
aspects of pooling resources and of collective investigation and prosecution of nationwide
cases.8 Finally, the states have always argued, and it has long been considered one of the
mainstays of antitrust federalism, that the state attorneys general are more sensitively attuned to
the issues affecting the citizens of their states than the federal antitrust agencies can be. In some
respects they can therefore better represent the public interest, even at the risk of coming under
the sway of interest groups representing competitors of a potential antitrust defendant. As the
economy has become globalized, and antitrust issues jump state and national borders, it is also
not surprising that state AGs have become more involved in matters that formerly would have
been considered the sole or at least primary jurisdiction of the federal enforcement agencies.
This chapter describes some of the conflicts and tensions that arise when multiple
enforcers collide in the same antitrust case. Part I summarizes some recent cases, beginning with
the Mylan litigation, where state enforcers and private plaintiffs have battled to represent indirect
purchasers in the wake of a successful FTC enforcement action, and continuing with the Nine
West, Microsoft and Vitamins, Inc. cases. Part II of this chapter undertakes a more thorough
analysis of the varieties of antitrust federalism reflected by these cases.
7
One p rominent exa mple is Ha rtford F ire Ins. C o. v. Californ ia, 509 U.S. 764 (1993) (antitrust suit by 19
states against insura nce comp anies, following decisio n by D OJ not to accep t states' invitation to investigate
the industry). See also Caro le R. D ons, Another View on State Antitrust Enforcement -- A Reply to Judge
Posner, 69 A ntitrust L.J. 3 45 (200 1).
8
Vermont Attorney General William H. Sorrell, a propos of the settlement of the Vitamins Inc. state actions,
put the point as follows: "This extraordinary result was achieved largely because the state attorneys general
effectively organized and intervened in this matter on a multistate basis, thereby avoiding a protracted stateby-state litigation process." (http://www .state.vt.us/aa tg/press10102 000 .htm.) See also the National
Association of Attorneys G enera l at http://www .naag.o rg/about/vision.cfm (describing as one of its goals
the promotion of cooperation and coord ination on interstate legal matters to foster a more responsive and
efficient legal system for state citizens).
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Part III synthesizes some of the federalism issues raised by these cases and comments
briefly on the criticism that has been directed at the states and other parties over their
involvement in suits in which the federal government is also involved.9 We conclude that
antitrust enforcement was intended to be messy, and that absent dramatic and highly unlikely
Congressional action, there is no global solution to the kinds of overlapping public and private
enforcement that some observers condemn and others applaud. However, in particular cases,
multiple enforcement may lead to injustice for both plaintiffs and defendants and it is incumbent
on the parties and the courts to work together to minimize the substantive and procedural costs
of our antitrust federalism.
I.
Recent Cases Illustrating Overlapping Federal, State and Private Enforcement
The following discussion summarizes the facts of several recent cases that illustrate the
variety of means used by the courts to accommodate the different and sometimes conflicting
interests of the federal agencies, state attorneys general and private plaintiffs:10
•
The related cases against generic drug manufacturer Mylan Laboratories
highlight the potential conflict with the principles of Illinois Brick -- which prohibits
claims under federal law by indirect purchasers and thereby limits potentially duplicative
litigation -- when the federal government sues for restitution and/or disgorgement, along
with a number of states, and indirect purchasers are the ultimate beneficiaries.
9
For other recent views, see Kevin J. O'Connor, "Is the Illinois Brick Wall Crumbling," and Michael L.
Denger and D. Jarent Arps, "Does Our Multifaceted Enforcement System Promote Sound Competition
Policy," ANT ITRU ST, V ol. 15 #3 (Summ er 2001).
10
The following case summaries are included primarily for illustrative purposes and do not purport to be
comprehensive accounts of the cases. The descriptions of pending cases are current through August 15,
2001.
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•
The cases against shoe retailer and manufacturer Nine West highlight the
tension between a parens patriae action and a proposed class action, where each purports
to represent the interests of consumers.
•
The governments' cases against Microsoft involved extensive cooperation
between the federal and state government plaintiffs, leading to significant savings of
public resources, although objections by plaintiff states allegedly prevented a successful
mediation by Judge Posner. The recent appellate decision upholding the finding that
Microsoft is a monopolist and violated Sect. 2 of the Sherman Act will be binding against
the company in the many suits by indirect purchasers and in potential suits by direct
purchasers, heightening Microsoft's exposure and shifting the focus of that litigation to
the plaintiffs' asserted damages.
•
The cases collectively known as Vitamins, Inc. concerning a worldwide
conspiracy to fix the prices of bulk vitamins and allocate markets raise the issue of how
states that were not even litigants were in the end able to obtain substantial settlements
from the defendants.
A.
Mylan
In 1998 and 1999, the FTC, 32 states, the District of Columbia and a number of direct
and indirect purchasers sued Mylan Laboratories, Inc., the second largest generic drug
manufacturer in the U.S., and several other companies for allegedly violating federal and state
antitrust laws.
In particular, Mylan was charged with enforcing exclusive licensing rights,
foreclosing its competitors' access to important pharmaceutical inputs, and with substantially
raising the prices of certain of Mylan's drugs.
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NY B 1 189 857 .1
(1)
FTC Suit. The FTC filed suit against Mylan on December 22, 1998 in federal
district court for the District of Columbia and filed an amended complaint on February 8, 1999.11
The FTC alleged that Mylan violated Section 5 of the FTC Act with respect to two generic,
widely prescribed anti-anxiety drugs, lorazepam and clorazepate, manufactured and sold by the
company.
The Commission claimed that Mylan had engaged in illegal restraint of trade,
monopolization, attempted monopolization and conspiracy to monopolize by entering into
certain exclusive licensing agreements for the supply of essential raw materials (known as active
pharmaceutical ingredients, or APIs) necessary for the manufacture of the two drugs. The FTC
contended that Mylan, by obtaining long-term exclusive licenses from its API suppliers,
prevented its actual or potential competitors from gaining access to the APIs, which they needed
to manufacture their own generic lorazepam and clorazapate, and that Mylan also was able to
significantly raise prices.12 After obtaining these exclusive licensing rights, Mylan allegedly
raised the price of its clorazepate tablets by approximately 1,900 to 3,200 percent, and raised the
price of its lorazepam tablets by approximately 1,900 to 2,600 percent, on sales to state Medicaid
programs, wholesalers, retail pharmacy chains and other customers.13 The FTC sought equitable
relief, including a permanent injunction barring Mylan from engaging in conduct that violates
11
F.T.C. v. Mylan Laboratories, Inc., No. 98C V0 311 4 (D .D.C ., complaint filed Dec. 22, 199 8). See also
David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 F ood & D rug L.J . 321 (2000).
12
The FTC also named the foreign supplier of these raw materials, the supplier's parent company and its U.S.
distributor, as defend ants.
13
For instance, it allegedly raised the price of a 5 00 count b ottle of 7 .5 mg clorazepate tablets from $11 .36 to
$37 7.00 , and allegedly raised the price of a 5 00 count b ottle of 1 mg lorazep am tab lets from $7.3 0 to
$19 1.00 .
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FTC Act § 5(a), rescission of certain enabling license agreements and restitution14 and
disgorgement15 in an amount exceeding $120 million plus interest.
(2)
State Suit. On the same day that the FTC filed its suit against Mylan, the state
Attorneys General of 15 states filed a parallel suit against Mylan, in the same court, based on the
same underlying conduct.16 On February 8, 1999, the state AGs of 16 states and the Corporation
Counsel of the District of Columbia joined the initial action of the 15 states; on August 5, 1999,
these 31 states and the District of Columbia, along with the State of Maryland as a recently
added plaintiff, filed a second amended complaint. The 32 states and the District of Columbia
asserted claims against the same parties named in the FTC action, and one other distributor,
under Sections 1 and 2 of the Sherman Act and the states' respective competition laws. The
14
The equitable remedy of restitution requires that the wrongdoer restore the injured person to the status quo
ante. The injured person is entitled to the difference between the price it paid before the illegal conduct and
the price it paid after the conduct. In the case of an anticompetitive overcharge, there can be multiple layers
of buyers, direct and indirect, from the manufacturer. Thus, in a multiple-level distribution chain, where a
manufacturer is found to have made an anticompetitive overcharge (n) on top of its previous charge (x) to
its distributor, where that distributor adds its own extra margin, and so on down the line, with the result that
the ultimate consumer pays so me m ultiple of its original p rice, the restitution amou nt to the ultimate
consumer would equal the difference between its original price and the new, final price. It should be noted
that the amount of restitution can be greater than three times the amount of damages (the statutory amount
provided under the Clayton Act for antitrust violations), where damages is defined as the amount of the
illegal overcharge (n). This is due, o f course, to the p ossibility of margins being add ed at each level of a
multi-level system of distributio n. See Ivy Johnson, No te, Restitution on B ehalf of Indirect Purchasers:
Opening the Backdoor to Illinois Brick, 57 W ash. & Lee L . Rev. 100 5 (2000 ).
15
The equitable remedy of disgorgement, unlike restitution, does not aim primarily to compensate the victims
of wrongful acts; instead, it is intended to deny the wrongdoer of his or her unjust enrichment and to serve
as a deterrent. It wrests ill-gotten gains from the hands of the wrongdoer. Thus, in the hypothetical
explained in the previous footnote, disgorgement would equal n, i.e., the amount of the alleged overcharge
by the manufacturer to the first buyer in the distribution chain. The FTC sought disgorgement under
§ 13(b) of the FTC Act, a provision under which disgorgement had previously been ordered in consumer
protection cases, b ut not in comp etition cases.
16
State of Alaska v. Mylan Laboratories, Inc., No. 98C V0 311 5 (D .D.C ., complaint filed Dec. 22, 199 8).
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states sued in their parens patriae capacity on behalf of natural persons,17 and also in their
sovereign capacity on behalf of each state's general economy and as injured purchasers or
reimbursers under state Medicaid and other programs. The states' claims were based on factual
allegations similar to those made by the FTC.
For relief, the states sought, among other
remedies, a permanent injunction, treble damages, appropriate relief under applicable state
statutes, and other equitable relief under federal law, including disgorgement and restitution.
On November 29, 2000, the FTC approved a settlement with Mylan, all 50 states and the
District of Columbia, and a variety of other purchasers (including insurance companies, but not
direct purchasers), in which Mylan agreed to pay $147 million to settle the suits.18 Under the
plan, Mylan will pay $100 million into a fund to compensate injured consumers and state
agencies, plus $8 million in legal fees. An additional $35 million will be used to settle private
suits by large institutional buyers, such as insurance companies, and the remaining $4 million
will cover additional legal costs. Mylan and the other defendants also agreed, without admitting
any wrongdoing, to entry of a permanent injunction prohibiting, for periods of five and ten years,
specified exclusive agreements concerning the pharmaceutical inputs and other raw materials for
Mylan's drugs. The agreement does not cover several additional suits brought by certain alleged
direct buyers of the drugs at issue.
(3)
Private Suits. Following close on the heels of the FTC and state actions, within a
week to six months afterwards, some 25 private actions were filed against Mylan and the other
17
The states' parens patriae authority is based on Section 4C of the Clayton Act, which states in part as
follows: "Any attorney general of a State may bring a civil action in the name of such State, as parens
patriae on behalf of natural persons residing in such State, in any district court of the United States having
jurisdiction of the defendant, to secure monetary relief as provided in this section for injury sustained by
such natural person s to their p roperty by reason of any vio lation of the Sherman Act. "
18
The settlement must be ap proved by the p residing federal district court judge. See FTC v. Mylan
Laboratories, Inc., Civ. N o. 1:9 8CV0 311 4 (T HF ) (pro posed O rder and S tipulated Permanent Injunction).
The final approval hearing was set for N ovembe r 29, 200 1.
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defendants in federal and state courts around the country. The claims were essentially the same
as those in the FTC and state actions. Plaintiffs included alleged direct purchasers -- drug
wholesalers, health care delivery systems, managed health care companies, insurers and
pharmacists -- and indirect purchasers -- consumers (filing in some 20 putative class action
suits), third-party payors, pharmacies and health centers.
In April 1999, a number of the cases already filed were coordinated for pretrial
discovery. By August 1999, virtually all of the federal and state cases against Mylan and its codefendants had been coordinated for pre-trial proceedings before Judge Hogan in the District of
Columbia federal district court, in order to avoid discovery duplicative of that taken in the FTC
and states' actions.
B.
Nine West
The recent litigation by the FTC, the states and consumers against the U.S. shoe company
Nine West Group for minimum resale price maintenance highlights another offshoot of the trend
toward multiple actions relating to the same conduct: not, in this case, the tension between
federal and state enforcement, but instead the tension between state parens patriae enforcement
and proposed class actions by consumers.
In this litigation, competing actions sought to
represent the interests of consumers of Nine West shoes -- the case brought by state AGs, acting
on behalf of the natural citizens of their states, and the proposed class actions brought by the
consumers themselves.19
Because each litigation was representing the same interests, relating to the same conduct,
the question arose as to whether the two could continue simultaneously and, if not, which of the
two would be favored. Where the interests are truly identical, the resolution of this case,
19
The FTC action also presumably was brought on behalf of consumers but in this case, unlike in the Mylan
litigation (discussed below), there was no issue of duplicative recovery of damages as between the States
and the FT C, be cause the FT C sought only injunctive relief.
10
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consistent with the weight of the law, indicates that parens patriae actions are superior to
consumer class actions.
But the law's answer as to who may lead the chase in these
circumstances -- the states -- still begs the question of who gets the money. Leaving that
question to the states may result in a different resolution than if it is left to the class action
plaintiffs and their counsel. In this case, the settlement agreement between the defendants and
the states provides for distribution of the settlement figure to fund women's health, educational,
vocational and safety programs under the cy pres principle. If the private actions had been
allowed to take precedence over the AGs' actions, however, the distribution of a settlement fund
would undoubtedly have been different. Although this discussion focuses on the procedural
dynamics of the competition among the competing claims, or among the representatives of those
claims, the more important subtext is the normative question of how to arrive at the most "just"
outcome and whether the means chosen accomplish that goal.
(1)
FTC Action (In re Nine West Group Inc.)
In March 2000, the FTC
simultaneously filed a complaint and entered into a consent decree with Nine West Group,
settling charges under Section 5 of the FTC Act that the company had engaged in illegal resale
price fixing with certain dealers to maintain minimum prices on its shoes.20
Nine West sells shoes under a number of brand names in retail outlets, including its own,
throughout the U.S. The FTC complaint charged that beginning in January 1998 and for more
than a year and a half, Nine West fixed, raised and stabilized retail prices to consumers. It
allegedly adopted pricing policies governing the retail sale of Nine West products and distributed
"off-limits" or "non-promote" lists of shoes, including shoes that could not be promoted outside
of defined periods of time, called "clearance windows" or "breakdates." According to the FTC,
20
In re Nine West Group, Inc., FTC file No. 981 -0386 (proposed co nsent order, Marc h 6, 200 0). Nine W est
was acquired by Jones Apparel G roup Inc. after the conduct that was the subject of the order.
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Nine West did not merely announce these policies and terminate a retailer that did not adhere to
them, which would have been lawful, but it also sought acquiescence in the policies and
threatened and initiated enforcement actions to enforce them.
It also allegedly coerced
compliance by threatening to withhold discounts or advertising funds if the dealer refused to
comply with the pricing policy. The FTC found that retailers also communicated to Nine West
their agreement to adhere to the pricing policies. The purpose and effect of these policies,
according to the FTC, were to increase, or at least stabilize, prices to consumers of Nine West
shoes and to restrict price competition among retail dealers selling Nine West products.
The FTC's consent order is entirely injunctive. It prohibits Nine West from fixing the
price at which its dealers advertise, promote, offer for sale or sell any product; from requiring,
coercing or otherwise pressuring dealers to maintain, adopt or adhere to any resale price; and
from notifying dealers in advance that they are subject to a temporary or partial suspension of
supply if they sell Nine West shoes below a designated price.
As is customary in such
circumstances, Nine West is also required to use disclaimers on price lists restating retailers'
freedom to set their own prices.
(2)
Private class action suits (In re Nine West Antitrust Litigation) In February 1999,
more than a year prior to the FTC complaint, but after the FTC and the states had begun their
investigations, some 25 proposed class actions were filed in federal court by and on behalf of
consumers who bought Nine West shoes after January 1, 1988, against Nine West Group, Inc.
and ten department store chains that sell its women's shoes. The actions were consolidated in
March 1999 in the Southern District of New York.21
21
Gruen v. Nine West Group Inc., 199 9 U .S. Dist. LEX IS 20 682 (S.D .Y.Y . March 5 , 199 9). See "Suit
Contends Nine West and Stores Illegally Fixed Shoe Prices," The New York Times (Jan. 1 9, 19 99) at C4.
12
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In January 2000, the federal district court denied a motion to dismiss by Nine West and
ten department store chain defendants that sell Nine West shoes. The court held, inter alia, that
the complaint adequately alleged an antitrust injury -- higher prices and a reduction in
competition as a result of defendants' conduct -- and that the Nine West defendants' alleged 20
percent market share could not preclude a finding that the complaint adequately alleged antitrust
injury, because the plaintiffs alleged a per se violation of Section l.22 The court held that the
plaintiffs' allegations of fraudulent concealment by the defendants and due diligence by the
plaintiffs were sufficient to toll the four-year statute of limitations of the Clayton Act.
Subsequently, as discussed in further detail below, counsel for the proposed class conditionally
agreed to withdraw their claims in view of the proposed settlement agreement between Nine
West and the states.23
(3)
State Attorneys General Actions (State of Florida v. Nine West Group)
24
In
March 2000, on the same day that the FTC entered into a proposed settlement with Nine West,
the AGs of the 50 states, the District of Columbia and the U.S. territories, commonwealths and
possessions, simultaneously filed a complaint and entered into a proposed settlement agreement
on their own behalf, in their sovereign capacity, and, in their parens patriae capacity, under
Clayton Act. Sect. 4(c), on behalf of their (natural person) citizens who purchased Nine West
products during the relevant period. The settlement agreement provides for injunctive relief and
22
In re Nine West Shoes Antitrust Litigation, 80 F. Supp. 2d 181 (S.D.N.Y. Jan. 7, 2000). It should be noted
that a state court judge dismissed a class action brought against Nine West under the Donnelly Act, New
York's antitrust statute, for the same conduct, on the grounds that alleging a per se violation for resale price
maintenance is not tantamo unt to alleging antitrust injury, i.e., does not in itself allege an ac tual injury to
competition as a whole in the relevant market; dismissal was also based on the finding that a class action
cannot be brought under the Do nnelly Act. Rubin v. Nine West Gro up, In c., No. 0763/99, 1999-2 Trade
Cas. (CCH ) ¶ 72,714 at 86,291 -292 (N.Y . Sup. Ct., 1999).
23
Counsel for the propo sed class also repre sented that Nine W est was p repared to pay them $8 00,0 00 in
attorne ys' fees.
24
00 C iv. 170 7 (S.D .N.Y .)
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NY B 1 189 857 .1
for the payment to the states of $34 million in damages, to fund women's health, educational,
vocational and safety programs. As maintained by the states25 and held by the court26, the
settlement resolved all claims against the defendants -- Nine West and ten department store/Nine
West retailers -- on behalf of residents of the plaintiff states for antitrust violations related to the
sale of Nine West shoes during the relevant period.
The states, led by Florida, had begun investigating the vertical pricing practices of Nine
West in early 1999, in collaboration with the FTC. In June 1999, upon completion of their
investigation, the states began settlement discussions. Because of the relatively small amount of
money sought and the large number of consumers, cy pres distribution, rather than a de minimis
distribution to hundreds of thousands of consumers, appeared to be the logical remedy.27 The
claims stated in the states' complaint are substantially similar to the claims in the private actions
and ultimately counsel for the private actions agreed to the cy pres settlement in lieu of further
litigation.28
C.
U.S. v. Microsoft
As of July 2001, the Department of Justice (DOJ) and states' cases against Microsoft had
spawned some 170 consumer class action cases filed in federal and state courts around the
country.29 Although over 50 of these cases have been dismissed, most of them on Illinois Brick
25
States' M emo randum of Law o n Sup eriority of Parens Patriae Actions (March 17, 20 00).
26
State of Florida v. Nine West Group, 00 Civ. 1707, Final Judgment and Consent D ecree (Dec. 14, 200 0).
27
See, e.g., settlement agreements in Va cco v. Reeb ok Int'l, 96 F.3d 44 (2d Cir. 1996) and In re Toys "R" Us
Antitrust Litigation, 191 F.R.D. 347 (E.D.N.Y . 2000).
28
The settlement procedure is as follows: when the states, acting in a parens patriae capacity, settle an action,
they must get preliminary ap proval from the court of the settlement and of a form of notice to con sumers,
who will then have an o ppo rtunity to objec t to the settlem ent and opt o ut and pursue their own claim s.
After that, and assuming the states still want to go ahead (do not receive a trigger amo unt of opt outs -- i.e.,
an overwhelming number, in this case 125,000 consumers), the states and the defendant move for final
app roval of the settlem ent.
29
"Private Suits Put Microsoft at Little Risk," The New York Times (July 16 , 200 1).
14
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grounds, the June 2001 decision by the Court of Appeals in the governments' cases gave the
remaining private actions a big boost by collaterally estopping Microsoft from denying that it
has monopoly power or that it abused that power in violation of Sect. 2. This sets the stage for
the likelihood of at least some kind of injunctive relief in the DOJ and states' cases and the
possibility of private damages in private suits.
As is well known by now, in May 1998 the DOJ and 20 states filed separate complaints
in federal district court for the District of Columbia alleging that Microsoft had monopolized the
market for computer operating systems running on Intel microprocessors and unreasonably
restrained trade in that and related markets, in violation of Sections 1 and 2 of the Sherman Act
and analogous state laws.30 Their complaints were subsequently consolidated for purposes of
discovery, trial and judgment. The plaintiff states played an active role in discovery -- for
instance, taking key deposition testimony from Bill Gates -- with the DOJ taking the lead at
trial.31 In April 2000, federal district court Judge Penfield Thomas Jackson ruled that Microsoft
had illegally restrained trade and monopolized the market for operating systems for personal
computers running on Intel microprocessors, in violation of Sections 1 and 2 of the Sherman
Act.
Judge Jackson held that Microsoft had monopoly power in the market for operating
systems for PCs that run on Intel microprocessors; that it violated Sect. 2 by engaging in a series
of exclusionary, anticompetitive and predatory acts to maintain its monopoly; also violated Sect.
2 by attempting to monopolize the Web browser market; and violated Sect. 1 by unlawfully
tying its Web browser, Internet Explorer, to its Windows operating system; that the effect of
30
One of the states subsequently withdrew. In July 2001, following the decision by the D.C. Court of
Appeals, another state, N ew M exico , entered into a settlement agreement with M icroso ft.
31
The states had their own views on strategy and relief, perhaps making it impossible to settle the case during
the mediation supervised by Judge Posner prior to the issuance of Judge Jackson's Conclusions of Law.
15
NY B 1 189 857 .1
Microsoft's marketing arrangements with other companies did not constitute exclusive dealing
under Sect. 1; and that the evidence proving violations of the Sherman Act also satisfied the
elements of analogous causes of action arising under the laws of each plaintiff state. Judge
Jackson subsequently ordered that the company be broken up into an operating system company
and an applications company and stayed his decision pending an appeal by Microsoft from the
final judgment of liability and remedy issued by the district court.
In June 2001, the Court of Appeals for the District of Columbia issued a unanimous en
banc decision that affirmed in part and reversed in part the judgment that Microsoft had violated
Sect. 2 through monopoly maintenance of the PC operating system market; reversed the
judgment that Microsoft had violated Sect. 2 through attempted monopolization of the putative
market for Internet browsers; remanded the claim of unlawful tying in violation of Sect. 1 for
findings under the rule of reason rather than the per se standard used by the district court; and
vacated the order of divestiture that would have broken up the company into an operating
systems company and an applications company. The Court of Appeals also found that Judge
Jackson had engaged in judicial misconduct relating to the case and remanded the case to a
different district court judge.32
Microsoft has had some success in dismissing suits by foreign purchasers and by indirect
purchasers in states that have no Illinois Brick repealers because in those states indirect
purchasers have no claim against Microsoft under either federal or state law.33 (PC purchasers
32
In early August 2001, Microsoft filed a petition for certiorari with the Supreme Court, seeking a reversal of
the appellate court's decision not to d isqualify Judge Jackson as of the date of his earliest interviews with
reporters (which predate the district court's issuance of the findings of fact) and, on these grounds, a vacatur
of all of that court's findings of fact and conclusions o f law.
33
Seventeen states either have Illinois Brick repealers or other statutory or com mon law c onferring antitrust
standing on indirect purchasers. For the plaintiffs in states with Illinois Brick repealers, other obstacles may
arise that have nothing to do with the merits: for instance, it was recently held that class actions are not
perm itted und er the D onne lly Act. See Rubin v. Nine West Group, Inc., No. 07 63/99 , 1999 -2 Trade Ca s.
(CCH ) ¶ 72,714 at 86,291 -292 (N.Y . Sup. Ct. 1999). Similarly, it was recently held that foreign purchasers
who did not participate in the U .S. domestic market are barred und er the Foreign Trad e Antitrust
16
NY B 1 189 857 .1
are indirect purchasers of the Windows operating system because they buy their PC with the
operating system preloaded.) The remaining consumer cases cover some 30 states; most of the
cases have been consolidated in state court in San Francisco or in federal district court in
Baltimore.34 As explained by the Maryland federal court, the motion for consolidation in that
court was granted on the grounds that "each action raises similar questions of market definition,
the existence of monopoly power, the fact and significance of Microsoft's alleged anticompetitive conduct, and the existence and scope of any antitrust injury suffered by plaintiffs."35
In all of the cases for damages, although the plaintiffs have cleared the hurdle of establishing that
Microsoft is a monopolist and abused its monopoly power (barring of course a reversal by the
Supreme Court of the appellate court decision in U.S. v. Microsoft), an even more formidable
obstacle looms: proving that they were harmed by Microsoft's conduct and that they suffered
actual, monetary damages.
D.
"Vitamins, Inc."
A worldwide conspiracy to fix the prices of bulk vitamins, allocate markets and engage
in other collusive conduct in the bulk vitamins industry, in violation of Section 1, has spawned a
wide range of litigation, including criminal prosecution by the DOJ and private cases in federal
and state court. These cases raise the significant issue of how states that were not even litigants
were in the end able to obtain substantial settlements from the defendants. The alleged cartel
operated from 1990 to 1999 and is the largest ever investigated anywhere in the world. The
Improvements Act from pursuing S herman Act claims. In re Microsoft Corp. Antitrust Litigation, 127 F.
Supp.2d 7 02, 717 (D . Md. 200 1).
34
The earliest of the co nsumer harm suits is no t sched uled fo r trial until August 15 , 200 2.
35
In re Microsoft Corp. Windows Operating Systems Antitrust Litigation, 2000 U .S. D ist. LEX IS 5559 (JPML
April 25, 2000) (transfer by the Judicial Panel on Multidistrict Litigation of 27 actions to the District of
Maryland). The court subsequently dismissed most of the federal monetary claims in these cases as barred
by Illinois Brick. Id., MDL 1 332 (D . Md. Jan. 12, 200 1).
17
NY B 1 189 857 .1
defendants are manufacturers of bulk vitamins, which are used in the production of a wide
variety of food products, such as animal feed, soft drinks and breakfast cereal.
Principal
defendants include, among others, Hoffman LaRoche (Swiss), Rhone-Poulenc (French), BASF
and Hoechst Marion Roussel (German), Eisai Co., Daiichi Pharmaceuticals and Takeda
Chemical Industries (Japanese), Merck KgaA and Dugussa-Huls AG (German), Chinook Group
Limited (Canadian), Nepera Inc. and Reilly Industries Inc. (U.S.), and various affiliates and
subsidiaries.
All of the corporate defendants and a number of individuals pleaded guilty in some 25
DOJ prosecutions to charges of criminal price fixing. Among the fines, Hoffman LaRoche
agreed to pay a record $500 million36 and BASF agreed to pay $225 million37.
The corporate defendants in the DOJ prosecutions were also named in a number of
private cases brought in federal district courts around the country by companies, typically large
corporations,38 that bought directly from the vitamin manufacturers. The plaintiffs used the
vitamins for a variety of purposes, including the manufacturing of animal feed (e.g., plaintiff
Tyson Foods adds vitamins to animal feed for chickens), vitamin pills and food for human
consumption. The claims were substantially the same as those made by the DOJ in its criminal
cases but also included claims based on state antitrust laws. The federal cases were consolidated
in a multidistrict class action in the District of Columbia.
In November 1999, seven of the defendants (and their affiliates) entered into a settlement
agreement with the plaintiffs and agreed to pay approximately $1.05 billion, plus $122 million in
36
U.S. v. Hoffman-LaRoche Ltd., No. 3:99 -CR-184 -R (N .D. T ex., M ay 20, 199 9).
37
U.S . v. BA SF Aktien gesellschaft, No. 3:99-CR-200 -R (N.D. Tex., M ay 20, 1999).
38
Plaintiffs include, among others, American Hom e Products, Archer Daniels Midland, Bayer Co rporation,
Hormel Foods, Bristol-Meyers Squibb and Kellogg Co.
18
NY B 1 189 857 .1
counsel fees.39 Three of the defendants -- BASF, Hoffman-LaRoche and Rhone-Poulenc40 -were responsible for paying $900 million of the total figure. Since November 1999, several
hundred plaintiffs have opted out of the settlement and the settlement figure therefore has been
reduced to about $250 million excluding counsel fees. To ensure that the settling plaintiffs are
not shortchanged vis a vis the opt-outs, the settlement agreement contains a most-favored nations
clause that requires a settling defendant to pay the settlement class additional money if a settling
defendant agrees to pay any opt-out claimant proportionally more than the money made
available to the members of the class with respect to any vitamin product.
Twelve of the defendants in the federal actions, who also had pleaded guilty to the DOJ
charges, did not join in the settlement of the multidistrict federal action. In May 2000, the D.C.
district court denied most of their motions to dismiss, which were based in part on arguments
that claims by indirect purchaser plaintiffs (who constitute a small percentage of the plaintiff
class) under state law were legally insufficient.
A number -- although not all -- of the corporations named as defendants in the DOJ and
private federal actions were also sued in private actions in state court in some 15 states and the
District of Columbia based on the same alleged facts underlying the federal actions.
The
plaintiffs were for the most part indirect purchasers and their claims were based on state law.
These suits were brought in states that allow indirect purchaser claims. None of the plaintiffs in
the private federal actions are plaintiffs in any of the state court actions.
II.
Unraveling the Dilemmas
39
In re Vitamins Antitrust Litigation, Misc. No . 99-1 97, M DL 128 5 (D .D.C ., Nov. 4, 19 99).
40
Although Rhone-Poulenc paid damages in the civil settlement, the company was not charged in the criminal
prosecution, because of its cooperation under the DOJ amnesty program.
19
NY B 1 189 857 .1
The Mylan, Nine West, Microsoft and Vitamins cases raise key issues about the
interaction of federal, state and/or private enforcement: Does it constitute an end-run of Illinois
Brick for the states in Mylan to recover on behalf of indirect purchasers? Who speaks for
consumers when, as in Nine West, the states assert their parens patriae authority concurrently
with putative class action suits by consumers?
In the Vitamins settlement with the states
(described below), the states appear to have used their clout to achieve a more global settlement
with the settling defendants than the private plaintiffs arguably would have obtained in their own
state court suits. Has judicial efficiency and at least a more global peace been gained here at the
expense of a fuller and more effective defense? The Vitamins case in particular highlights the
strength of the states when they act in concert. In Microsoft, despite extensive cooperation
between the DOJ and the plaintiff states, the states have not balked at pursuing -- or indicating
their willingness to pursue -- an independent strategy at key points along the way.
A.
Mylan: An End-Run Around Illinois Brick?
(1) Decisions on claims by FTC and States. In July 1999 Judge Hogan granted in part
and denied in part motions to dismiss by the defendants in the FTC and state actions.41 In the
FTC case, the defendants had argued that the court lacked subject matter jurisdiction under FTC
Act Sect. 13(b) either because the statute does not authorize the Agency to seek a permanent
injunction or does not permit equitable monetary relief (such as the disgorgement of profits, as
requested by the FTC).42 The court rejected this argument and ruled that the FTC was entitled to
seek both a permanent injunction and disgorgement. The court reasoned that although Sect.
13(b) does not explicitly authorize the FTC to seek monetary remedies, "monetary relief is a
41
FTC v. Mylan Laboratories, Inc.; State of Connecticut v. Mylan Laboratories, Inc. [formerly captioned
State of Alaska v. Mylan Laboratories, Inc.], 62 F . Supp.2d 25 (D .D.C . 199 9).
42
Section 13(b) of the FTC A ct states, in relevant part, that "in proper cases, the Commission may seek, and
after prope r proof, the co urt may issue, a perma nent injunction."
20
NY B 1 189 857 .1
natural extension of the remedial powers authorized under § 13(b)."43 The court also ruled,
however -- and this was the ruling with greatest significance for the interaction of remedies
sought by the FTC and the states -- that the states could not sue for restitution/disgorgement
under Sect. 16 of the Clayton Act.44 The defendants argued that restitution and disgorgement are
retrospective remedies for past conduct, not relief against "threatened" conduct (as per the
statutory language). The court agreed that disgorgement and restitution are not forward-looking,
as courts have held that remedies under Sect. 16 must be, and that Sect. 16 therefore could afford
the states no relief in the form of either disgorgement or restitution.45
The court seemed to rest its rejection of the states' claim for restitution and disgorgement
more fundamentally on a second ground -- namely, that "permitting disgorgement . . . raise[d]
the specter of duplicative recoveries."46 As the court explained, under Sect. 4 of the Clayton Act,
private parties, including the states (suing on their own behalf), can pursue direct purchaser
actions for treble damages, as they in fact did in this case.47 Under Sect. 4(c), the states also can
sue for treble damages in their parens patriae capacity on behalf of their natural person residents
(i.e., not corporations or entities), as they did in this case.
43
62 F. Supp.2d at 36.
44
Section 16 states that "[a]ny person, firm, corporation, or association shall be entitled to sue for and have
injunctive relief . . . against threatened loss or damage by a violation of the antitrust laws . . . when and
under the sam e cond itions and principles as injunctive relief against threatened conduct that will cause loss
or damage is granted b y courts of equity." 15 U.S.C. § 2 6.
45
The court cited California v. American Stores Co., 495 U .S. 271 (1 990), which held that divestiture is a
form of injunctive relief within the meaning of Sect. 16. The district court observed that "[t]he divestiture
order in American Stores was quintessentially forward-looking: it was designed to prevent the
anticompetitive harms of the merger from materializing by dissembling [sic] the merged corporation." 62
F. Supp.2d at 41.
46
62 F. Supp.2d at 41.
47
Section 4 of the Clayton Act provides, in part, as follows: "Any perso n who shall be injured in his business
or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover
threefo ld the damages by him sustained, and the cost of suit, including a reasonable atto rney's fee."
21
NY B 1 189 857 .1
In rejecting the states' claim under Sect. 16, the court was guided by the policy directives
underlying Illinois Brick. In Illinois Brick, the Supreme Court held that indirect purchasers -e.g., in the Mylan cases, the ultimate consumers of clorazepate and lorazepam -- lack standing
and therefore may not recover under federal antitrust law.48 As Judge Hogan explained in his
Mylan decision, the Supreme Court in Illinois Brick was guided by two concerns: first, that the
"addition of indirect purchasers to the litany of possible antitrust plaintiffs threatened to mire
courts in unduly complicated and speculative damages proceedings; and, second, that permitting
indirect purchasers to sue creates a 'serious risk of multiple liability for defendants'."49
Therefore, Illinois Brick's prohibition of antitrust claims by indirect purchasers under federal law
means that a state, acting as parens patriae, has no claim under federal antitrust law for its
natural persons who are indirect purchasers, any more than the indirect purchasers themselves
can have such a claim. Based on this reasoning, Judge Hogan disallowed any claim of the states
to restitution or disgorgement under Sect. 16 as an end-run of the Illinois Brick prohibition:
Permitting disgorgement under § 16 would provide yet another
route to defendants' allegedly ill-gotten gains, and would therefore
heighten the possibility that defendants in antitrust actions could
be exposed to multiple liability. . . . The States should not be
allowed to circumvent Illinois Brick through a novel interpretation
of § 16.50
The court therefore limited the states' possible remedies to treble damages under § 4 of the
Clayton Act for any direct purchases that state entities or natural persons of a state may have
made of generic clorazepate and lorazepam from the defendants.
48
Illinois B rick v. Illinois, 431 U.S. 720 (1977).
49
62 F. Supp.2d at 41 (citing Illinois Brick, 431 U.S. at 730).
50
62 F. Supp.2d at 41.
22
NY B 1 189 857 .1
(2) States' equitable claims: parens claims based on federal antitrust law other than the
Clayton Act. Sixteen of the plaintiff states moved for reconsideration of the court's ruling on the
grounds, in part, that the court had mistakenly dismissed various states' claims for equitable
monetary relief. The court had dismissed a number of state restitution claims on the basis that
because -(a) the law of those states prompts courts to look to federal law in interpreting their
unfair competition and consumer protection statutes, -(b) the state statutes had to be construed
with a view to the Clayton Act, and -(c) the Clayton Act does not authorize restitution in light of
Illinois Brick, then (d) the states therefore could not state a claim for equitable monetary relief.
As the court acknowledged on the motion for reconsideration, however, the Clayton Act is not
the sole source or reference for states' competition and consumer protection statutes: some
states' statutes prompt their courts to interpret those statutes in light of Section 5(a)(1) of the
FTC Act rather than the Clayton Act.51 Because the court had already held that the FTC could
pursue equitable remedies such as disgorgement, based on Sect. 13(b) of the FTC Act, on the
motion for reconsideration it held that states now found by the court to interpret their
competition and consumer protection statutes in light of the FTC Act could state equitable
claims for monetary relief.52 This result rests on a two-step logic: first, Illinois Brick held only
that indirect purchasers lack standing to sue for monetary relief under the Clayton Act; the Court
did not hold that -- or much less even address whether -- they lacked standing to sue for
monetary recovery on antitrust claims under federal laws other than the Clayton Act. Second,
51
Section 5(a)(1) of the FTC Act provides as follows: "Unfair methods of competition in or affecting
com merc e, and unfair or deceptive acts or practices in or affecting com merc e, are d eclared unlawful."
52
The cou rt reviewed the relevant statutes o f the mo ving states and on most, but not all, of the motio ns uph eld
the claims of the states for equitable monetary relief on behalf of indirect purchasers. For instance, in the
case of Alaska, the court found that the state's Unfair Trade Practices and Consumer Protection Act
provides that "in interpreting [the Act] due consideration and great weight should be given the interpretation
of 15 U.S.C. § 45(a)(1) (§ 5(a)(1) of the Federal Trade Commission Act." 99 F. Supp.2d 1, 9 (D.D.C.
199 9) (citing Alaska Stat. § 45.5 0.54 5).
23
NY B 1 189 857 .1
under ARC America, Illinois Brick does not preempt the states' right to enact and enforce their
own antitrust laws, including laws specifically granting a state the right to sue on behalf of
indirect purchasers.53
The district court's analysis prompts several questions. First, it should be noted, whereas
the court mentioned as one possible basis of recovery the states' cause of action under § 4C as
parens patriae on behalf of natural persons, in fact there are no natural person direct purchasers
among the plaintiffs for whom the states could act as parens patriae in these cases, for the
purchasers were all corporations or entities. The question therefore arises as to how allowing
disgorgement under § 16 (which would yield nothing) contributes to any duplication of recovery
obtained by the states under § 4C on behalf of direct purchasers when there can in fact be no
such recovery in this case because there are no natural person direct purchasers.
Second, in evaluating the court's concerns over the kind of multiple liability to be
avoided under Illinois Brick, it is important in this case to distinguish between the remedies of
restitution and disgorgement. Both the FTC and the states sought restitution and disgorgement.
As detailed above, the court allowed the FTC's claim for disgorgement (without explicitly
addressing its claim for restitution54) and disallowed the states' claims for restitution and
53
Of course, it could be argued that the Illinois Brick exclusion of federal antitrust claims by indirect
purchasers was made with reference only to the Clayton Act because at the time of that ruling, there was
little or no precedent for, or contemplation of, monetary recovery by the government under any other
federal antitrust provision, such as Section 13(b) of the FTC Act. Under this reasoning, the Supreme
Court's rationale, if not its explicit words, would have required extending the prohibition on any recovery
on behalf of indirect purchasers to claims under the FTC Act, in addition to the prohibition of indirect
claims under the Clayton A ct. Ho wever, unde r a literal interpretation of Illinois Brick (which limited itself
to the Clayton Act), and as Judge Ho gan interpreted it in Mylan, the FTC was entitled to equitable monetary
relief under FTC Act Sect. 13(b) -- relief that in effect would be on behalf of indirect purchasers, even if the
FT C did not explicitly so characterize it. This literal interpre tation of Illinois Brick, leaving open the
possibility of recovery by the FTC on behalf of indirect purchasers under the FTC Act, thus opened the
way, und er the tea ching o f ARC A merica, to similar recovery by those states with competition laws based
on the FT C Act.
54
The court did not explicitly address the FTC's request for restitution in the initial decision, 62 F. Supp.2d
25; however, in the subsequent decision addressing the states' motion for reconsideration, the court stated
that although "no co urt has addressed the specific issue o f restitution o n behalf of indirect purchasers . . .
24
NY B 1 189 857 .1
disgorgement under Sect. 16 of the Clayton Act. Some confusion arises in the decision because
the court tends to use the terms "restitution" and "disgorgement" interchangeably, whereas their
meanings are quite different.
Restitution requires restoring the injured person to the status quo ante, whereas
disgorgement takes away the wrongdoer's unjust enrichment.55
Restitution for the ultimate
consumer is the total amount of alleged overcharge suffered by that consumer.
Disgorgement
refers only to the amount of alleged overcharge imposed on the first purchaser by the
manufacturer. Typically there are several intermediate levels in the distribution chain between
manufacturer and ultimate consumer, at each of which the wholesaler/distributor may not only
pass through but add its own extra margin to the alleged illegally increased price charged by the
manufacturer. Whereas the allegedly illegal increase in price charged by the manufacturer to the
wholesaler, its direct purchaser, may be $1, the wholesaler may in turn pass the $1 through and
also add its own margin of $0.50, and so on down the line, with the result that the alleged illegal
profit to the manufacturer would be $1 and the out-of-pocket loss to the ultimate consumer
would be the passed-through allegedly illegal price increase plus the extra amounts of margin
added to it at the different levels of the distribution chain. Thus, the disgorgement amount,
representing the overcharge by the manufacturer to its direct purchaser (the wholesaler), would
be $1. The restitution amount, which represents the total out-of-pocket loss to the consumer as a
result of the pass-through increase and all supplementary margin increases as the product
proceeds down the distribution chain, would be some figure greater than $1.
Because disgorgement corresponds only to damages suffered directly by the first
purchaser from the manufacturer, it is not clear why the court in Mylan, in assessing the states'
the Co urt will assum e that the F TC does have the authority to seek such relief." 9 9 F. Supp.2d 1 , 5 n.2.
55
See footnotes 43 and 44, supra.
25
NY B 1 189 857 .1
claims, found that "disgorgement would have the additional benefit of permitting the states to
compensate indirect purchasers who are excluded from recovery under current law."56 The court
may of course simply have understood that the disgorgement amount, or some part of it, would
be distributed to indirect purchasers notwithstanding the exclusion of such recovery in some
states.57
Restitution, however, not disgorgement, is the amount that accurately reflects the
alleged out-of-pocket loss suffered by indirect purchasers.58
As for the interrelationship between the federal and state actions, one can only speculate
about how the state claims would have proceeded through the courts, independently, had the
district court denied the FTC's claim to monetary recovery under Sect. 13(b) of the FTC Act,
instead of being 'piggybacked' as they were with the FTC's claims. It has been estimated,
however, that the states' claims might have equaled roughly seven times the amount of the
disgorgement claim of the FTC. In this case, the fact that the FTC and the states were involved
in the same action, and in the same settlement negotiations, may have had a moderating
influence on the potential recovery by the states.
(3) Effects on Illinois Brick policy goals. The question therefore arises whether the
Mylan settlement undercuts the policy goals of Illinois Brick. Those goals are (1) to save the
courts from unduly complicated and speculative damages proceedings and (2) to reduce the risk
of multiple liability for the defendants. As the intervening settlement saved the court from
56
62 F . Supp.2d at 41.
57
As for the settlement giving the states the right to distribute some $100 million from the $147 million
settlement fund: the state AGs will distribute the fund to injured consumers and to state agencies. The 32
states and the District of Columbia sued on behalf of government direct purchasers. Most of these 33
plaintiffs also sued on behalf of their indirect purchaser/consumers under state antitrust and other common
law and consumer protection laws for d amages and/or equitable relief. Presu mab ly the states will have to
decide among themselves the proper method of distribution among the 33 named plaintiffs and the 28 states
that did not join in the action.
58
In any case, the court finally makes it clear in dismissing the states' claim under Sect. 16 that the dismissal
applies to the claim for "disgorgement and/or restitution." 62 F. Supp.2d at 42.
26
NY B 1 189 857 .1
having to conduct damages proceedings, the outcome was at least neutral with respect to the first
policy goal (i.e., to save the courts from unduly complicated and speculative damages
proceedings). Whether the second goal -- to reduce the risk of multiple liability for defendants -was promoted, subverted or merely left alone is less clear. Although private actions were
brought on behalf of putative classes of indirect purchasers, these actions were settled as part of
the $35 million to be paid to insurance companies, which in turn would be expected to keep the
money as partial reimbursement for their coverage of their insureds' higher drug costs.
Therefore, the indirect purchasers will not be recovering both from a distribution by the states
and from the $35 million settlement encompassing their putative class action suits. There also
remains the possibility that certain alleged direct purchasers, whose claims were not covered by
the settlement, will win a monetary judgment against the defendants.59 It is this "serious risk of
multiple liability for defendants," resulting from "allowing offensive but not defensive use of
pass-on," that Illinois Brick sought to preclude by granting automatic standing to direct
purchasers and precluding the possibility of claims by indirect purchasers under the Clayton
Act.60
A pre-trial settlement of a 13(b) action, however, is of somewhat ambiguous and limited
value in trying to reconcile such an action with the policy goals of Illinois Brick. A further -and more probative -- question arises in the case where the action progresses to a damages
proceeding (regardless of whether it is followed by a settlement). If the settlement in Mylan
avoided some of the potential conflict with the policy goals of Illinois Brick, it clearly did not do
so completely, and it is also possible that in a future case, there may have to be just the kind of
59
See In re Lorazepam & Clorazepate Antitrust Litigation, 2001 WL 88072 (D.D.C., July 2, 2001) (TFH)
(declining to adopt "ultimate purchase rule" precluding direct purchaser suits where the FTC has sought
recovery under § 13(b)).
60
Illinois B rick Co. v. Illino is, 431 U.S. 720 , 730 (1977 ).
27
NY B 1 189 857 .1
speculative, complex damages proceeding, involving different levels of indirect purchasers, that
the Court in Illinois Brick sought to preclude.
(4)
FTC Commissioner Leary's dissent: 'Proposed settlement undercuts Illinois
Brick'. The FTC voted 4-1 to accept the proposed settlement in Mylan, with Commissioner
Leary dissenting in part and concurring in part. His principal objection was that the rulings of
the federal district court that underlie the settlement -- in particular, that the FTC may properly
seek monetary relief in an antitrust case under Sect. 13(b) of the Federal Trade Commission Act
on behalf of indirect purchasers -- "could seriously undercut federal policy [embodied in Illinois
Brick] against multiple claims by direct and indirect purchasers."61 In addition, Commissioner
Leary objected that seeking monetary relief under Sect. 13(b) of the FTC Act in this case could
open the door to less scrupulous uses in less apparently egregious circumstances, and
commented that "[a]t the very least, we might indicate that the remedy will not be sought in
cases where the violation is unclear and where private damage remedies are available and being
pursued."62
Leary acknowledged that disgorgement under federal statutes other than Sect. 4 of the
Clayton Act, such as Sect. 13(b) of the FTC Act, does not literally conflict with Illinois Brick.
Nonetheless, he argued, "it can hardly be claimed that restitution to indirect purchasers under an
alternative federal statute is consistent with the broad policy objectives of Illinois Brick, which
also involved a federal statute."63 The logic (of the four Commissioners in the majority) for the
non-applicability of Illinois Brick to the remedy of disgorgement in this case, Leary suggests,
61
FTC v. Mylan Pharma ceuticals, Inc., FTC File No. X990015 (Statement of Commissioner Thomas B.
Leary, Dissenting in P art and Concurring in Part).
62
Id.
63
Id.
28
NY B 1 189 857 .1
purportedly derives from California v. ARC America Corp.64, which held that Illinois Brick does
not preclude indirect purchaser recoveries under state -- as contrasted with federal -- statutes.
But ARC, Leary aptly notes, did not address the issue of any distinctions among federal laws;
rather, it was simply based on the principle of federalism, which is careful to distinguish between
the authority of the federal, as contrasted with state, sovereigns, and there is no such
corresponding distinction between application of the FTC Act and application of the Clayton
Act, which are both enforced by the same sovereign. Reliance on ARC for the proposition that
monetary relief is available for antitrust injury under Sect. 13(b) of the FTC Act to indirect
purchasers is misplaced, according to Leary, for ARC would, if anything, counsel that the
Sherman and Clayton Acts should be construed consistently with the FTC Act, as many other
courts have done, as a matter of substantive law.
Characterizing the settlement as "an essentially ad hoc allocation of the disgorgement
amount in this case, under the aegis of a single judge," Leary in effect decries the settlement as a
one-off, expediency-driven solution that simply steers wide of the problem -- ostensibly resolved
in Illinois Brick -- of unduly complicated, speculative damages determinations that would award
damages to both direct and indirect purchasers. "[S]ound legal rules," Leary added, "have to be
premised on the assumption that there will be no settlement," and here, in the absence of a
settlement, the court might well have faced just the kind of unduly complicated and speculative
damages determination that the holdings in Illinois Brick and ARC, taken together, are intended
to limit.
Leary finally criticized the use of Sect. 13(b) in this case as possibly opening the door to
its further use, in circumstances where it is less warranted, so as to undermine the final policy
64
490 U .S. 93 (1989).
29
NY B 1 189 857 .1
foundation of Illinois Brick, namely, the avoidance of duplicative recoveries65, for the FTC and
some states could now obtain restitution on behalf of consumers (indirect purchasers) while the
defendants would remain potentially liable for full treble damage recoveries by direct
purchasers. In conclusion, Leary stated:
Illinois Brick has withstood frontal assaults for over 20 years. It
would be ironic, indeed, if a barrier against indirect purchaser suits
under a federal statute (Clayton Act Section 4) that specifically
refers to monetary recoveries in antitrust cases could be so easily
avoided by a backdoor approach under a statute (Section 13(b) of
the FTC Act) that nowhere specifically authorizes monetary
recoveries in antitrust cases and that was never so employed until
very recently.66
The pending suits by alleged direct purchasers that survive the settlement do raise the
real possibility of the kind of duplicative recovery anticipated by Leary. The settlement in effect
allocates $100 million to consumers/indirect purchasers. Yet, Illinois Brick, which accepted the
rule of no defensive pass-on of Hanover Shoe67 (prohibiting a defendant from disclaiming
liability to its direct purchaser on the grounds that that purchaser has passed on the allegedly
illegal overcharge to another purchaser down the line), extended that rule to offensive pass-on,
thereby rejecting an allocation of damages among direct and indirect purchasers. It would be
logically inconsistent, the Court reasoned in Illinois Brick, to deny defendants the use of the
pass-on theory in defense but to allow indirect purchasers to use it offensively, even though they
65
It is important to highlight the meaning of "duplicative" as used in the Mylan case and generally, with
respect to monetary relief. As explained by the Court in Illinois Brick, "[a] one-sided application of
Hanover Shoe substantially increases the possibility of inconsistent adjudications -- and therefore of
unwarranted multiple liability for the defendant -- by presuming that one plaintiff (the d irect purchaser) is
entitled to full recovery while preventing the defendant from using that presumption against the other
plaintiff; overlapping re coveries are certain to result from the two law-suits unless the indirect purch aser is
unable to establish any pass-on whatsoever. As in Ha waii v. Stan dard O il Co. o f Cal., we are unwilling to
"open the door to duplicative recoveries" under § 4." Illinois Brick, 431 U.S. at 730-31.
66
Id. (noting that the district court in Mylan stated that "no court, including this one, has held [until now] that
the FT C may pursue restitution claim s on behalf of indirect purch asers," 99 F . Supp.2d at 5, n.2).
67
392 U .S. 481 (1968 ).
30
NY B 1 189 857 .1
may in fact end up absorbing the largest portion of the overcharge. The Court in Illinois Brick
thus concluded that plaintiffs and defendants had to be treated equally with respect to the
permissibility of pass-on arguments; that is, the argument would henceforth be unavailing for
both parties.
With the possibility of monetary recovery by the alleged direct purchasers in Mylan, the
symmetrical rejection of the pass-on theory -- that is, for both defendants and plaintiffs -- is
repudiated: plaintiffs can use it but defendants cannot. Of course, there is more to the no passon rule for both defendants and plaintiffs (i.e., the equal application of the rule to defendants and
plaintiffs) than mere logical symmetry; its importance lies in the policy and the evidentiary
realities that it is intended to address.
"First," said the Court in Illinois Brick, "allowing
offensive but not defensive use of pass-on would create a serious risk of multiple liability for
defendants. Even though an indirect purchaser had already recovered for all or part of an
overcharge passed on to it, the direct purchaser would still recover automatically the full amount
of the overcharge that the indirect purchaser had shown to be passed on; similarly, following an
automatic recovery of the full overcharge by the direct purchaser, the indirect purchaser could
sue to recover the same amount."68 Second, "[h]owever 'long and complicated' the proceedings
would be when defendants sought to prove pass-on, they would be equally so when the same
evidence was produced by plaintiffs. The evidentiary complexities and uncertainties involved in
the defensive use of pass-on against a direct purchaser are multiplied in the offensive use of
pass-on by a plaintiff several steps removed from the defendant in the chain of distribution."69
(5)
FTC Majority's Response.
In response to Commissioner Leary, Chairman
Pitofsky and Commissioners Anthony and Thompson wrote a separate Statement justifying the
68
Mylan, 431 U.S. at 730.
69
Illinois Brick, 431 U.S. at 732 .
31
NY B 1 189 857 .1
use of Sect. 13(b) to seek disgorgement in this case as not inconsistent with the policy goals of
Illinois Brick. To Leary's argument that the result in this case will open the door to less
scrupulous uses of Sect. 13(b) to obtain disgorgement, Pitofsky, Anthony and Thompson reply:
"We cannot agree . . . that because a claim for disgorgement in some future case under a
different set of facts might conflict with the policy of Illinois Brick, the Commission should
never seek disgorgement (or used disgorged monies to compensate overcharged consumers) or
should not have done so here." 7 0 Underlying their argument is the fundamental point that the
purpose of disgorgement (which is measured by the amount of the ill-gotten gains received by
the wrongdoer) is to ensure that the defendant does not reap the rewards of its unlawful conduct,
whereas an order for damages or restitution is intended to make the injured plaintiff whole.
Thus, explain the three Commissioners, "the Commission in this case sought a monetary award
equaling the full amount of the unlawful overcharge the defendant imposed, without regard to
whether the direct purchasers absorbed the overcharge or passed it along."71
The three Commissioners acknowledge, however, that regardless of the conceptual point
that disgorgement is intended to take back a wrongdoer's ill-gotten gains, here the $100 million
settlement fund is intended to compensate consumers, including of course indirect purchasers,
who paid inflated prices for the drugs. Nonetheless, they add, this result is not inconsistent with
the policy of Illinois Brick. First, they reason, the complexity of a damages proceeding awarding
restitution to indirect purchasers -- thereby forcing the court to try to trace the amount of the
overcharge passed on to indirect purchasers -- is not brought into play by a disgorgement action
such as this because here the only calculation necessary is the measurement of Mylan's unjust
70
Federal Trade Commission v. Mylan Laboratories, Inc., FTC File No. X990015 (Statement of Chairman
Robert P itofsky and Commissioners Sheila F. Anthony and M ozelle W . Thomp son).
71
Id.
32
NY B 1 189 857 .1
enrichment. Second, the FTC's action, far from discouraging vigorous private enforcement,72 in
fact appears to have precipitated the filing of a number of class actions on behalf of both direct
and indirect purchasers.
Third, and most importantly, the three Commissioners dispute that an FTC action for
disgorgement, such as this one, undercuts any policy articulated in Illinois Brick against multiple
recovery, or indeed that the Supreme Court even articulated such a policy in that case or
subsequently. The Court in Illinois Brick and ARC, they explain, was not concerned that a
defendant's liability might exceed treble damages, but that multiple recoveries might be obtained
under the same statute, which would violate the legislative intent of the Clayton Act. This logic,
according to the Commissioners, is based on the recognition of dual sovereigns for antitrust
enforcement, federal and state, as reflected in the Court's statement in ARC that "[s]tate laws
[permitting indirect purchaser recoveries] are consistent with the broad purposes of the federal
antitrust laws."73 The Commissioners conclude from this that "[a]ccording to the Court's logic
[in ARC], the possibility that a defendant's total liability might exceed treble damages therefore
does not constitute justification for denying relief under other statutes." 74
It would appear that Commissioner Leary's point is better reasoned, at least theoretically.
In his view, the Court in ARC sought to reconcile state judicial sovereignty with the rule of
Illinois Brick by reference only to state antitrust laws (as a category) vis-a-vis federal antitrust
laws (as a category), and that ARC did not anticipate, or therefore predicate its decision, on any
72
Recall here, as the Comm issioners noted, that "the rationale [in Illinois Brick] behind allowing direct
purchasers to recover the entire amount of the overcharge rather than splitting the damages between direct
and indirect purchasers was to ensure sufficient enforcement of the antitrust laws." Id.
73
490 U.S. at 102.
74
Statement of Pitofsky, Anthony and Thompso n.
33
NY B 1 189 857 .1
exception to the prohibition on federal recovery for indirect purchasers in the form of Sect. 13(b)
or any other statute.
The Commissioners noted, more practically, that there is "little risk of multiple recovery
in excess of the treble damage amount in the present case, nor should there be in most cases . . .
[for c]ourts have routinely coordinated remedies in government disgorgement actions and private
damage actions, and are readily able to surmount the potential problem of duplicative
recovery."75
B.
Nine West: Who Speaks for the Indirect Purchasers?
In Nine West, the federal district court held oral argument in March 2000 on the
suspension of the discovery schedule because the states and Nine West had reached a settlement
agreement calling for payment of $34 million and injunctive relief. Counsel for the putative
class had not been privy to the settlement negotiations, however, and objected and also asked to
see the underlying documents that served as the basis for the settlement and the settlement
figure.76 The judge ruled that putative class counsel had no right to review documents regarding
the proposed settlement between states and Nine West before they moved for preliminary
approval of the settlement by the court, and discovery was suspended.
75
Id. (citing SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1966) (upholding award of
disgorgement to agency with set-off of amounts paid to private litigants in prior settleme nt), cert. denied,
118 S.Ct. 57 (1997 ); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (2d Cir.) (establishing escrow
fund " [t]o protect [the defendants] from double liab ility"), cert. denied, 404 U.S. 100 5 (1971 ); McGh ee v.
Joutras, No. 94 C 705 2, 19 95 U .S. Dist. LEX IS 20 40, at *1-3 (N .D. Ill. Feb. 14 , 199 5) (ho lding that private
litigant's damages would be reduc ed by any amounts the litigant receives from disgorged funds paid to the
SEC); SEC v. Penn Central Co., 425 F. Supp. 593, 599 (E.D. Pa. 1976) ("In the event that we deem
disgorgement [to the SEC] appropriate, defendants will have the opportunity to prove that they have already
relinquished their ill-gotten gains [in a private damages action].)). It should be noted, however, that none of
the cases cited by the three Com missioners in supp ort of their statement conc erned treb le damag es.
76
Class counsel asked to see "info rmatio nal exchanges . . . prese ntations that Nine W est made to the AG s . . .
the analysis of the distribution scheme, that is, why the money is paid to charities, as opposed to individual
consumers who actually bought the shoes . . . [in short] the analysis that precluded that money from going
to consumers."
34
NY B 1 189 857 .1
Nine West and the states argued that the parens patriae action superceded the putative
class action, even though the latter was filed on behalf of consumers nearly 13 months earlier,
and even though the court had denied Nine West's motion to dismiss the complaint of the
putative class. The states, and Nine West, made the following points in support of the view that
parens patriae actions are superior to class actions under FRCP 23 as a means to resolve
multiple claims77:
•
The states brought claims under Sect. 4C of Clayton Act, 15 U.S.C. § 15c.
Section 4C gives state attorneys general the authority to represent the natural persons
residing in their states as parens patriae in any lawsuits arising under the Sherman Act.
15 U.S.C. § 15c(a)(1).78
•
Enactment of Sect. 4C in 1976 (as part of Hart-Scott-Rodino Antitrust
Improvements Act of 1976) expanded the common law doctrine of parens patriae. As
explained by the states, the "[i]mpetus for the enactment of Section 4C was Congress'
concern that private class actions had not adequately served consumers. The legislative
history of the HSRA is replete with references to Congress' dissatisfaction with the
limitation inherent in Rule 23 class actions, which often rendered them ineffective as a
means of providing redress for consumers harmed by violations of the antitrust laws . . . .
77
78
States' M emo randum of Law o n Sup eriority of Parens Patriae Actions (March 17, 20 00).
Section 4C pro vides in pertinent part as follows:
Any attorney general of a state may bring a civil action in the name of such state, as parens patriae on
behalf of natural persons residing in such state in any district court of the United States having jurisdiction
of the defendant, to secure m onetary relief… for injury sustained by such natural perso ns to their property
by reason o f any violation of the Sherman Act.
35
NY B 1 189 857 .1
As explained by Chairman Rodino, 'this bill represents the legislative conclusion that the
state's attorney general is the best representative conceivable for the state's consumers.'"79
•
In contrast to Rule 23 practice, Sect. 4C does not require court approval,
certification or factual finding before the AG may exercise its authority to represent
citizens as parens patriae. Thus, the legitimacy of an AG's capacity as representative of
natural persons residing in its state is assumed.
•
Most importantly, according to the states, parens patriae suits "finally
resolve all consumer claims. A final judgment or settlement of the parens action is 'res
judicata as to any claim [under the antitrust laws] by any person on behalf of whom such
action was brought.'"80 The only exception is for those persons who expressly opt out of
the parens patriae action after publication of notice by the state. Unless and until
individual consumers opt out of the action, those consumers will be represented and
bound by their state attorneys general in the action.81
•
Since enactment of Section 4C, courts have rejected attempts by private
class action plaintiffs to supercede parens patriae representation by state attorneys
general.82 For instance, in Pennsylvania v. Budget Fuel Co.,83 a parens patriae action by
the AG as the representative of consumers injured by a price fixing conspiracy, the court
denied a request by a private citizen for class certification for himself and others
similarly situated, based on the same price-fixing allegation; expressly held that where an
79
States' Memorandum of Law at 5.
80
Mem o at 6, citing Sect. 4C(b)(3).
81
Sect. 4C(b)(3).
82
Memo at 7. See Susan Beth Farm er, More Lessons from the Laboratories: Cy Pres Distributions in Parens
Patriae Antitrust Actions Brought by State Attorneys General, 68 Fordham L . Rev. 361, 387-88 (19 99).
83
122 F.R.D . 184, 186 (E.D . Pa. 1988).
36
NY B 1 189 857 .1
AG has filed a parens action, "there is simply no reason or authority for allowing
coextensive representation by private parties;" and further explained that Congress had
clearly made a parens patriae action superior to a class action by not requiring state AGs
to seek court approval or certification before bringing an action on behalf of their
consumers. Similarly, in In Re Montgomery County Real Estate Antitrust Litigation,84
the court refused to expand certification of a class comprised of individuals who had
purchased from defendants before September 30, 1976 to include individuals who
purchased from the defendants on or after that date and up to April 1, 1977, when the
Maryland AG already represented the latter group of purchasers in a parallel action, and
explained that there was "no reason or authority" to permit representation by private
parties when parens patriae representation exists.85
•
Section 4C of the Clayton Act contains a statutory bar to duplicative
damage awards for parens patriae claims under the Sherman Act. It states:
The court shall exclude from the amount of monetary relief
awarded in such [i.e., parens patriae] action any amount of
monetary relief (A) which duplicates amounts which have been
awarded for the same injury, or (B) which is properly allocable to
(i) natural persons who have excluded their claims pursuant to
subsection (b)(2) of this section, and (ii) any business entity.
15 U.S.C. 15c(a)(l) (1994). Allowing both a class action and a statutory parens patriae action to
proceed will result in dual and in some cases conflicting representation of this group by both the
private plaintiffs and the AG.86 Such an outcome would also be judicially inefficient. Hence,
courts have generally concluded that statutory parens patriae actions brought by the state AG on
behalf of the natural person citizens of the state are superior to class actions brought under Rule
23. This is the case here because there are no consumers in the putative class who are not
actually represented in the parens patriae suit, as natural persons of all 50 states, territories, etc.
are so represented.
84
1988-2 T rade Cas. (CCH ) ¶ 68,230 (D. M d. 1978).
85
See also Sag e v. Appa lachian O il Co., In c., 1994-2 Trade Cas. (CCH) ¶ 70,745 (E.D. Tenn. 19 94).
86
See, e.g., In Re Montgomergy County Real Estate Antitrust Litigation, 1988 WL 125789 at *2.
37
NY B 1 189 857 .1
On the other hand, in concurrent cases where a state's parens patriae representation does
not entirely overlap private attorneys' class representation, it is consistent with Sect. 4C and case
law to allow both cases to proceed to any ultimate recovery to the extent of the non-overlap
between them. In Nine West, the states argued, and the private plaintiffs did not dispute, that
there was a complete overlap between the consumers represented by the AGs and those in the
putative classes; thus, following the states' logic, there should be no recovery pursuant to the
private action. In In re Arizona Escrow Fee Antitrust Litigation, 87 however, there were areas
where the state's parens representation did not overlap with the private attorneys' class
representation, and the class representatives and the state were at essentially the same stage of
investigation; as a result the private attorneys and the AG agreed to prosecute the case jointly.
As the states also acknowledged in Nine West, where both business and consumer interests are at
stake, "it might be appropriate to allow parens patriae and class action litigation" because
Section 4C "only permits the AGs to represent natural persons, while affected businesses could
be represented individually or through a class action."88
•
The states and counsel for Nine West argued that the parens patriae action
automatically suspends the putative class action.
Counsel for the putative class
responded that their ability to maintain and litigate class actions on behalf of consumers
is unaffected by the AGs' preliminary settlement until the court actually rules on the
settlement, and that the final settlement alone can extinguish putative class claims.
The states and Nine West also argued that the class could not be certified at this juncture
because there is no class, or even a proposed class, and that the case is instead entirely a parens
patriae action. This point was hotly disputed by class counsel, who countered that this same
scenario occurred in the Toys R Us cases and that "those cases went along in parallel tracks and
were eventually settled." The states and Nine West replied that reliance on Toys R Us was
misplaced because the issue of co-representation was never litigated in that case89 and the state
AGs in that case never conceded the right of private class attorneys to represent their citizens;
rather, the settlement agreements in TRU (signed by the defendants, states and private class
attorneys) expressly stated that they should not be construed as setting any precedent "with
respect to the states Attorneys General and counsel for the Plaintiff Settlement Class." Thus, the
States argued in Nine West, the circumstances in the two cases were quite different: in TRU all
plaintiffs were on essentially the same footing, as the states had not conducted an in-depth
investigation prior to filing their action, unlike here; when the states filed their complaint in
TRU, no settlement was in place or even contemplated -- they simply elected to cooperate with
counsel for the private classes in an effort to resolve their claims as quickly as possible; and only
44 states joined the TRU complaint, so that the private class representatives could seek to
represent consumers in the remaining states, whereas here all 50 states and all U.S. territories
87
1982-83 Trade C as. (CCH) ¶ 65,198 at 71,802 (D. Ariz. 1982 ).
88
States' Memo at 10.
89
See 98 M .D.L. 1211 (E.D .N.Y. 1998 ) (order granting final approval entered on Feb. 17, 2000).
38
NY B 1 189 857 .1
and possessions joined the action, so that there were no citizens of the U.S. who were not
represented in the parens action.
C.
Microsoft: Cooperation and Independent Strategy -- An Unfinished Story
In Microsoft, the DOJ and the plaintiff states have cooperated and rallied around their
key points of agreement regarding Microsoft's liability. The states also, however, have not
hesitated to pursue their own independent enforcement goals -- for instance, in the mediation
process, whose failure has been blamed on intransigence on the part of the states. At this time,90
it is not at all clear what the outcome of the governments' cases will be, including whether any
settlement or district court judgment on remedy will cover Microsoft's new operating system,
Windows XP. Here again, however, the states have indicated -- without apparent consultation
with the DOJ -- an intention to press this issue, and, indeed, an intention to pursue their case
even if the DOJ seeks to settle.91 To take a normative position on such an eventuality is besides
the point here; what matters the most is that the states have demonstrated their power and ability
to pursue an independent enforcement strategy, even as they continue to coordinate and
cooperate in the main with the DOJ.92
While Judge Posner raises important issues relating to multiple enforcement of the
antitrust laws against the same defendant, and expresses understandable frustration in not
reaching agreement on settlement among all the parties, Microsoft itself does not embody most
of these concerns. As between the federal government and the states, there are few cluster
bombs or free riders. The states chose not to proceed separately, worked closely with the
Antitrust Division, agreed with the Antitrust Division on most substantive and procedural issues,
and appear to have pulled their own weight. Each state further appeared to make its own
judgment as to whether to join the action, withdraw or settle with the defendant, and as to what
remedy to seek. Even in the worst case scenario, if the states and federal government disagree as
to the proper remedy, this critical issue will be decided by a single court based upon a single
record jointly created by all plaintiffs and presumably reflecting such evidence as all parties
deem relevant. While messy, this seems superior to the delay, inefficiency and real risk of
inconsistent verdicts or remedies had the plaintiffs gone their separate ways.
D.
Vitamins Inc.: States' Settlement Clout -- Tool for Efficiency or Blunt
Instrument?
In early October 2000, the attorneys general of 22 states, Puerto Rico and the District of
Columbia entered into proposed settlement agreements totaling $335 million with six leading
vitamins manufacturers that were also named as defendants in the private, state court actions
90
August 2001.
91
See "States Discuss New Microsoft Suit," Associated Press (June 20, 2001) (citing statement by
Connecticut AG Richard Blumenthal that "[w]e have never said that the Justice Department was an
essential partner. Certainly a critically important one, but ne ver a p rereq uisite to our pursuing the case. W e
are absolutely determined to pursue this case.").
92
The larger context of suc h independent enforcement policy is of course positive antitrust fede ralism. See
notes 2 and 7, supra.
39
NY B 1 189 857 .1
brought in 15 states and the District of Columbia, as described above.93 The companies are
Hoffman-LaRoche, BASF, Aventis (Rhone-Poulenc), Takeda Chemical Industries, Eisai and
Daiichi Pharmaceutical Co., which collectively account for 80 percent of the world vitamins
market. Although approval of the proposed agreement would result in the dismissal of these
companies from the states' cases, those cases would remain alive as against other, non-settling
vitamins manufacturers.
Under the agreements, 23 of the 24 participating jurisdictions would receive a
predetermined share of a $118 million pool to compensate for alleged damages to consumers,
and the AG in each jurisdiction would decide how that state's allocation would be distributed.94
An additional $107 million would be deposited in a business settlement fund to reimburse
damaged businesses in each of these 23 jurisdictions. A separate settlement agreement, in the
amount of $80 million, was reached with California. Finally, $30 million would be used to
reimburse 47 state governments -- i.e., all 24 parties to the settlement agreements plus 23 more -for overcharges on direct and indirect state purchases of products containing vitamins.
The settlement agreements are unusual in that they appear to resolve -- but are not limited
to -- the 16 state court actions described above. With the exception of a small handful of states
in which only the AG is authorized to sue (and did sue) on behalf of indirect purchasers, the
states party to the settlement agreements were not parties to the state court suits. Yet the AGs
were parties to the settlement agreements and they clearly influenced the terms of the
distribution of the settlement fund.
93
See Part I.D., supra.
94
For instance, the Illinois A G ha s indicated that Illinois' $12 million share wo uld be distributed p rimarily to
nonprofit charitable groups that promote health and nutrition; New York's AG said that $19 million of New
York's $25 million would fund programs concerning prenatal care, nutrition and hunger.
40
NY B 1 189 857 .1
From one point of view, the state AGs successfully muscled their way in to a settlement
that stands primarily on a foundation built by the various private suits. Their success in this
strategy clearly owes a great debt to the DOJ and the private federal actions that preceded the
states' involvement. It is true, the settlement fund is directed in part to the interests represented
by the named plaintiffs in the state suits -- indirect purchasers and businesses that purchased
directly from the defendants -- and those plaintiffs presumably must also have signed on to the
proposed agreement, but it appears that it is the AGs, even without being parties to most of the
suits, who largely determined the outcome. The settling defendants also will not necessarily
have bought peace for themselves with this settlement, for open questions remain as to indirect
and direct purchasers who elect to opt out. Furthermore, the question arises as to whether the
state AGs' involvement has been or will be cloaked with their parens patriae authority.
Unlike Microsoft, Vitamins, Inc. does raise the real specter of cluster bombs and free
riders. The success of the non-party states appears to go beyond the normal follow-on suits after
a government criminal verdict. Beyond the specifics of antitrust law and enforcement, the
actions of the non-party states in obtaining monetary settlements after consciously choosing not
to participate in the litigation challenges the fundamental precepts of our civil litigation system -that one must be a party to either be bound by, or benefit from, the results of the case.95 The
significance and propriety of this strategy depends on whether waiting until the end of the
follow-on suit to enter the settlement discussion was pushed by the defendants or the non-party
states and whether this becomes the standard modus operandi for the future.
95
See Martin v. Wilks, 490 U.S. 755 (1989).
41
NY B 1 189 857 .1
Cluster Bombs, Piling on, Free Riders and Global Peace
III.
Both the Illinois Brick issues in Mylan, and the fight in Nine West over who (states or
private plaintiffs) should stand in the shoes of the indirect purchasers, raise the broader issue of
who best vindicates the public and private purposes served by the antitrust laws.
Such conflicts are inevitable in a system of decentralized enforcement. Much of this
phenomenon was clearly intended by the drafters of the antitrust laws. Private treble damages
have been part of the antitrust laws since the passage of the Sherman Act itself. Follow-on treble
damage actions are contemplated and encouraged by provisions which give judgments in
government enforcement actions prima facie effect in subsequent private actions.96 State actions
in federal court were contemplated and encouraged by amendments in the 1970s creating the
parens patriae powers relied upon in the cases discussed above. State enforcement actions were
further encouraged in provisions permitting or allowing cooperation between the federal and
state agencies.97
Aggressive state action was even more likely once states began sharing
information and resources through the National Association of Attorneys General.98 Follow-on
state and private actions are further contemplated and encouraged through the general doctrines
of claim preclusion and issue preclusion.99
This is an important issue and a preview of things to come on a world-wide scale. The
number of countries with private rights of actions is growing although none of the current private
96
18 U.S.C. § 5.
97
18 U.S.C. § 4F.
98
For example, states draw on a shared fund for the use of experts in multistate litigation. The fund was
begun through use of a portion of the recovery in parens patriae litigation and is rep lenished from tim e to
time from other recoveries in multistate cases and settlements.
99
See generally David L. Shapiro, Preclusion in Civil Actions (2001).
42
NY B 1 189 857 .1
rights of action carries with it the significance of the combined effect of treble damages, class
actions, one way attorney fees, generous discovery, jury trials, and contingent fees as is the case
in the U.S. Nonetheless, the complexity of modern antitrust litigation will only grow as foreign
buyers bring their own actions against global price fixers around the world, if not in the United
States.100
What then appears unseemly when all these parties exercise their statutory or sovereign
rights to investigate or litigate in the same area? The principal objection is either that some
parties are getting more than they are entitled to and/or the defendants are paying total fines and
damages far in excess of what they ought to. There is also a timing issue where one party whose
claims are weaker, or less obvious, simply lies in wait until it sees how it sees how the rest of the
litigation is going and then pounces for an easy pay day.
It is extremely difficult to solve these issues on a theoretical level. All that can be said
with certainty is that to the extent per se violations amounting to criminal conduct are involved,
normally it is the DOJ that acts first. The combination of the amnesty program, the grand jury
process for investigating suspected criminal violations, the nature of the criminal trial process,
and the criminal penalties of jail time and fines up to double the gain or loss make the Antitrust
Division the likely first mover.
What happens then is highly fact specific and will differ from case to case. Whether the
states or private parties are "piling on" in some pejorative sense will depend on whether they
were aware of the conduct, whether they brought it to the attention of the Agencies,101 whether
100
So far, foreign buyers have not been successful in suing in the United States pursuant to the terms of the
Foreign T rade Antitrust Im provements Act and the failure o f certain inn ovative international law theo ries.
See, e.g., In re Microsoft Corp. Antitrust Litigation, note 3 2, supra.
101
The Agencies, through their co nsultation procedures, will no t simultane ously investigate the same con duct.
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they participated in the investigation with the Agencies or investigated on their own, the amount
of resources they invested in developing the case, the degree of overlap or difference in legal
theories and evidence, the amount of delay if any, the amount of prejudice to the defendants in
defending their interest, and the degree that potential remedies overlap, duplicate, or conflict
with each other. In addition, what might look like a "late hit" may indeed be nothing more than a
defendant seeking to settle with as many potential parties in an attempt to buy global peace.
While individual proceedings can get chaotic, judges are not without tools to simplify the
issues, even if total solutions are not possible. The Manual for Complex Litigation is the starting
place for multi-party and multi-district litigation and provides at least a roadmap for sorting out
the leading roles and voices when multiple parties all seek the spotlight in federal court.102 The
combination of Illinois Brick, ARC, and Illinois Brick repealers makes it likely that at least some
claims will simultaneously be in both federal and state court. Parties must seriously think about
whether Illinois Brick has thus solved, or actually exacerbated, the
complexity and the
possibility of duplicative recovery it sought to address. The duplication between state and
private parties seems more easily solved through the interpretation and application of the parens
patriae law that forms the basis for state action in the first place. The wisdom of state versus
private actions in any particular case appears more of a policy question of how damages and
restitution will best be distributed. When states and the federal agencies work together on cases,
differences are bound to emerge as to litigation strategy, settlement strategy, and potential
remedies as will disputes where one sovereign proceeds and the other chooses to refrain from
action. While these disagreements should be criticized when they waste judicial resources and
interfere with the resolution of the underlying dispute on the merits, they also illustrate that
102
Manua l for Complex Litigation (3d ed. 199 7).
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many antitrust cases are the kind where reasonable people can differ, and that we rely on the
judiciary, and not executive fiat, at either the state or federal level to set our fundamental
competition policy.
Conclusion
The cases discussed represent a larger set of issues beyond the specific issues which are
unlikely to repeat themselves anytime soon.
After all, Microsoft represents a once-in-a-
generation structural monopoly case brought by an activist administration (and to be continued if
at all by a more conservative one), joined by a group of even more aggressive states, and
followed by a group of private cases which must demonstrate the additional element of
consumer damages. Similarly, Mylan involved an aggressive use of disgorgement remedies in a
competition case by the FTC raising important Illinois Brick issues and issues of duplication
with the companion state and private cases, and it is unlikely to be repeated for quite some time.
Perhaps Nine West and Vitamins are more typical, where government enforcement is followed by
private and/or state damage actions.
The fundamental issue is how the antitrust laws are best enforced and by whom. For
better or worse, Congress created multiple enforcers and our system of federalism allows for
states to diverge from federal antitrust policy, both in the cases they bring and the private cases
they authorize. This policy, in the absence of highly unlikely Congressional action, simply
defies harmonization and resolution, except on an ad hoc basis as the presiding judge and parties
sort out rights and remedies at trial and through settlement.
What is clear is that state
enforcement has grown dramatically over the past 20 some years and is likely to remain a force
to be reckoned with, separate from the prevailing policy at the federal level, and the needs of
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private parties, for many years to come. Indeed, state enforcement is likely to be an important
driver both for the substantive case law and enforcement policy for much of the next century.
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