Antitrust Alert: California Court Strengthens Exception to Direct Purchaser Standing Requirement
The federal antitrust laws do not allow the "indirect" purchaser of a product that was subject to price fixing to recover damages for the product's higher price; only "direct" purchasers have standing to sue for damages. But courts continue to wrestle with the question of just when a purchase is sufficiently indirect to deny standing to the purchaser.
Last week a California federal judge dismissed two class action lawsuits alleging Japanese and South Korean manufacturers conspired to fix the prices of lithium ion battery cells. However, the court unequivocally rejected the defendants' attack on the standing of certain class members whose purchases arguably were "indirect." The court held that, when a corporation sells price-fixed components to a sister entity that incorporates those components into end-user products, the purchasers of the end-user products still have standing to sue as direct purchasers. This decision follows in a line of cases that have expanded the class size, and liability, companies face in federal treble-damages antitrust suits.
Current law on direct purchaser standing
The question for the court was whether plaintiffs had standing to seek damages under federal antitrust laws as direct purchasers of the products subject to alleged price fixing. Direct purchasers buy an allegedly price-fixed product directly from the defendant company. Of course, many companies do not sell directly to the ultimate consumer. A company may resell a finished product through a wholesaler, or the product may be used as a component in a larger product. In those situations, the ultimate consumer generally is considered an indirect purchaser. The distinction between direct and indirect purchasers is important; under the Supreme Court's Illinois Brick decision, only direct purchasers of price-fixed products have standing to bring a private antitrust damages action. (The antitrust laws of many states allow both direct and indirect purchasers to sue.)
Nevertheless, federal courts have recognized three exceptions in which an indirect purchaser has standing under federal antitrust law:
- the indirect purchaser has a preexisting cost-plus contract with direct purchaser;
- there was price-fixing between the manufacturer and the middleman; and
- customers of a direct purchaser own or control the direct purchaser, or a conspiring seller owns or controls the direct purchaser.
Courts have justified the third exception, the "ownership or control" exception, on the basis that a conspiring parent corporation would not allow its direct purchaser subsidiary to bring a price-fixing suit against the parent. Without allowing a purchaser further downstream to have standing, the antitrust violation would go unremedied.
Applying the "ownership or control" exception
In the lithium ion battery cells case, the defendant manufacturers argued that the plaintiffs should be considered indirect purchasers, because they had not purchased battery cells, only completed batteries containing the battery cells. The exception is available only to direct purchasers of the actual price-fixed product (in this case, the battery cells) because only the direct purchasers necessarily paid a passed-through overcharge. Defendants argued that, where the product has been transformed into a larger finished product (here, batteries), the purchaser lacks standing because the full overcharge was not necessarily passed on to the indirect purchaser.
The plaintiffs argued they had standing, because the defendants owned or controlled the direct purchasers of the battery cells, which in turn made finished batteries.
The court agreed with the plaintiffs' argument. The rationale behind the "ownership or control" exception is that, where the direct purchaser is a subsidiary of the price-fixing parent corporation, the overcharge is not likely to be recovered by the victim of the price fixing. A direct purchaser subsidiary is unlikely to bring a lawsuit for damages against its price-fixing parent. This argument applies equally to already-finished products and to complex finished goods (like batteries). Therefore, the court held, in this situation the purchasers of the batteries containing the battery cells have standing.
Nevertheless, the court ruled that, based on the plaintiffs' complaint, they lacked standing. The court acknowledged that, although the defendants sold their battery cells through their own subsidiaries, they also sold through third-party "packers," which assemble battery cells and other components into finished batteries. The defendants did not have "control" over the packers simply because the packers depended on the defendants for the supply of battery cells. As the plaintiffs had not specified whether they bought batteries from packers or from defendants' subsidiaries, the court could not conclude whether the plaintiffs were entitled to take advantage of the ownership or control exception applied. The court gave the plaintiffs leave to amend their complaint to address this issue.
Manufacturers should be aware of the exceptions to the direct purchaser standing requirements for federal damages actions. A company ultimately may be liable to consumers who did not purchase allegedly price-fixed products directly from the company itself. Companies also should realize that the ownership or control exception is not limited to parent-subsidiary relationships. Courts will consider various factors to determine whether an accused conspirator has control over a direct purchaser, including the ability of accused conspirator to set prices or to control the board of the direct purchaser, interlocking directorates, minority stock ownership, loan agreements that subject the wholesalers to the manufacturers operating control, trust agreements, or other modes of control separate from a majority ownership share of wholesalers' stock.
This court declined to limit the "ownership and control" exception to indirect purchasers of only the price-fixed product itself. Such a ruling would have prevented consumers from suing a manufacturer if the product had been modified or incorporated into another good by the middleman. This interpretation would not have been surprising, as other courts have limited indirect purchaser standing exceptions in that way. Instead, this court made available the "ownership and control" exception to any consumer who purchased a good that contained the allegedly priced-fixed product. This could exponentially expand the potential class size, and liability companies face in a federal treble-damages antitrust suit, as in cases like In re LCD (Flat Panel) Antitrust Litigation, and is likely to continue to be an issue of contention until addressed by the Supreme Court.
The January 21, 2014, opinion of the United States District Court for the Northern District of California can be found here.
Keira M. Campbell, an associate in the New York Office, and Emily C. Bowne, an associate in Washington Office, assisted in the preparation of this Alert.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Eric P. Enson
Keira M. Campbell
Emily C. Bowne
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