Opinion
Case Nos. 96-C-959, 97-C-412, 97-C-508.
March 30, 2000.
Attorney Beth J. Kushner, von Briesen, Purtell Roper, Attorney Michael Hausfeld, Attorney Daniel A. Small, Cohen, Milstein, Hausfeld Toll, Attorney Howard J. Sedran, Levin, Fishbein, Sedran Berman, Attorney Arthur N. Bailey, Arthur N. Bailey and Associates, Daniel Gustafson, Renae Steiner, Hems, Mills Olson, Attorney for Plaintiff Paper Systems Incorporated.
Attorney Thomas M. Pyper, Whyte, Hirschboeck Dudek, Attorney Laurence Sorkin, Cahill, Gordin Reindel, Attorney for Defendant Mitsubishi Corp./Mistubishi Int'l Corp.
Attorney Jeffrey W. Kilduff, O'Melveny Myers, Attorney David J. Cannon, Michael, Best Friedrich, Attorney for Defendant Nippon Paper Industries Co., Ltd.
Attorney Richard E. Donovan, Attorney Mark S. Gregory, Kelley, Drye Warren, Attorney Howard A. Pollack, Godfrey Kahn, Attorney for Defendant Kanzaki Specialty Papers. Inc. and New Oji Paper Co., Ltd.
Attorney Jerold S. Solovy, Jenner Block, Attorney Brian R. Smigelski, Friebert, Finerty St. John, Attorney for Defendant Mitsubishi Paper Mills. Ltd.
Attorney Stanley M. Lipnick, Arnstein Lehr, Attorney Frank W. Doster, Arnstein Lehr, Attorney for Defendant Elof Hansson Paper Board, Inc.
DECISION AND ORDER
Nippon Paper Industries (NPI) is one of several makers of heat-sensitive facsimile paper alleged to have participated in a price-fixing conspiracy. It is the only maker whose intermediaries in the distribution chain have not been joined as defendants, and the only maker whose intermediaries are not alleged to have participated in the conspiracy. Accordingly, NPI has moved to be dismissed pursuant to Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), which held that indirect purchasers do not have standing to mount antitrust claims against indirect sellers. Although I find that the Seventh Circuit has adopted a co-conspirator exception to Illinois Brick, I find that it does not apply here and NPI must be dismissed.
I. BACKGROUND
The charged period is February 1990 through March 1992. During this period, heat-sensitive facsimile paper — which, due to technological advances, has since gone much the route of buggy-whips — was sold in 2000-pound "jumbo rolls" to converters, including plaintiffs and the proposed class. Converters in turn cut the jumbo rolls into smaller rolls for sale to their own customers.
It is undisputed that NPI, unlike other defendants, did not directly sell to plaintiffs, to other members of the proposed class, or to other defendants which in turn sold to plaintiffs. Rather, NPI sold to non-defendant Japanese trading houses, which in turn sold to non-defendant U.S. trading houses, which in turn sold to plaintiffs and other members of the proposed class. In its complaint, plaintiff Paper Systems alleges that, "During the Class Period, Jujo Paper [an NPI predecessor, hereinafter referred to as NPI] manufactured and sold fax paper for import into North America through trading houses in Japan and the United States." (Paper Systems Compl. ¶ 14) (emphasis added). And in their complaints, plaintiffs Graphic Controls and Victor Paper Roll Products explicitly acknowledge that NPI's product was sold first to trading houses in Japan for resale, and then to two specific trading houses in the United States, Japan Pulp Paper Co, Ltd., and Mitsui Co., Ltd., and only then to U.S. converters. (Graphic Controls Compl. ¶ 14; Victor Paper Roll Products Compl. ¶ 14.) Plaintiffs' proposed modified class explicitly excludes these intermediate distributors. (Pls.' Resp. to Ct.'s Request for Status of Mot'n for Prelim. Approval of Partial Settlement Mot'ns for Relief from Scheduling Ord. for Certif. of Modified Class, at 4.) Thus, no plaintiff and no member of plaintiffs' proposed class was a direct purchaser from NPI, and no plaintiff and no member of the proposed class directly purchased NPI paper from any defendant.
II. PROCEDURAL HISTORY AND STANDARD OF REVIEW
The case was randomly assigned to United States Magistrate Judge Patricia J. Gorence on January 29, 1998. The parties did not consent to full magistrate judge jurisdiction. Therefore, Judge Gorence issued a report and recommendation, which found that the Seventh Circuit had adopted the co-conspirator exception to Illinois Brick and that NPI was subject to suit. NPI interposed objections to the recommendation. I now consider NPI's motion in light of the magistrate judge's recommendation, NPI's objections, and plaintiffs' response. The standard of review of the recommendation is de novo. See 28 U.S.C. § 636(b)(1)(C). A motion to dismiss should not be granted "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 46-47 (1957). Furthermore, this court must accept as true all well pleaded allegations of the complaint and the inferences that may reasonably be drawn from those allegations.See Palda v. General Dynamics Corp., 47 F.3d 872, 874 (7th Cir. 1995).
III. ANALYSIS
Section 4 of the Clayton Act, 15 U.S.C. § 15, allows suit to be brought "by any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws." The Supreme Court has twice addressed who counts as sufficiently "injured" under this statute to bring suit in the case of indirect purchaser suits. In Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968),. the Court ruled that even if a direct purchaser that paid illegal overcharges was able to pass all of the overcharges on to its own customers, the direct purchaser was nonetheless injured — it would have had higher profits, but for the illegal overcharges, because its customers were willing to pay higher prices — and therefore had standing to sue. Nine years later, the Supreme Court addressed the converse side of the issue, and ruled that even if illegal overcharges had been passed on to them, indirect purchasers should not be considered to have standing to bring suit alleging illegal overcharges. See Illinois Brick, 431 U.S. at 746. The two rationales for Illinois Brick's decision were that allowing both direct and indirect purchasers to sue under Clayton Act § 4, would, first, require the courts to resolve enormously complex apportionment problems in determining how much of which overcharges were paid by each tier of downstream customers affected by a given antitrust violation; and second, would expose defendants to the possibility of multiple liability and inconsistent adjudications. See Illinois Brick, 431 U.S. at 431, 741-42. To avoid these problems, the Court held that standing to sue under § 4 of the Clayton Act must be limited to direct purchasers only. In both Hanover Shoe and Illinois Brick, the Court also sought to advance the general policy of encouraging private enforcement of the antitrust laws, and believed that direct purchasers were more likely to bring suit to vindicate their rights than indirect purchasers; it observed that in the case of Hanover Shoe, which alleged that a manufacturer of shoe-making machinery charged monopolistic prices, the reductio ad absurdum would allow suit to be brought only by the ultimate consumers, buyers of individual pairs of shoes. See Hanover Shoe, 392 U.S. at 492; Illinois Brick, 431 U.S. at 745-46.
It is important to distinguish antitrust standing to sue from the constitutional doctrine of standing, which simply requires proof of injury. Even though it ruled that indirect purchasers could not be granted standing to sue, the Illinois Brick court explicitly acknowledged that such plaintiffs did allege injuries by reason of an antitrust violation. See Illinois Brick, 431 U.S. at 746. See also Associated Gen. Contractors v. California State Council of Carpenters, 459 U.S. 519, 535 n. 31 (1983) ("Harm to the antitrust plaintiff is sufficient to satisfy the constitutional standing requirement of injury in fact, but the court must make a further determination whether the plaintiff is a proper party to bring a private antitrust action."). For this reason, an indirect purchaser plaintiff must do more to overcomeIllinois Brick than merely allege injury due to an indirect seller's participation in a conspiracy.
Illinois Brick identified two possible exceptions to its rule, a "cost-plus" exception and a "control" exception. See Illinois Brick, 431 U.S. at 736 n. 16. Neither applies here. Several courts have also recognized a third exception, where the intermediary (who is both direct purchaser and direct seller) is a co-conspirator of the upstream distributor. See, e.g., Arizona v. Shamrock Foods Co., 729 F.2d 1208, 1212-13 (9th Cir. 1984) (allowing consumer plaintiffs to sue wholesalers on strength of allegation of conspiracy including intermediary retailers, who were not joined as defendants); Mid-Atlantic Toyota Antitrust Litig., 516 F. Supp. 1287, 1295-96 (D. Md. 1981). In this situation, indirect purchasers are allowed to sue the upstream distributor, on the ground that the intermediary would not be allowed to recoup overcharges that it paid due to an antitrust conspiracy in which it participated, and thus neither of Illinois Brick's rationales would apply: there would be no need to apportion damages to different tiers of customers, because the intermediary would be ineligible for any recovery; and because the intermediary would be ineligible for any recovery, the upstream distributor would not be exposed to multiple liability or inconsistent judgments. See Shamrock Foods, 729 F.2d at 1213-14.
The exception is not universally recognized. See, e.g., In re Beef Indus. Antitrust Litig., 600 F.2d 1148, 1159 (5th cir. 1979) [hereinafter In re Beef] (declining to allow exception toIllinois Brick even though intermediary firms passing on indirect sellers' overcharges were alleged to participate in price-fixing conspiracy).
A respected treatise observes that it matters little whether the doctrine is regarded as a co-conspirator "exception" to theIllinois Brick rule, or whether instead as simply placing the co-conspirator situation outside Illinois Brick's domain. See 2 Phillip E. Areeda Herbert Hovenkamp, Antitrust Law ¶ 6371h at 264-65 (rev. ed. 1995). I will follow the convention of calling it a co-conspirator exception.
The Seventh Circuit appeared to adopt the co-conspirator exception in Fontana Aviation. Inc. v. Cessna Aircraft Co., 617 F.2d 478. 481 (7th Cir. 1980), holding that the Illinois Brick rule does not directly apply "in circumstances where the manufacturer and the intermediary are both alleged to be co-conspirators in a common illegal enterprise resulting in intended injury to the buyer." The issue has risen more recently — and obliquely — in In re Brand Name Prescription Drugs Antitrust Litigation, 123 F.3d 599, 604 (7th Cir. 1997) (Posner, C.J.) [hereinafter Prescription Drugs I]. In that case, retail pharmacies sued manufacturers and wholesalers of prescription drugs under § 4 of the Clayton Act. The retail pharmacies alleged that, at the instigation of the manufacturers, wholesalers sold drugs to various classes of preferred customers, such as hospitals, health maintenance companies, and other large purchasers at very low prices — below the prices the wholesalers themselves paid to buy the drugs from the manufacturers. The manufacturers reimbursed the wholesalers for these losses through a "chargeback" system which prevented the wholesalers from extending the steeply discounted prices to unfavored customers. The manufacturers raised an Illinois Brick defense: the plaintiff retail pharmacies bringing suit had concededly purchased from the wholesalers, and not from them, and were therefore only indirect purchasers.
The Seventh Circuit accepted this analysis. It found that given the case's posture on appeal — the wholesalers had earlier been dismissed on summary judgment — Illinois Brick required dismissing the manufacturers, because the plaintiff pharmacies bought from the wholesalers and not from the manufacturers, and because the plaintiffs' alleged overcharges were due to the wholesalers' passing on the overcharges to which they themselves were subjected. See Prescription Drugs I, 123 F.3d at 606.
Applied blindly, this result would dictate dismissing NPI as a defendant without further inquiry. However, Prescription Drugs I's discussion of Illinois Brick begins and ends by recognizing that if the wholesalers were reinstated as parties and found liable, the manufacturers would also have to stay in the case, because they were alleged to be co-conspirators of the wholesalers, who were direct sellers to plaintiffs. See id. at 604, 607. In a later appeal, taken after the case was remanded for further proceedings below, the Seventh Circuit reaffirmed its view that indirect purchasers may sue indirect sellers, Illinois Brick notwithstanding, if the indirect sellers conspired with the direct sellers in violation of the antitrust laws. See In re Brand Name Prescription Drugs Antitrust Litigation, 186 F.3d 781, 789 (7th Cir. 1999) (Posner, C.J.) [hereinafter Prescription Drugs II] ("the indirect-purchaser doctrine, which limits the right to bring antitrust overcharge suits to buyers who buy directly from the overcharging sellers rather than indirectly through middlemen, would bar the plaintiffs from recovering damages unless the wholesalers were members of the manufacturers' conspiracy") (citations omitted) (emphasis added).
For these reasons, I concur with the magistrate judge's recommendation and with the district court in In re Brand Name Prescription Drugs Antitrust Litigation, No. 94-C-8987, 1998 WL 474146, *14 (N.D. III. Aug. 6, 1998) [hereinafter Prescription Drugs District Court Decision of Aug. 6, 1998], in concluding that the Seventh Circuit recognizes a co-conspirator exception to the Illinois Brick rule. To be sure, the Seventh Circuit did not state that it was doing so; but its stating that Illinois Brick would not bar the manufacturers from liability if the intermediary wholesalers "were members of the manufacturers' conspiracy," Prescription Drugs II, 186 F.3d at 789, strongly indicates that this was, in fact, what it was doing. Moreover, as observed in Prescription Drugs District Court Decision of Aug. 6, 1998, 1998 WL 474146, *14, Judge Posner used a "see" citation inPrescription Drugs I, 123 F.3d at 604, to cite Shamrock Foods, which squarely adopts the co-conspirator exception, but used a weaker citation, "see also," to cite In re Beef, which opposes the exception. Further, the district judge certified for interlocutory appeal this finding that the Seventh Circuit would allow a co-conspirator exception, see In re Brand Name Prescription Drugs Antitrust Litigation, No. 94-C-897, 1998 WL 808992, at *5 (N.D. Ill. Nov. 17, 1998). but it appears that the Seventh Circuit did not take up the appeal.
Judge Reynolds, in an earlier decision in this case, readPrescription Drug I as "suggest[ing] that the Seventh circuit would only recognize the control, and not the co-conspirator, exception to the Illinois Brick rule." Paper Sys. Inc. v. Mitsubishi Corp., 177 F.R.D. 435, 438 (E.D.Wis. 1997). But the passage quoted is the extent of Judge Reynold's discussion of the issue; Fontana Aviation is not discussed, and this decision was issued before Prescription Drug II's reaffirmation of the conspirator language in Prescription Drug I.
Even though I find that the Seventh Circuit recognizes the co-conspirator exception to Illinois Brick, I do not believe (contrary to the magistrate judge's recommendation) that the exception is sufficient to provide plaintiffs with antitrust standing to sue NPI. The reasons underlying Illinois Brick's refusal to permit, suits by indirect purchasers are fully applicable here. If NPI participated in a horizontal conspiracy to fix the price of heat-sensitive facsimile paper, and if NPI's trading houses were not parties to the conspiracy, then those trading houses would be entitled to sue NPI for the illegal overcharges that they paid. This is true even if, as plaintiffs here allege, the trading houses in turn passed on to them some or all of NPI's alleged illegal overcharges. See Hanover Shoe, 392 U.S. 481. Thus, allowing plaintiffs here to sue NPI would require apportioning any damages among multiple classes of downstream customers: the first tier of intermediaries, the Japanese trading houses; the second tier of intermediaries, the U.S. trading houses; and finally, the plaintiff converters. Even if NPI were found liable and this court attempted to apportion damages, the intermediary trading houses could sue NPI themselves and seek additional damages, exposing NPI to multiple liability. Moreover, even if NPI were found not liable in this litigation, the intermediary trading houses might not be bound by that finding and could sue NPI on precisely the same grounds alleged here, thus exposing NPI to the possibility of inconsistent adjudications. In sum, both rationales of Illinois Brick fully apply here. Because NPI's downstream intermediaries are not alleged to have been co-conspirators, the co-conspirator exception does not apply.
The three cases on which plaintiffs rely do not support their position. As we have already seen, in Prescription Drugs I the Seventh Circuit found that if the intermediary wholesalers were found to be members of the conspiracy along with the manufacturers, Illinois Brick would not preclude recovery from the manufacturers as co-conspirators. See Prescription Drugs I, 123 F.3d at 604. The present case, however, is distinguished because plaintiffs here have not alleged that the intermediary trading houses were members of the conspiracy along with NPI. An upstream seller's mere participation in, or even its instigation of, an antitrust conspiracy is not sufficient to make it liable to suit from an indirect purchaser; that is precisely the holding of Illinois Brick. What allows the co-conspirator exception toIllinois Brick to get off the ground is not that the indirect seller participated in a conspiracy which injured indirect purchaser plaintiffs, but rather that the conspiracy included the intermediary as well as the indirect seller. Because the intermediary participated in the conspiracy, the court has no need to apportion damages from the indirect seller between the intermediary and the indirect purchaser, and the indirect seller is not exposed to the possibility of multiple liability and inconsistent adjudications. See Shamrock Foods, 729 F.2d at 1212-13; Mid-Atlantic Toyota, 516 F. Supp. at 1295-96. It is this reason, and not merely the manufacturer's participating in a conspiracy that injured plaintiffs, that allows an exception toIllinois Brick.
In the second case relied upon by plaintiffs, Ambook Enterprises v. Time Inc., 612 F.2d 604, 620 (2nd Cir. 1979), advertiser plaintiffs alleged that advertising agencies pressuredTime, The New York Times, and other media outlets into agreeing to a dual rate system: advertisers which placed ads through agencies received a 15% discount, while advertisers placing ads directly with the media outlets had to pay the full rate. The court ruled that even though the plaintiffs had not done business with the advertising agency defendants, they nonetheless had (constitutional) standing to sue them, on the ground that those defendants had participated in the conspiracy that led to the plaintiffs' damages. See id. Ambook thus involved a dealer cartel and a restraint on the media outlets' dual distribution, in which downstream consumers (the advertisers) were forced to pay a higher price to bypass the powerful dealers (the advertising agencies) in order to purchase directly from the producers (the media outlets). In contrast, the present case, as in Illinois Brick, involves an alleged horizontal conspiracy, in which producers conspire to overcharge their distributors, which in turn overcharge downstream consumers. The concerns about apportioning damages and exposing defendants to multiple and possibly inconsistent adjudications that motivated Illinois Brick simply were not present in Ambook the court would not need to apportion damages from the advertising agencies between the plaintiffs and the agencies' direct purchasers (because the direct purchasers were not injured, and in fact received a 15% discount), and the agencies would not be subject to multiple liability, or the possibility of inconsistent adjudications. Because it addressed a factually distinct situation, Ambook thus did not need to address the issues considered in Illinois Brick about why indirect purchasers should not be allowed to sue; indeed, although it was issued sixteen months after Illinois Brick, Ambook did not even mention Illinois Brick (or, for that matter, Hanover Shoe, issued ten years before).
See 8 Phillip E. Areeda, Antitrust Law ¶¶ 1604-05 (1989). Dual distribution occurs when a manufacturer simultaneously sells to independent dealers and to those who might otherwise be customers of those dealers. See id. ¶ 1605a at 78. A dealer cartel arises when intermediary dealers coerce unwilling manufacturers to adopt restraints on distribution that bring the dealers more profit than necessary for efficient distribution. See id. ¶ 1604a at 38. In theAmbook case, the alleged coercion was the advertising agencies' threat that unless the media outlets agreed, they would steer their customers' ads elsewhere.
Moreover, Illinois Brick seeks to advance the public policy of allowing private individuals to serve as "private attorneys general" to enforce the antitrust laws. See Hawaii v. Standard Oil Co., 405 U.S. 251, 262 (1972) (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 130-31 (1969)). By hypothesis, a horizontal conspiracy has some downstream group of non-conspiring direct purchasers, and Illinois Brick indicates that that group has standing to sue the conspirators. In this case, if NPI did indeed participate in the alleged conspiracy and its downstream trading houses were not parties to that conspiracy, the trading houses have standing to sue NPI. See Illinois Brick, 431 U.S. at 745-46. By contrast, in a dealer cartel and dual distribution restraint of the kind alleged inAmbook, if the powerful intermediary dealers — the advertising agencies — could not be sued by the non-customer plaintiffs who had bypassed them, they could not be sued by any private party: their upstream distributors (the media outlets) were parties to the conspiracy, and their downstream customers, which received the 15% discount, were not injured. Thus, Ambook did not involve the coconspirator exception to Illinois Brick and is not a useful precedent in this case.
The present case should also be distinguished from the third case on which plaintiffs rely, Brown v. Cameron-Brown Co., 652 F.2d 375, 377 (4th Cir. 1981). In Brown, mortgagor plaintiffs brought antitrust claims against a group of mortgage-holder banks relating to their mandatory escrow account policies. A group of defendant banks sought to be dismissed because they had not done business with any of the plaintiffs. The court held that they could not be dismissed, because they had participated with other banks in the conspiracy, and the plaintiffs had dealt those other banks and had been injured by the conspiracy. See Brown, 652 F.2d at 378. Plaintiffs here contend that because NPI participated with other firms in the conspiracy, and they dealt with those other firms and were injured by the conspiracy, NPI's motion to dismiss must be dismissed. But this is mistaken. Brown addressed a one-level distribution chain — banks to mortgagors — while in the present case, as we have already seen, plaintiffs concede that multiple levels of distribution separated NPI from its downstream converter customers. The only standing issue in Brown was the constitutional standing question of whether plaintiffs had alleged some injury arising from the defendants' alleged conspiracy. See Brown, 652 F.2d at 378 (citing Warth v. Seldin, 422 U.S. 490, 500-02 (1975) (constitutional standing in zoning case) and Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 45-46 (1976) (constitutional standing in tax case)). But focusing on the constitutional standing requirement alone misses the importance of Illinois Brick, which, as discussed above, acknowledged that indirect purchaser plaintiffs in an antitrust case do allege injuries traceable to the defendants' alleged conspiracy. See Illinois Brick, 431 U.S. at 726. Even though such plaintiffs do allege an injury, the Illinois Brick court ruled that due to considerations unique to multi-level distribution chains — apportionment and the possibility of multiple liability and inconsistent adjudications — only direct purchasers could be granted antitrust standing to sue. To apply Brown here would confuse constitutional and antitrust standing, substantially undercut Illinois Brick, and utterly fail to address Illinois Brick's policy rationales for preventing indirect purchasers from bringing antitrust claims against indirect sellers. Plaintiffs' arguments are thus unavailing. I will therefore grant NPI's motion and dismiss it as a party in each of the consolidated cases.
In some cases courts have permitted plaintiffs to amend their complaints to allege that indirect sellers conspired with the relevant intermediaries, sometimes on the condition that the intermediaries be joined as defendants. See, e.g., In re Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1338 (9th Cir. 1982) (affirming district court's granting permission to amend complaint subject to condition that intermediaries be joined as defendants). But see In re Midwest Milk Monopolization Litig., 730 F.2d 528, 532 (8th Cir. 1984) (finding no abuse of discretion in district court's denying motion to amend complaint and join intermediaries). I have no idea as to whether plaintiffs have any basis to allege that NPI conspired with its intermediary trading houses. Obviously if plaintiffs have such a basis they are free to move for leave to amend their complaint, join the intermediaries as defendants, and reinstate NPI as a defendant.
THEREFORE, IT IS HEREBY ORDERED that the magistrate judge's recommendation regarding Nippon Paper Industries' (NPI) motion to dismiss is NOT ADOPTED, that the motion (R. 162) is GRANTED, and that NPI is DISMISSED as a defendant in each of these consolidated actions.
Dated at Milwaukee, Wisconsin this 30 day of March, 2000.