Killing Antitrust Softly (Through Procedure)

Sandeep Vaheesan – 

The Supreme Court has waged a multi-decade war on private rights of action. It has subverted the rights of consumers, workers, small businesses, and others to hold corporations accountable for wrongdoing through lawsuits. The Federal Arbitration Act (FAA) has been a preferred tool of the Court. Since the 1980s, it has reinvented this modest statute, converting the FAA into a quasi-constitutional sledgehammer for corporations to wield against private lawsuits, especially class actions. And the evisceration of private enforcement of law goes beyond arbitration. The Court has rewritten class certification, pleading, and summary judgment standards to help businesses ward off private lawsuits and accountability.

On top of these general procedural hurdles, the Supreme Court has imposed special burdens on parties seeking to vindicate their rights under the federal antitrust laws. Congress enacted an expansive private remedy originally in the Sherman Act and subsequently in the Clayton Act. Section 4 of the Clayton Act grants “any person” injured by an antitrust violation the right to recover treble damages and legal fees from the violator. Since the 1970s, however, the Supreme Court has effectively rewritten this text. While once recognizing that Section 4 “is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated[,]” the Court has severely restricted who can enforce the antitrust laws. Two doctrines deserve special consideration. First, the Court held that, in general, only parties who purchased a good or service directly from the antitrust violator can obtain damages for overcharges. Second, it created the amorphous “antitrust injury” doctrine and granted the lower courts the power to dismiss disfavored substantive claims on supposedly procedural bases.

These procedural changes raise the age-old question: what good is substantive law if it cannot be enforced? The described procedural changes have not affected the substantive law (though the courts have done that too in certain areas) but it has prevented some of the most motivated parties from enforcing the law. Consumers and businesses injured by antitrust violations have long been the lead enforcers of the antitrust laws. Their role is only accentuated by the Department of Justice and Federal Trade Commission’s unwillingness to enforce multiple areas of antitrust law. This combination of judicial hostility to private cases and bureaucratic lethargy has turned much of the substantive law into a dead letter.

In creating the federal antitrust regime, Congress wanted consumers, workers, farmers, and businesses to play a primary role in enforcing the law. In the Sherman Act, Congress enacted a special remedy: the treble damages action. The drafters of the law believed that giving injured parties the right to recover threefold the amount of their sustained harm, as well as their legal fees, would ensure effective private policing of business practices. The text of the private remedy (now codified in the Clayton Act) is broad: “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue . . . and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.” The text is so clear that, in the past, the Supreme Court acknowledged that it “contains little in the way of restrictive language” and stated that “Congress encouraged [injured] persons to serve as ‘private attorneys general.’”

Notwithstanding this plain language, the Court in 1977 concluded that “any person” does not mean just any person. In the decision Illinois Brick Co. v. Illinois, it ruled that typically only one class of purchasers has the right to recover damages from prices inflated by antitrust violations. Specifically, the Court held that only parties that purchased the overpriced products directly from the violator could sue for damages. In a multi-layer supply chain, direct purchasers, unless they are end-use consumers, can often raise their prices and pass the overcharge, at least in part, on to subsequent purchasers. In other words, downstream purchasers, including individual consumers, may often bear the ultimate harm from the upstream antitrust violation. Under the Illinois Brick decision, however, these parties cannot recover damages under federal antitrust law. The Court ignored the plain text of the Clayton Act and reached this decision because of the fear of complicated damages calculations and the potential for unfairness to companies that violated the antitrust laws. (In its recent decision in Apple Inc. v. Pepper, the Supreme Court rejected Apple’s calls to revise Illinois Brick and further limit who can sue an antitrust violator for damages. The Open Markets Institute filed amicus briefs in support of the plaintiffs in this case and in a pending appeal in the Seventh Circuit concerning Illinois Brick.)

In the modern world of multi-layer supply chains, Illinois Brick radically shrunk the pool of potential purchaser plaintiffs. For many antitrust violations, final consumers are out of luck. By virtue of having bought a good or service from an intermediary such as a retailer and not directly from the antitrust violator, many purchasers cannot obtain damages under federal antitrust law. Illinois Brick frustrates the compensatory purpose of the Clayton Act. Many injured parties cannot seek recompense and be made whole. Deterrence is also impaired. To be sure, direct purchasers can and do bring suits for treble damages and have recovered billions, but they are not a proxy for general consumer interests. Is a direct purchaser always going to file an antitrust suit and jeopardize a commercial relationship with a powerful supplier? If the direct purchaser passes the full overcharge down the chain by raising prices for its customers, the likelihood of a suit only goes down further.

In the same year it announced Illinois Brick, the Supreme Court added another restriction on who can enforce the antitrust laws. The Court, in a unanimous decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., held that private parties must show “antitrust injury” before they can recover damages. Antitrust injury is defined (unhelpfully) as an “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” The Court subsequently extended this antitrust injury requirement to parties seeking injunctive relief as well and stated that the doctrine “ensures that a plaintiff can recover only if the loss stems from a competition-reducing aspect or effect of the defendant’s behavior.” Terms such as “competition” and “competition-reducing” are open-ended and do not have universally or even widely shared meanings, even after forty years under the antitrust regime of “consumer welfare.”

Whereas Illinois Brick establishes a straightforward, though overly narrow, rule, antitrust injury is a confusing—and indeed confused—doctrine. By muddling the separate questions of liability and damages, the Supreme Court itself is the source of this confusion. In its principal decisions on antitrust injury, the Court skipped past the question of whether alleged conduct was (or should be) an antitrust violation. It should have decided the liability question before inventing a new doctrine. For instance, on Brunswick, the business law scholar Norman Hawker has written, “[T]he Court manufactured a dilemma based upon its flawed assumption that the mergers were illegal. Only because the Court refused to recognize that these mergers could not violate [anti-merger law] precisely because they preserved competition did it have to face the specter of a loss which occurred ‘by reason of the unlawful acquisitions.’” And if the Court determined that the plaintiff had established an antitrust violation, it would still have to address the question of damages. A plaintiff that could not show it was worse off due to the antitrust violation would not be entitled to damages.

By virtue of its slipperiness, the antitrust injury is a serious threat to private antitrust enforcement. The doctrine gives judges broad discretion to throw out—on nominally procedural grounds—substantive claims that they dislike. In private antitrust suits, judges can avoid questions of legal liability entirely. They can dismiss private suits at the pleading stage on the basis that the plaintiff failed to allege antitrust injury. Since the concept has no clear definition, judges have extraordinary latitude in deciding what constitutes antitrust injury. Without questioning or challenging existing doctrine, they can dispose of substantive claims that they find philosophically disagreeable or expect to be complicated and time-consuming.

For example, in this era of consumer welfare antitrust, even complaints alleging credible consumer injury are not safe from the reach of antitrust injury. One district judge, in a decision that was subsequently reversed, dismissed, based on a purported lack of antitrust injury, a complaint alleging collusive suppression of LIBOR (a benchmark interest rate) among sellers of financial instruments. In a case challenging the bundling of cable channels, the Ninth Circuit affirmed the dismissal of the complaint and stated that “an agreement [that] has the effect of reducing consumers’ choices or increasing prices to consumers does not sufficiently allege an injury to competition.” This raises the question: what does?

To further confuse and complicate matters, the Supreme Court synthesized Illinois Brick, antitrust injury, and assorted common law concepts to create “antitrust standing.” Under this standing inquiry, courts determine whether a party is “the proper plaintiff to enforce the antitrust laws.” In manufacturing this standing doctrine, the Court glided past the unambiguously expansive language of the Clayton Act and claimed to divine a narrower congressional intent than the text of the law indicates. This doctrine, in the words of the late John Flynn, is reminiscent of “one of the curiosities of the past designed to provide certainty while only generating massive confusion and depriving litigants of their appropriate day in court on the merits of their claims.” Antitrust standing gives judges another tool with which to toss private suits on ostensibly procedural grounds.

In addition to rewriting specific doctrines to protect monopolists and other dominant firms, the Supreme Court has weakened enforcement of antitrust law across the board through procedural innovations. It has dramatically shrunk the potential pool of purchaser plaintiffs through the Illinois Brick rule and given courts broad discretion to dismiss private claims using antitrust injury. Restoring the antitrust laws as the “Magna Carta of free enterprise” (to borrow from a 1972 Supreme Court decision) will require a philosophical, political, and doctrinal reconstruction of the entire field. One important part of this reconstruction is a congressional clearing of the judicially cultivated thicket blocking private enforcement and restoration of the plain meaning of the Clayton Act. Private attorneys general have served as a pillar of antitrust enforcement and surely will be a mainstay of a reborn antitrust regime.

Sandeep Vaheesan is legal director at the Open Markets Institute.