Source: http://www.ncbusinesscourt.net/OtherRefdocs/2004%20NCBC%207.htm
Timestamp: 2018-01-23 13:47:08
Document Index: 522978963

Matched Legal Cases: ['§ 75', '§ 75', '§1', '§2', '§ 75', '§ 4', '§ 4', '§ 4', '§ 75', '§ 75', '§ 75', '§ 75', '§ 14', '§ 16720', 'sui generis', '§ 28', '§ 15', '§ 75']

Crouch v. Crompton Corp., 2004 NCBC 7
Morris v. Visa U.S.A. Inc., 2004 NCBC 7
AULEY M. CROUCH, III, on behalf of himself and all others similarly situated,
CROMPTON CORPORATION, CROMPTON MANUFACTURING COMPANY, INC., formerly named in North Carolina as Uniroyal Chemical Company, Inc., UNIROYAL CHEMICAL COMPANY LIMITED, FLEXSYS NV, FLEXSYS AMERICA LIMITED PARTNERSHIP OF NORTH CAROLINA, BAYER AG, BAYER CORPORATION, AND RHEIN CHEMIE RHEINAU GMBH,
02 CVS 4375
TIMOTHY J. MORRIS, on behalf of himself and all others similarly situated,
VISA U.S.A. INC. and MASTERCARD INTERNATIONAL, INC.,
03 CVS 2514
OPINION, ORDER AND JUDGMENT
{1} The above captioned cases are before the Court on motions to dismiss pursuant to Rule 12(b)(6) of the North Carolina Rules of Civil Procedure. They are treated together because they both present the same legal issues. The first issue is whether indirect purchasers have standing under N.C.G.S. § 75-16 to sue for violations of the state antitrust laws. The Court holds, as it has before, that the decision of the Court of Appeals in Hyde v. Abbott Laboratories, Inc., 123 N.C. App. 572, 473 S.E.2d 680 (1996), disc. rev. denied, 344 N.C. 734, 478 S.E.2d 5 (1996), is controlling, and indirect purchasers do have standing to sue under North Carolina’s antitrust laws. If indirect purchasers have standing, the question becomes whether there are applicable limitations on that standing. The Court holds that indirect purchaser standing is not limitless; that there are standing requirements that apply to indirect purchasers. Application of those standards to the pleadings in each of these cases results in dismissal.
Lea, Rhine & Associates, PLLC by Christopher A. Chleborowicz and Joel R. Rhine; Lerach Coughlin Stoia Geller Rudman & Robbins LLP by Robert J. Gralewski, Jr. and Bonny E. Sweeney; The David Danis Law Firm by Alexander E. Barnett, Michael J. Flannery and James J. Rosemergy for Plaintiff Crouch.
Moore & Van Allen, PLLC by Joseph W. Eason; O’Melveny & Myers, LLP by Benjamin G. Bradshaw, Richard G. Parker and Ian Simmons for Defendants Crompton Corporation, Crompton Manufacturing Company, Inc. and Uniroyal Chemical Company Limited.
Womble Carlyle Sandridge & Rice by Pressley M. Millen; Gibson, Dunn & Crutcher, LLP by D. Jarrett Arp, James Slear and Daniel G. Swanson; Covington & Burling by Michael J. Fanelli, William D. Iverson and Vijay Shanker for Defendants Flexsys America, LP, Flexsys America Limited Partnership of North Carolina, and Flexsys NV.
Helms, Mulliss & Wicker, PLLC by Henry L. Kitchin, Jr. and Bradley R. Kutrow; Jones Day by Thomas Demitrack, William V. O’Reilly and J. Andrew Read for Defendants Bayer Corporation and Rhein Chemie Corporation.
Hardison & Leone, L.L.P. by Kenneth L. Hardison, Elizabeth A. Leone and Joseph W. Osman; Susman Godfrey, L.L.P. by Mark A. Evetts, Drew D. Hansen and Neal S. Manne; Markun Zusman Compton & David, L.L.P. by Kevin Eng, David S. Markun, Edward S. Zusman; Friedman & Shube by Noah Shube for Plaintiff Morris.
Ellis & Winters, LLP by Richard W. Ellis, Stephen C. Keadey, and Matthew W. Sawchak; Robinson, Bradshaw & Hinson, PA by Everett J. Bowman, Mark W. Merritt and John R. Wester; Heller Ehrman White & McAuliffe LLP by Stephen V. Bomse, David M. Goldstein and Rachel M. Jones; Arnold & Porter LLP by Robert C. Mason for Defendant Visa U.S.A. Inc.
Womble Carlyle Sandridge & Rice by Pressley M. Millen; Paul Weiss Rifkind Wharton & Garrison, L.L.P. by Gary R. Carney, Patricia C. Crowley and Kenneth A. Gallo for Defendant MasterCard International, Inc.
FACTUAL BACKGROUND IN CROUCH
{2} Plaintiff Crouch is an individual residing in New Hanover County, North Carolina. Plaintiff purchased four B.F. Goodrich tires (Advantage GT model # P195-70R14 90SM+S) for his automobile on October 19, 2002 from Sam’s Club of Wilmington. Plaintiff brings this claim individually and on behalf of all other persons who purchased tires, other than for resale, that were manufactured using the rubber-processing chemicals sold by Defendants since 1994.[1]
{3} Defendant Crompton Corporation (“Crompton”) is a Connecticut corporation with its principal place of business in Greenwich, Connecticut. Crompton is a global marketer and manufacturer of specialty chemicals, polymer products and processing equipment, which includes chemicals used for the processing of rubber and tires. Crompton’s actions have affected commerce within the State of North Carolina.
{4} Defendant Uniroyal Chemical Company Limited (“Uniroyal”) is a Delaware corporation with its principal place of business in Akron, Ohio. It is a wholly-owned subsidiary of Crompton and is responsible either independently or jointly with Crompton Manufacturing Company, Inc. for the manufacture, sale and/or distribution of rubber-processing products as part of its ordinary and customary business. Uniroyal manufactures several rubber-processing products including specialty products for tires and industrial rubber goods. Uniroyal’s actions have affected commerce within the State of North Carolina.
{5} Defendant Crompton Manufacturing Company, Inc., formerly legally named in North Carolina as Uniroyal Chemical Company, Inc. (“Crompton Manufacturing”), is a New Jersey corporation with its principal place of business in Greenwich, Connecticut. It is a wholly-owned subsidiary of Crompton and is responsible either independently or jointly with Uniroyal for the manufacture, sale and/or distribution of rubber-processing products as part of its ordinary and customary business. Crompton Manufacturing’s rubber-processing products include specialty products for tires and industrial rubber goods. Crompton Manufacturing’s actions have affected commerce within the State of North Carolina.
{6} Defendant Flexsys NV is a joint venture between Solutia, a United States company, and Akzo Nobel, a Netherlands company. Flexsys NV has its headquarters in Woluwe, Belgium.
{7} Defendant Flexsys America LP (“Flexsys”) is the United States subsidiary of Flexsys NV. Flexsys is a Delaware corporation with its headquarters located in Akron, Ohio. Flexsys NV is the world’s leading supplier of chemicals to the rubber industry. Flexsys’ actions have affected commerce within the State of North Carolina.
{8} Defendant Flexsys America Limited Partnership of North Carolina (“Flexsys NC”), the legal name in North Carolina of Flexsys America LP, is the United States subsidiary of Flexsys NV. Flexsys NC is a Delaware corporation with its headquarters located in Akron, Ohio.
{9} Defendant Bayer AG is a corporation organized and existing under the law of the Federal Republic of Germany and maintains its principal place of business in Leverkusen, Federal Republic of Germany. Bayer AG is the parent company of Bayer Corporation, the wholly-owned subsidiary that sells and markets rubber-processing chemicals in the United States.
{10} Defendant Bayer Corporation (“Bayer”) is a wholly-owned subsidiary of Bayer AG. Bayer has its principal place of business in Pittsburg, Pennsylvania, and is incorporated under the laws of Pennsylvania. Bayer develops, manufactures, sells and distributes a variety of pharmaceutical and chemical products, including rubber-processing products.
{11} Bayer develops, manufactures, sells and distributes its rubber-processing products through its Fibers, Additives and Rubbers Division. The Division is headquartered in Akron, Ohio. The Division manufactures rubber-processing chemical products which have a variety of differing roles in rubber-processing.
{12} Defendant Rhein Chemie Rheinau GmbH (“Rhein GmbH”) is a business organized under the laws of the Federal Republic of Germany with its principal place of business located in Mannheim, Federal Republic of Germany. Rhein GmbH, a subsidiary or affiliate of Bayer AG, manufactures, sells and distributes the relevant rubber-processing chemicals throughout the global market, including the United States.
{13} Defendant Rhein Chemie Corporation (“Rhein”), a New Jersey corporation and a wholly-owned subsidiary and/or affiliate of Rhein GmbH, is responsible for the manufacture, sale and/or distribution of the relevant rubber-processing products throughout the United States, including North Carolina.
{14} On September 26, 2002, inspectors from the European Commission’s Competition Division, assisted by officials from the Commission’s member states, carried out unannounced inspections at defendants’ European offices. According to a memorandum issued by the Commission on October 10, 2002, the stated purpose of the inspections was to “ascertain whether there is evidence of a cartel agreement and related illegal practices concerning price fixing for rubber chemicals.” (Am. Compl. ¶ 43.) On October 14, 2002, the Associated Press reported that Crompton, Bayer and Flexsys made press releases verifying that their respective companies were under investigation for alleged price collusion in rubber chemicals both by U.S. and European Union authorities.[2] On May 27, 2004, Crompton pled guilty to participating in a conspiracy to suppress and eliminate competition by maintaining and increasing the price of certain rubber chemicals sold in the United States and elsewhere during the period between July 1995 to 2001. The U.S. federal court imposed a fine of $50 million. On May 28, 2004, Crompton pled guilty to one count of conspiring to lessen competition unduly in the sale and marketing of certain rubber chemicals in Canada. The Canadian federal court imposed a sentence requiring Crompton to pay a fine of $7 million. On July 14, 2004, Bayer pled guilty to charges filed by the U.S. Department of Justice in Federal District Court in the Northern District of California and agreed to a $66 million fine for participating in an international conspiracy to fix prices in the rubber chemicals market.
{15} Plaintiff filed this action on November 5, 2002, only thirty days after the European investigation was announced, alleging violations of North Carolina’s Unfair and Deceptive Trade Practices Act (“UDTPA”), including N.C.G.S. §§ 75-1.1, 75-2, 75-5, 75-16, 75-16.1. Plaintiff alleges that defendants “entered into an agreement, arrangement, contract, combination, conspiracy and/or understanding that was intended to and which did have the effect of fixing, raising, stabilizing and maintaining the price for the relevant rubber-processing chemicals.” (Am. Compl. ¶ 40.) Plaintiff alleges that defendants’ “supracompetitive pricing” was reflected in the prices of automobile tires manufactured using these rubber-processing chemicals. (Am. Compl. ¶ 41.) Therefore, plaintiff alleges that consumers who purchased these automobile tires, not directly from defendants but rather from tire retailers, paid more than they would have in the absence of the alleged anticompetitive agreement. (Am. Compl. ¶ 55.) Similar suits have been filed in other jurisdictions that recognize indirect purchaser standing. Plaintiff seeks to represent only persons who purchased tires at retail.
{16} Direct purchasers have filed a nationwide class action lawsuit seeking to recover the alleged overcharge that is the subject of the state litigation. In re Rubber Chemicals Antitrust Litig., Master Docket No. C-03-1496 (N.D. Cal. (Judge Martin J. Jenkins)).
{17} Defendants have responded by moving to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted based upon plaintiff’s lack of standing to sue under North Carolina’s antitrust laws.
{18} The case was assigned to this Court by Order dated April 19, 2004.
Factual Background in Morris
{19} Plaintiff, Timothy Morris, is a resident of North Carolina. Plaintiff brings this contemplated class action on behalf of all North Carolina consumers who purchased goods from merchants who accepted Visa and/or MasterCard credit cards and debit cards during the four years preceding the filing of the Complaint.
{20} Defendant Visa U.S.A. Inc. (“Visa”) is a Delaware corporation. Visa’s principal place of business is San Francisco, California. Visa transacts business within the State of North Carolina. At all relevant times, Visa was a national bankcard association whose members included more than 6,000 banks.
{21} Defendant MasterCard International, Inc. (“MasterCard”) is a Delaware corporation. MasterCard’s principal place of business is Purchase, New York. MasterCard transacts business within the State of North Carolina. At all relevant times, MasterCard was a national bankcard association whose members included more than 6,000 banks.
{22} In October 1996, Wal-Mart Stores, The Limited, Sears Roebuck, Safeway, Circuit City, the International Mass Retail Association, the National Retail Federation, the Food Marketing Institute, Bernie’s Army-Navy Store, Auto-Lab of Farmington Hills, Burlington Coat Factory Warehouse, Sportstop, Payless Shoesource Shoes, Etc., the Coffee Stop, UCC Kwik Doc, Computer Supplies Unlimited, Denture Specialist, Inc./Geneva White D.M.D., Shark 3 Audio, 53, Inc., and Scrub Shop collectively filed a claim challenging the “Honor All Cards” rules of Visa and MasterCard that require all merchants accepting Visa and MasterCard credit cards to also accept their debit cards. The plaintiffs alleged that this requirement was a tying arrangement violating section 1 of the Sherman Antitrust Act, 15 U.S.C. §1. Plaintiffs further asserted that Visa and MasterCard attempted and conspired to monopolize the debit card market in violation of section 2 of the Sherman Act, 15 U.S.C. §2. Plaintiffs alleged that the defendants’ actions resulted in excessive fees to merchants for the debit card processing services. See In re Visa Check/MasterMoney Antitrust Litig., 192 F.R.D. 68 (E.D.N.Y. 2000) aff’d, 280 F.3d 124 (2d Cir. 2001), cert. denied, 536 U.S. 917 (2002).
{23} In February 2000, a plaintiff class of approximately four million merchants who have accepted Visa and/or MasterCard credit cards and therefore were required to accept VisaCheck and/or MasterMoney debit cards under the “Honor All Cards” rule was certified. Id. Oral arguments on motions for summary judgment were heard on January 10, 2003. On April 1, 2003, the federal court granted the merchants’ motion for summary judgment in part and denied it in part. The defendants’ motions for summary judgment were denied in their entirety. In addition, MasterCard’s motion for a severance was denied. See In re Visa Check/MasterMoney Antitrust Litig., 2003 U.S. Dist. LEXIS 4965, at *27 (E.D.N.Y. Apr. 1, 2003).
{24} On the day that opening statements were to occur, April 28, 2003, MasterCard agreed to settle with the plaintiff class. In re Visa Check/ MasterMoney Antitrust Litig., 297 F. Supp. 2d 503, 508 (E.D.N.Y. 2003). Visa agreed to settlement two days later, April 30, 2003. On December 19, 2003, the federal court issued an order providing final approval of the settlements. Pursuant to the settlement, merchants who accept Visa and MasterCard credit cards were free to reject Visa and MasterCard debit cards. In addition, Visa and MasterCard will pay more than $3 billion into a settlement fund to be distributed to the merchant class. Id. at 506-08.
{25} Plaintiff filed this action on December 31, 2003, alleging violations of North Carolina’s Unfair and Deceptive Trade Practices Act, N.C.G.S. § 75. Plaintiff asserts consumer antitrust claims that attack the manner in which the “Honor All Cards” rules of the MasterCard and Visa national payment systems are applied to merchants across the country. Plaintiff’s claim in this action is founded upon the same alleged “tying” conduct by Visa and MasterCard that was at issue in the federal merchant class antitrust action. (Compare Compl. ¶¶ 2-6, 27(m), 28-57, with In re Visa Check/MasterMoney Antitrust Litig., 192 F.R.D. at 71-73.) Plaintiff alleges that consumers paid higher prices for goods sold by the merchants bringing the claim in the federal action. Plaintiff alleges that because merchants were “compelled to pay supracompetitive prices,” merchants, in turn, passed along their extra costs to consumers by raising the price of goods. (Compl. ¶¶ 57-58.)
{26} Defendants have responded by moving to dismiss under Rule 12(b)(6) based on two grounds: first, that plaintiff lacks standing to sue under North Carolina’s antitrust laws; and second, that plaintiff seeks relief that would violate the Commerce Clause of the United States Constitution, which forbids states from regulating interstate commerce that requires uniform national regulation.
{27} The case was assigned to this Court by Order dated May 11, 2004.
{28} When ruling on a motion to dismiss under Rule 12(b)(6), the court must determine “whether, as a matter of law, the allegations of the complaint . . . are sufficient to state a claim upon which relief may be granted.” Harris v. NCNB, 85 N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987). In ruling on a motion to dismiss, the court must treat the allegations in the complaint as true. See Hyde v. Abbott Labs., Inc., 123 N.C. App. 572, 575, 473 S.E.2d 680, 682 (1996). The court must construe the complaint liberally and must not dismiss the complaint unless it appears to a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim. See id.
{29} An understanding of the issues in these two cases necessarily begins with examination of the standing requirements under federal antitrust law. That examination begins with the study of two cases, Hanover Shoe Co. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), and Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The interrelationship of those two cases is best described by William Landes and Richard Posner in their seminal article: Should Indirect Purchasers Have Standing to Sue Under the Antitrust Laws? An Economic Analysis of the Rule of Illinois Brick.
In Illinois Brick Co. v. Illinois, the Supreme Court held that indirect purchasers do not have standing to sue for violations of the antitrust laws under section 4 of the Clayton Act, which authorized private treble-damage suits by individuals or firms injured in their business or property by a violation of those laws. To understand this decision, one must go back to Hanover Shoe Co. v. United Shoe Machinery Corp., a suit by a shoe manufacturer against a manufacturer of shoe machinery who had earlier been found to have monopolized the shoe machinery industry in violation of section 2 of the Sherman Act. The defendant argued that it should be allowed to show that its customer had not in fact been injured by the antitrust violation because the customer had passed on the costs of the violation to its customers, the purchasers of shoes. The Supreme Court rejected this argument, holding that there is no “passing on” defense to a suit by a direct purchaser; the direct purchaser is entitled to get the overcharge back, trebled, whether or not he was really injured to that extent.
Illinois Brick is the mirror image of Hanover Shoe. The plaintiffs in Illinois Brick, represented by the state of Illinois suing on behalf of itself and some 700 local government entities in the Chicago area, claimed overcharges in connection with various construction projects. The defendants, manufacturers and distributors of concrete block alleged to be in collusion, sold the block to masonry contractors who submitted bids to general contractors who in turn submitted bids to customers such as the plaintiffs. The Illinois Brick plaintiffs were therefore indirect purchasers of concrete block, standing in the same relation to the defendants as the buyers of shoes at retail stood to United Shoe Machinery Corporation. The predicate of the Illinois Brick suit was the passing on of all or part of the overcharge by the direct purchaser; without passing on, there could be no injury to indirect purchasers.
Unless they are willing to countenance multiple liability, the courts cannot allow suits by indirect purchasers without also permitting the defendant to assert a “passing-on defense” against direct purchaser plaintiffs. As the Court recognized in Illinois Brick, there are only two ways of avoiding unacceptable multiple liability: (1) allow indirect purchasers to sue but overrule Hanover Shoe or (2) retain Hanover Shoe and preclude indirect purchasers from suing.
46 U. Chi. L. Rev. 602, 602-03 (1979) (footnotes omitted).
{30} The rule governing indirect purchaser standing in federal antitrust cases has not changed since Illinois Brick. The fact that there has been no congressional or judicial repeal of the rule indicates that the policy behind it has proven effective. That policy holds that the direct purchaser suit is on balance a more effective instrument for enforcement of the antitrust rule prohibiting price fixing than the indirect purchaser suit.[3] Under the federal scheme, where avoidance of a double recovery is favored, the federal government has chosen the direct purchaser suit as the most effective means of enforcing the antitrust laws, particularly in price fixing cases.
{31} The choice made in the federal system had the effect of preventing indirect purchasers who were actually injured by a price fixing scheme from recovering their damages. It was a policy decision that was not well received in some states. There were rational arguments that the decision was wrong from a policy standpoint. Those arguments were made effectively by Justice Brennan in a well-reasoned dissent in Illinois Brick. A minority of states chose to alleviate the problems created for indirect purchasers by Illinois Brick by either passing statutes (Illinois Brick repealer statutes) or interpreting their existing statutes as permitting indirect purchaser standing under the state antitrust law based upon some differentiation in language between the state and federal statutes. For example, the District of Columbia passed a statute[4] which was modeled directly on Justice Brennan’s dissent in Illinois Brick. It specifically provides for indirect purchaser standing and it adopts the “target area” test for standing mentioned by Justice Brennan in his dissent.[5] It is a model for states desiring to create a clear statutory framework for indirect purchaser cases.
{32} The recognition of indirect purchaser standing by this minority of states created an unusual situation. In federal price fixing cases, direct purchasers were permitted to recover the artificially inflated price and treble damages even though they may have passed on the artificially inflated price to someone else in the distribution chain. They receive a windfall in some instances; but that windfall is predicated upon the policies that the federal scheme was (a) the most effective deterrent, (b) eliminated double recovery, (c) eliminated extraordinarily difficult damage proof[6] and (d) was economically rational.[7] When the minority states reacted by repealing Illinois Brick, they created a situation which (a) restored the ability of indirect purchasers to recover for injuries actually sustained as a result of anticompetitive behavior, (b) added a redundant and less effective deterrent, (c) condoned double recovery (trebled) against violators and (d) created the potential for extremely difficult damage proof issues.
{33} Not surprisingly, the state efforts to restore indirect purchasers’ ability to recover for injuries sustained as a result of antitrust violations were challenged, primarily on the ground that state statutes were preempted by the federal scheme. That challenge was directly rejected by the United States Supreme Court in California v. ARC America Corp., 490 U.S. 93 (1989). The Supreme Court held that states may allow an indirect purchaser to sue under state antitrust laws.
When viewed properly, Illinois Brick was a decision construing the federal antitrust laws, not a decision defining the interrelationship between the federal and state antitrust laws. The congressional purposes on which Illinois Brick was based provide no support for a finding that state indirect purchaser statutes are pre-empted by federal law.
California v. ARC Am. Corp., 490 U.S. 93, 105-06 (1989).
This Court has previously noted the problems created by this dual enforcement in Adams v. Aventis, S.A., 2003 NCBC 7, at ¶ 23 (No. 01CVS2119, Craven County Super. Ct. August 26, 2003)(Tennille, J.). The Court stated:
In 1995, the Section of Antitrust Law of the American Bar Association published a Report of the Indirect Purchaser Task Force outlining proposed legislative changes to address the “indirect purchaser problem.” Report of the Indirect Purchaser Task Force: Section of Antitrust Law American Bar Association, 63 Antitrust L.J. 993 (Spring 1995). The report stated that the results of state Illinois Brick repealer laws are that:
(1) The full amount of the overcharge, trebled, can be recovered by (i) direct purchasers who sue under federal law; (ii) the customers of those direct purchasers who sue under state law; and (iii) under most state Illinois Brick repealers, by indirect purchasers at every other stage of distribution down the line.
(2) The overcharge that an indirect purchaser can have trebled may be a multiple of the overcharge to the direct purchaser because indirect purchasers can claim that their seller's markups on the original overcharge are also inflated because of that overcharge.
(3) The direct purchaser cases can be prosecuted in federal court and the indirect purchaser cases can be prosecuted in state court(s). Indeed, the Supreme Court seemed to encourage that kind of multiple litigation in ARC America by broadly hinting to federal courts that they utilize pendent jurisdiction principles for state law indirect purchaser claims.
(4) The results in the direct and indirect purchaser cases need not be consistent. The overcharge which is treated as the direct purchaser's in the federal court can be treated as the indirect purchaser's in the state court. In fact, if indirect purchaser cases are brought in several state courts, there may be inconsistencies in those decisions.
Thus, defendants in horizontal price-fixing cases face not only the burden and expense of multiple treble-damage lawsuits, but also enormous potential liability—not just three, but multiples of three times the overcharge, if a lay jury finds liability. Few companies can afford to “roll the dice” on a jury verdict when the exposure is that high, no matter how innocent they believe they are.
Additionally, the current law turns judicial economy—the principal reason for the decisions in Hanover Shoe and Illinois Brick—on its head. Federal and state judicial resources are finite and precious. It makes little sense to permit, much less encourage, multiple litigation in federal and state courts. It makes even less sense to permit inconsistent judgments as to who bore the overcharge.
2003 NCBC 7, at ¶ 23.
{34} Thus, states may provide indirect purchaser recovery based upon state antitrust laws even though (1) the result may and almost assuredly will be a double recovery and (2) a preferable deterrent exists under federal law. It is clear then that the primary rational for enforcement of the state antitrust laws is to provide a recovery for indirect purchasers actually injured by antitrust violations. That goal should be kept in mind when interpreting and applying the statute.
{35} The inquiry into standing in federal antitrust cases does not end with Hanover Shoe and Illinois Brick. Those cases dealt only with apportionment of damages in price fixing situations.
{36} The Supreme Court specifically noted that its decision was not directed to standing. It said:
Because we find Hanover Shoe dispositive here, we do not address the standing issue, except to note, as did the Court of Appeals below, that the question of which persons have been injured by an illegal overcharge for purposes of § 4 is analytically distinct from the question of which persons have sustained injuries too remote to give them standing to sue for damages under § 4.
Illinois Brick, 431 U.S. at 728 n.7 (citation omitted).
{37} Since Illinois Brick, the federal courts have addressed standing in other situations involving indirect purchasers or persons indirectly injured by alleged antitrust activity. The leading federal case on standing in situations not involving price fixing is Associated General Contractors of California, Inc. v. California State Counsel of Carpenters, 459 U.S. 519 (1983) (“AGC”).[8] In that case, the Unions sought damages under section 4 of the Clayton Act. [9] They alleged that the employer group defendant had coerced some of its members to enter into business relationships with nonunion contractors and subcontractors, thus adversely affecting the trade of the unionized firms and consequently the unions themselves.
{38} In holding that the Union was not a person injured by reason of a violation of the antitrust laws within the meaning of section 4 of the Clayton Act, the Supreme Court adopted a five factor standing test which it derived in part by looking at the standard applied in common law damage actions when the Clayton Act’s predecessor was originally passed in 1890.
{39} Significantly, the Supreme Court rejected the argument made by both plaintiffs in these cases that because the language in the statutes (section 4 of the Clayton Act and Chapter 75) is broad and unrestricted, it covers any and every arguable injury flowing from an antitrust violation.[10] In rejecting a limitless interpretation of the language the Supreme Court said:
A literal reading of the statute is broad enough to encompass every harm that can be attributed directly or indirectly to the consequences of an antitrust violation. Some of our prior cases have paraphrased the statute in an equally expansive way. But before we hold that the statute is as broad as its words suggest, we must consider whether Congress intended such an open-ended meaning.
AGC, 459 U.S. at 530 (footnote omitted).
{40} The Court then went on to hold:
As this Court has observed, the lower federal courts have been “virtually unanimous in concluding that Congress did not intend the antitrust laws to provide a remedy in damages for all injuries that might conceivably be traced to an antitrust violation.” Hawaii v. Standard Oil Co., 405 U.S. 251, 263, n. 14 (1972). Just last Term we stated:
An antitrust violation may be expected to cause ripples of harm to flow through the Nation’s economy; but “despite the broad wording of § 4 there is a point beyond which the wrongdoer should not be held liable.” [Illinois Brick Co. v. Illinois, 431 U.S.], at 760 (BRENNAN, J. dissenting). It is reasonable to assume that Congress did not intend to allow every person tangentially affected by an antitrust violation to maintain an action to recover threefold damages for the injury to his business or property. Blue Shield of Virginia v. McCready, 457 U.S. 465, 476-477 (1982).
{41} The Supreme Court found that there was no single bright line test that could be applied in determining standing. Rather, it required federal judges to evaluate the plaintiff’s harm, the alleged wrongdoing by the defendant and the relationship between the two according to five factors. The five factors to be used by federal courts in determining standing as set forth in AGC are: (1) whether the plaintiff is a consumer or competitor in the allegedly restrained market, (2) whether the injury alleged is direct and a first hand product of the restraint alleged, (3) whether there exists more directly injured parties with motivation to sue, (4) whether the damage claims are speculative and (5) whether the claims (a) risk duplicative recovery and (b) would require a complex apportionment of damages.
{42} The holding in AGC has been followed consistently in the federal courts. See, Pocahontas Supreme Coal Co. v. Bethlehem Steel Corp., 828 F.2d 211, 219 (4th Cir. 1987) (affirming dismissal because “though there obviously is a causal relation between the conduct and harm as alleged, it is remote rather than direct”); Eagle v. Star-Kist Foods, Inc., 812 F.2d 538, 539‑43 (9th Cir. 1987) (affirming dismissal because plaintiffs “were neither consumers nor competitors in the relevant market,” who alleged injuries derivative of others who also had sued defendants); Henke Enters., Inc. v. Hy‑Vee Food Stores, Inc., 749 F.2d 488, 489‑90 (8th Cir. 1984) (affirming dismissal because plaintiff “was neither a competitor, participant, nor consumer within the [allegedly restrained] market” and its alleged injury was “an incidental by‑product of the conspirators’ claimed anticompetitive action”). Viewed in the broader context of standing enunciated in AGC, Illinois Brick appears as a per se disqualification of indirect purchasers in price fixing cases under application of factors 2, 3 and 5. Illinois Brick and AGC are logically consistent.
{43} If Hyde is correct that the North Carolina statute created indirect purchaser standing and if the courts of this state are required to interpret our antitrust statutes consistently with federal law[11], reconciling Illinois Brick and AGC in this state requires that factor 3 be modified and that the application of factors 2 and 5 be limited by the statutory recognition of indirect purchaser claims. The courts of this state may not deny standing based upon Illinois Brick but must still determine standing based upon relevant factors.
{44} “Standing is a necessary prerequisite to a court’s proper exercise of subject matter jurisdiction.” Neuse River Found., Inc. v. Smithfield Foods, Inc., 115 N.C. App. 110, 113, 574 S.E.2d 48, 51 (2002) (quoting Aubin v. Susi, 149 N.C. App. 320, 324, 560 S.E.2d 875, 878 (2002)). “The term [‘standing’] refers to whether a party has a sufficient stake in an otherwise justiciable controversy so as to properly seek adjudication of the matter.” Neuse River Found., 115 N.C. App. at 114, 574 S.E.2d at 51-52 (quoting Sierra Club v. Morton, 405 U.S. 727, 731-32 (1972)). Standing consists of three elements:
(1) “injury in fact” -- an invasion of a legally protected interest that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.
Neuse River Found., 155 N.C. App. at 114, 574 S.E.2d at 52 (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)) (emphasis added).
“The gist of standing is whether there is a justiciable controversy being litigated among adverse parties with substantial interest affected so as to bring forth a clear articulation of the issues before the court.” Street v. Smart Corp., 157 N.C. App. 303, 305-06, 578 S.E.2d 695, 698 (2003) (quoting Texfi Industries v. City of Fayetteville, 44 N.C. App. 268, 269-70, 261 S.E.2d 21, 23 (1979), aff’d, 301 N.C. 1, 269 S.E.2d 142 (1980)). “Standing most often turns on whether the party has alleged ‘injury in fact’ in light of the applicable statutes or caselaw.” Neuse River Found., 115 N.C. App. at 114, 574 S.E.2d at 52.
{45} The federal law and the issue of preemption of state antitrust laws by federal law being clear, the Court turns to a review of the North Carolina experience in indirect purchaser cases.
{46} That review begins with the statute and its history. The only appellate decision interpreting the statute is Hyde v. Abbott Laboratories, Inc., 123 N.C. App. 572, 473 S.E.2d 680 (1996), disc. rev. denied, 344 N.C. 734, 478 S.E.2d 5 (1996). As this Court has previously noted:
The Hyde decision is the only North Carolina appellate decision dealing with indirect purchaser standing. That case was settled after the Court of Appeal’s decision and before review by the North Carolina Supreme Court. In Hyde, plaintiffs filed a class action against manufacturers of infant formula, alleging violations of North Carolina’s antitrust laws. 123 N.C. App. at 573, 473 S.E.2d at 681. The purported class consisted of ultimate consumers who purchased infant formula from parties other than the manufacturer. Id. at 574, 473 S.E.2d at 681-82. The defendants filed a motion to dismiss alleging that plaintiffs were indirect purchasers and therefore lacked standing to sue under N.C.G.S. § 75-16. Id. The Superior Court granted the motion to dismiss, and plaintiffs appealed. Id.
The Court of Appeals reversed the Superior Court and found that under North Carolina’s antitrust statute, an indirect purchaser may sue a manufacturer for antitrust violations. The Court of Appeals based this finding upon a review of the plain language of N.C.G.S. § 75-16. North Carolina’s antitrust statute provides:
If any person shall be injured or the business of any person, firm or corporation shall be broken up, destroyed, or injured by reason of any act or thing done by any other person, firm or corporation in violation of the provisions of this Chapter, such person, firm or corporation so injured shall have a right of action on account of such injury done, and if damages are assessed in such case judgment shall be rendered in favor of the plaintiff and against the defendant for treble the amount fixed by the verdict. N.C.G.S. § 75-16 (1999).
The current version of N.C.G.S. § 75-16 was amended in 1969. Prior to the amendment, the first sentence of the provision began: “If the business of any person, firm, or corporation shall be broken up . . . .” 1913 N.C. Sess. L. 66, 70. The Hyde court found it significant that, in amending the statute, the legislature decided to add the phrase “if any person shall be injured” to the beginning of the provision. 123 N.C. App. at 578, 473 S.E.2d at 684. The court found that this evidenced an intent to expand the class of persons with standing to sue under Chapter 75, and thus provide a recovery “for all consumers,” including indirect purchasers. Id. at 577-78, 473 S.E.2d at 684. A review of the legislative history also leads to the conclusion that the General Assembly intended to create indirect purchaser standing to sue under the state antitrust laws when it amended the statute. There is simply no logical reason for the amendment other than the creation of indirect purchaser standing.
In holding that indirect purchasers have standing to sue under North Carolina antitrust law, the Court of Appeals specifically declined to interpret the statute consistent with federal antitrust law. As originally enacted in 1913, the North Carolina antitrust statute was modeled after federal antitrust law, codified as Section 7 of the Sherman Act. See An Act to Declare Illegal Trusts and Combinations in Restraint of Trade, Ch. 41, § 14, 1913 Sess. Laws 66. Section 7 of the Sherman Act was recodified as Section 4 of the Clayton Act. Both federal and state law have been amended throughout the years; however, the language of the North Carolina statute has remained similar to the language of the Clayton Act.
Bruggers v. Eastman Kodak Co., 2000 NCBC 3, at ¶¶ 5-8 (No. 97CVS11278, Wake County Super. Ct. March 17, 2000) (Tennille, J.).
{47} This Court has previously held that unless and until Hyde is overruled by the Supreme Court or new legislation is passed, this Court is bound by the decision in Hyde to the extent that it holds that indirect purchasers have standing under the North Carolina antitrust laws. See, Bruggers, 2000 NCBC 3, at ¶ 17; Adams, 2003 NCBC 7, at ¶ 8; MJM Investigations, Inc. v. Microsoft Corp. (No. 00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct., N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement). In Hyde, the Court of Appeals was only asked to consider the question of whether the statute provided indirect purchaser standing. It was not called upon to delineate the scope and breadth of standing under the statute.
{48} Since Hyde was briefed and argued there have been several developments which might have impacted the scope, if not the actual outcome, of that decision. Those developments demonstrate that the landscape upon which these types of claims are viewed has changed significantly since Hyde was decided.
{49} First, in June 1996 the General Assembly ratified a bill entitled “An Act to Revise the Statutes Regarding Antitrust Law to Ensure That These Provisions Are Internally Consistent and Consistent With Federal Antitrust Laws.” Act of June 3, 1996, ch. 550, 1995 N.C. Sess. Laws 550 (“1996 amendments”). That legislative history is important for two reasons. First, if the General Assembly had desired to change the statute to provide for an Illinois Brick/Hanover Shoe limitation, it could have done so then. It did not, and it has done nothing to change the law since the Hyde decision. Second, and equally important, the General Assembly signaled a clear intent for the state courts to follow federal decisional guidance in interpreting and enforcing state antitrust laws. Clearly, counsel for the parties did not bring the 1996 amendments to the attention of the Hyde court.[12] The statutory direction to follow federal guidance has a bearing on this Court’s decisions in these two cases, requiring the Court to reconcile the indirect purchaser standing statute with the federal standing requirements enunciated in AGC.
{50} Second, a track record is available which provides information not available to the Hyde court.[13] The track record to date establishes that state indirect purchaser cases are generally parasitic. They are not self-generating or supporting but almost always are dependent on some triggering federal action for their genesis. The track record also establishes that these cases pose significantly complex proof issues both as to damages and liability.[14] The track record establishes that they can in fact result in double recovery.[15] That same track record discloses that these types of cases are difficult to administer from a settlement standpoint and that the complexities and administrative costs and difficulties result in settlements that are something less than sterling from the consumer’s point of view.[16] None of that information was available to the court in Hyde. This Court has previously pointed out the problems with settlement of these kinds of cases. In approving the Microsoft indirect purchaser class action settlement, the Court noted:
There is no definitive decision from the North Carolina Supreme Court ruling upon the issue of indirect purchaser standing in North Carolina, nor is there a clear legislative history. Accordingly, every plaintiff argues that there is indirect purchaser standing, and every defendant argues that there is no standing under North Carolina law. The stakes are almost always too high for either side to risk trial and an appeal. Further, numerous issues flowing from indirect purchaser standing remain unanswered. For example, who has the burden of proof on pass-through issues, and what must be shown? How indirect can the purchaser be? Who has the burden of showing that an indirect purchaser did not pass through the price increase to another consumer? Are there reliable means to determine pass through and the amount thereof? The answers to these questions dramatically affect liability and the potential for recovery. It is no surprise that neither plaintiffs lawyers nor defendants have wished to incur the expense of trial and appeal which would be necessarily incurred in getting the answers to these questions. It is likely that more than one trial would be required to get all the required answers.
Additionally, there were significant questions concerning the application of the law of damages and how damages were to be determined in this case. The federal case which spawned this and other indirect purchaser cases was not a price fixing case. It involved anticompetitive behavior and not price fixing. The cost of Microsoft products at issue had decreased relatively speaking over the time in question. While there had been a determination in the federal action that Microsoft had a monopoly, there was no finding that it had used that monopoly to artificially increase prices. Proving damages by pass through of artificially inflated prices would have raised numerous novel questions of law. Proving damages to indirect purchasers by anticompetitive actions (which may have included artificially deflated prices) would raise a whole host of other issues for which there is no statutory or case law guidance.
In short, the process of trying this case and going through an appeal and possible retrial meant that the case would not be finally resolved for at least four or five years. Final judgment would have been entered some ten years after the alleged damages were incurred. For reasons explained more fully below, that time lag was a significant issue.
While there is a possible philosophical argument that this uncertainty has a salutary effect in promoting settlement of cases, this court does not believe it is the function of the law to create ambiguity and uncertainty. If consumers have a cause of action they should be entitled to full recovery, not a compromise amount. On the other hand, if no cause of action exists or damages are limited to direct pass through of artificially inflated prices, businesses ought not to have to pay for unfounded claims even if they are compromised. Under the present system, only the lawyers really benefit from the uncertainty. One of their clients is paying an unnecessary price.
Two factors are critical to the Court’s decision to approve the terms of this settlement affecting purchasers of Microsoft products—timing and purchaser identification. Most indirect purchaser cases involve common problems—how to identify the class members and distribute small amounts of money to them. This case is no different. Plaintiff’s counsel and Microsoft have represented to the Court that a means of identifying all consumers who purchased the software at issue does not exist and cannot be created. Thus, there will be a claim process of some sort no matter the outcome of settlement or trial. As counsel for one of the interveners has suggested, even in cash refund cases, the claims process is abysmally ineffective, with only single-digit percentages of potential beneficiaries making claims. It thus appears to the Court that there will have to be a claims process no matter the outcome. If the case were tried and some amount awarded for damages to purchasers of specific products, a mechanism would have to be put in place for identification of products purchased, claims and payment. If that process were to be put in place three to five years from now and it covered products purchased in the late 1990s, it is unlikely that the claims process would result in any significant payout. Most of these technology products will have been replaced well before any claims process begins. If the funds were not paid out, Microsoft would get to keep the money. Purchasers would be required to prove purchases which occurred many years before the claim process begins. That will be difficult enough now, and perhaps impossible years from now. Settlement now, while there is some prospect that purchasers will have records of their purchases, is far more beneficial to the class. Here, most of the purchasers are businesses that arguably have better records of their purchases. For consumers, the settlement has the benefit of not requiring proof of purchase for smaller claims. The combination of the more current claim process and the cy pres component of the settlement make acceptance of the coupon aspect of the settlement acceptable, even if it is not the most desirable process. Given the rapid advancements in technology, it is also likely that computer owners will make purchases of new hardware and software, making the coupons more valuable than they would be for products not likely to be replaced.
MJM Investigations, Inc. v. Microsoft Corp. (No. 00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct., N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement).
{51} Third, there are cases from other indirect purchaser states which provide some guidance with respect to limitations on standing. The case law has evolved from interpretations of state statutes to determine if they provide for indirect purchaser standing (as happened in Hyde) to a more detailed examination of standing requirements. Not unexpectedly, the far reaches of the claims against Visa and MasterCard in the various indirect purchaser states have prompted some of that evolution.
{52} At least eight other courts have rejected standing for plaintiffs with claims identical to those presented in the Morris case. Each of those states recognizes indirect purchaser claims. In South Dakota the court simply dismissed the case without detailed explanation.[17] In North Dakota the plaintiff’s case was dismissed with the holding: “As ‘non-purchasers’ of defendants’ debit card services to merchants, the Court believes that plaintiffs lack standing to sue for the alleged restraint of trade in such services. Their alleged injury is simply too remote.”[18]
{53} In Michigan[19] the trial court applied the five AGC factors directly in dismissing similar claims, finding that each failed to support standing. Significantly, the Michigan court rejected an argument similar to that made by plaintiffs in these two cases that the broad language of the state statute trumped application of the AGC factors. In addition, the court found that plaintiff was not an indirect purchaser under the statute.
{54} In Minnesota the courts have also applied AGC factors in determining standing for indirect purchasers even though Illinois Brick was not applied to preclude indirect purchaser claims. In a well-reasoned opinion in the Gutzmiller[20] case, the court applied factors 1, 4 and 5 under AGC in denying standing to plaintiffs under the Minnesota statute, which is similar to North Carolina’s antitrust law.
{55} In New York, the Commercial Court in Ho[21] rejected standing for plaintiffs under circumstances identical to the Morris case. The court applied several of the AGC factors in determining that the plaintiffs lacked standing under New York antitrust laws.
{56} In California the trial judge hearing the consolidated cases against Visa and MasterCard dismissed all the claims arising under the Cartwright Act, Cal. Bus. &. Prof. Code § 16720, et seq., applying the AGC factors to find no standing. The court also held that plaintiffs were neither direct nor indirect purchasers of card services.[22]
{57} In Nebraska, the trial court applied the five AGC factors in dismissing the identical claims by plaintiff. Specifically, the court held that the plaintiff failed to satisfy factors 2 and 3 under AGC. The court also held that the plaintiff was not an indirect purchaser within the scope of the state statute, which expressly grants standing to indirect purchasers.[23]
{58} In Maine the trial court rejected standing for the plaintiffs under an application of the AGC factors. The court held that factors 3, 4 and 5 particularly weighed against standing.[24]
{59} In Superior Court in Buncombe County, North Carolina, Judge Dennis Winner dismissed the plaintiff’s indirect purchaser claim, which was virtually identical to the claim in Crouch, stating:
It is the opinion of the undersigned that notwithstanding the enactment of the amendment in 1996, the Hyde decision is still the law of this State with respect to the issue of suit by an indirect purchaser. Nevertheless, this Court believes that the General Assembly never intended that the antitrust laws of this State be used in the manner in which the Plaintiff has attempted in this case, and that this case is therefore distinguishable from the Hyde case. To rule otherwise would put this Court in an impossible position of attempting to determine whether the alleged price-fixing by an oligopoly of an ingredient used to make tires had anything to do with the price paid by the Plaintiff when he bought the tires. This Court believes that without some allegation and proof that the tire manufacturers themselves were an oligopoly and were fixing prices, that it would be impossible to show the price the Plaintiff paid was not set by the normal laws of supply and demand in our open economic system, and that even if it were possible to show that, there would be no way for the Court to, in any fair or just way, determine an amount the Plaintiff was damaged.
Therefore, it is the opinion of this Court that the General Assembly could not have intended that our Antitrust Statue be used by an indirect purchaser of tires against the manufacturers of an ingredient placed in those tires.
Weaver v. Cabot Corp., No. 03CVS04760 (Buncombe County Super. Ct., N.C. Mar. 29, 2004) (Winner, J).
{60} A review of indirect purchaser cases in North Carolina is informative. The Court does not believe the North Carolina experience differs substantially from the national experience. State indirect purchaser cases have common characteristics. They are seldom sui generis. More commonly they originate after a federal triggering event. Those triggering events include a guilty plea to federal price fixing, a class action suit by direct purchasers, or notice of a settlement of antitrust claims with private plaintiffs or the Department of Justice. Morris is an excellent example. Sometimes only the announcement in an SEC filing that there is an investigation underway will trigger suit. The Crouch case is an excellent example. Almost all of the cases are brought as class actions.[25] Discovery tracks the federal action permitting class counsel to piggyback on the work of the government or counsel for the direct purchasers. Both plaintiffs and defendants have a vested interest in seeing the federal action proceed first. Cases are filed in most if not all states having indirect purchaser standing, frequently by the same lawyers. The cases are seldom, if ever, tried. They get settled far short of trial.[26] Often and not unexpectedly, the settlements in the various indirect purchaser standing states track each other closely. The Microsoft case is an excellent example. Sometimes the state and federal actions are settled together.[27] The Court is unaware of any case in which the settlement reflected treble damages. Rather, most settlements are less than a whole recovery of the alleged overcharge and are not particularly satisfying from the perspective of the consumer class member. Cy pres settlements are not uncommon since the difficulties inherent in distributing tiny amounts among large numbers of consumers are daunting and expensive. The settlement in Long v. Abbott Laboratories, 1999 NCBC 10 (No. 97CVS8289, Mecklenburg County Super. Ct. July 30, 1999)(Tennille, J.) is an excellent example. The North Carolina cases mirror the national characteristics.
{61} This Court has presided over a number of class action settlements involving indirect purchaser claims, beginning with Long v. Abbott Laboratories. That case is instructive for a number of reasons. It was parasitic in the sense that it was filed after a federal direct purchaser antitrust case was filed and discovery consisted of following discovery in the federal case. Similar cases were filed in ten other states by the same counsel appearing in North Carolina. Fortunately for the plaintiffs, a class action settlement of the various state claims was reached prior to trial of the federal action. The federal case was decided adverse to the plaintiffs, and no antitrust violations were found. Since a settlement agreement had been reached, it was enforced. The agreement provided for a settlement fund of approximately $9 million for North Carolina residents of which class counsel sought approximately twenty-five percent.[28] Since the settlement could not be distributed to the class, which consisted of all North Carolinians who purchased a prescription drug at a retail drugstore, a cy pres fund for people who could not afford their medications was created. Class members received nothing, and the defendants[29] paid a cost of litigation settlement although no underlying claim was ever proved.
{62} In Bruggers, the state claim was filed after federal triggering events, including a federal action. 2000 NCBC 3, at ¶ 15. Claims were filed in other indirect purchaser states.[30] The defendants were alleged to have fixed the price of x-ray film. The class consisted of all consumers of x-ray film in North Carolina. The problems created by the great variety of purchasers and the number of distribution chains made settlement difficult. In the end, a settlement fund of approximately $200,000 was created and divided among claimants on a two fund basis. One fund went to purchasers based upon the pro rata amount of film they purchased and the other fund provided one lump sum payment to anyone who filed a claim, determined per capita based on the number of claims. In total, 116 claimants sought recovery through the settlement fund. However, only 100 claims were found valid. Potential claimants numbered in the thousands. In this instance, money actually went to class members although the payment was small and the cost of administration high. Class counsel sought and obtained a reasonable fee based upon the amount recovered for the class. Counsel for both sides urged the Court to approve the settlement based upon the uncertain state of the law in North Carolina and the difficulty of proof involving so many different purchasers and distribution methods. The pass through issues were extremely difficult, including questions of whether hospitals absorbed the cost or passed it on to patients and insurance companies and whether the dentist or patient ended up paying the cost for dental x-ray film. The Court is convinced that the vast majority of class members declined to take advantage of the settlement because the dollar amount was not worth the effort required by the claims process.
{63} The Court’s most recent experience has been in the settlement of indirect purchaser claims against Microsoft.[31] Again, the action was filed after a federal triggering event, the determination in the government’s federal case of abuse of monopoly power by Microsoft. Lawsuits were filed in numerous states and discovery coordinated with federal actions by direct purchasers. The direct purchasers recovered little in the federal action, and their counsel intervened in the state actions to try to obtain some of the attorney fees in the state actions even though they had no agreements with local counsel and had made no appearances in the cases. The settlement was complicated and had a significant cy pres component.[32] Counsel for the plaintiffs and Microsoft urged approval of the settlement over significant objections based in part on the complicated proof of damages and the uncertain state of the North Carolina law. Like Morris, that case did not involve allegations of price fixing among competitors.
{64} The Court is aware of other cases in this state. A class action settlement was approved in an alleged price fixing scheme involving vitamins. Those cases followed guilty pleas to federal criminal charges. That case was not before this Court, but a number of large hog farmers opted out of what they believed was an inadequate class settlement and filed their own indirect purchaser actions. This Court ruled that they had standing.[33] The defendants declined the Court’s suggestion to seek appellate review of that decision, and those cases have settled without necessity of court approval since they were individual and not class actions. Another case involving price fixing of monosodium glutamate products has been stayed in this Court pending a global settlement covering the federal claims and all state indirect purchaser claims.[34] Such settlements are preferable, but rare. They produce a more rational allocation of the liability fund.
{65} The Court is not aware of any North Carolina class action that did not have a federal triggering event. The Court is not aware of any indirect purchaser case in North Carolina that has proceeded to trial, presumably because there is a federal triggering event establishing liability. In each case before this Court, the argument is made that the case must be compromised because the proof of damages is difficult and uncertain. Such arguments lead to a question of whether standing is appropriate. Settlements are to be encouraged, but they should have some basis in reality, and class counsel should be prepared to show the court more than the simple fact that the issues are difficult. That preparation undoubtedly requires some time and expense on the part of class counsel. Some investigation before rushing to the courthouse after a federal triggering event might generate better results or prevent dismissal on a challenge to standing.
{66} The following policy considerations are relevant in deciding the standing requirements in indirect purchaser cases in North Carolina.
{67} If Hyde is correct, the General Assembly intended for persons actually injured to be able to recover for injuries resulting from violations of the state antitrust laws.
{68} The General Assembly has directed the state courts to follow federal guidelines in determining standing.
{69} There is already an adequate deterrent to violation of the antitrust laws in the federal system. Accordingly, the focus of state law should be recovery for those actually injured: i.e., victim compensation.
{70} State indirect purchaser standing creates the prospect of double recovery, both as between direct and indirect purchasers and between indirect purchasers at different levels in the distribution chain. Double recovery is not favored, and where, as here, it is permitted between direct and indirect purchasers, it should be narrowly construed to ameliorate the adverse consequences.
{71} Indirect purchaser cases are expensive, inefficient and low-yield for consumers. The cost of obtaining information relevant to pass through of added costs from antitrust violations and investigating the pricing decisions made in the distribution chain is high. Apportionment among various tiers in the distribution chain involves extremely difficult problems of economic analysis and measurement. The practical difficulties of estimating both supply and demand elasticity at any one level and then over and among multiple tiers in the distribution chain results in speculative damage estimates. From an economics perspective, indirect purchasers face negligible price increases in comparison to direct purchasers.[35] Apportionment results in added cost of litigation and uncertainty. The actual recovery for class members in consumer class actions is relatively small and is frequently outweighed by the cost of administration and attorney fees. The yield is low given the potential expense of litigation. That is one explanation for the settlements which do not reflect actual injury as much as the costs of litigation.
{72} There is no single bright line test that works in every case. Each standing case must be decided based on its own factual situation.
{73} Given those policy considerations, the decision of the Court of Appeals in Hyde, the developments since Hyde, the history of the amendment of the statute and the subsequent directions from the General Assembly to follow federal guidelines, and the clear federal approach to standing, the Court believes that the North Carolina courts would apply a multifactor test to determine standing in indirect purchaser cases. The requirements would recognize indirect purchaser standing, but engraft upon the statute the requirements of standing enunciated in AGC, modified to recognize the right to recover for injury created by statute for indirect purchasers. The factors would include:
1. Whether the plaintiff is a consumer or competitor in the allegedly restrained market. This inquiry focuses on the market the alleged restraint was designed to impact and the intent of the actor in engaging in the restraint. One key question is whether the plaintiff claims injury in a market collateral to the market in which the alleged restraint took place. This factor recognizes that the antitrust laws are designed to see that customers in the relevant market get the benefit of price competition. This factor would have supported standing in Hyde.
2. The directness of the impact on the plaintiff. This factor is modified to eliminate the restriction of Illinois Brick against indirect purchaser standing. Being an indirect purchaser does not preclude standing. However, the causal connection between the act and the claimed injury cannot be too remote. Purchasers in the direct chain of distribution are more likely to be able to show sufficiently direct injury than those outside the chain of distribution. Purchasers who buy the product which is the subject of the restraint are more likely to be able to show sufficiently direct injury than those who purchase a product with a component which is the subject of the restraint. Purchasers of products whose manufacture was impacted by the restraint face significant hurdles showing sufficiently direct impact. Within the chain of distribution, the relative positions of the purchaser and the actor can be significant, depending on the length and complexity of the distribution chain. Even though a purchaser is removed from the direct restraint, he or she may still show direct injury. See Blue Shield of Va. v. McCready, 457 U.S. 465, 478-81 (1982). This factor would have supported standing in Hyde.
3. Whether there exist other indirect purchasers in the distribution chain who are more directly impacted by the alleged violation. The nature of the market is significant here. Courts must look at the nature of the product and the market for the product as well as the chain of distribution to determine the likelihood of direct pass through of the cost of the restraint or inflated price. The nature of the restraint must also be considered. Double recovery among indirect purchasers should be avoided. This factor would have supported standing in Hyde where the distribution chain was short.
4. The speculative nature of the damage claims. As damage claims move from direct to indirect and the distribution chain becomes more complex, the possibility of factors intervening to affect causation and price multiplies, and claims become more speculative. It is appropriate for purposes of determining indirect purchaser standing “to consider whether a claim rests at bottom on some abstract conception or speculative measure of harm.” McCready, 457 U.S. at 475 n.11. In McGready the Court noted that the courts were required to be cautious when dealing with speculative, abstract and impractical damage theories. Id. This factor would not have prevented standing in Hyde. This factor focuses on sound economic analysis. Important factors would include reliable demand and supply curve studies and sufficient regression analysis to eliminate other factors in pricing.
5. The risk of duplicative recovery and danger of complex apportionment of damages. While these factors are limited by the General Assembly’s creation of indirect purchaser standing, they should not be totally eliminated when considering the state claims. The courts still have the same interest in keeping the scope of a complex antitrust trial within judicially manageable limits. AGC, 459 U.S. at 543. The factors are simply taken down a level and the Hanover Shoe/Illinois Brick restrictions eliminated. State cases may present apportionment issues which are simply too complex and for which there exists no measure of recovery which is not speculative. It is clear that the General Assembly did not intend that every purchaser in the distribution chain have a right of recovery or that there be duplicative recovery among indirect purchasers. Such an interpretation would be contrary to the clear guidance to follow federal precedent and harmonize state antitrust law with federal law. Rather, it should be clear that the General Assembly intended that those who can show with some degree of certainty that they were directly impacted by the alleged acts in restraint of trade should be able to recover even though they are indirect purchasers. The courts must be cognizant that the problems between direct and indirect purchaser cases replicate themselves in state indirect purchaser cases where there are multiple levels in the distribution chain and multiple distribution chains. There should only be one fund constituting the amount of the alleged overcharge to North Carolina residents, and the courts must guard against multiple liability for the fund and prejudice to absent victims or non-class members. The complexity of the distribution chain and the variety of consumers in Bruggers highlight the issues this factor would implicate. As the Supreme Court noted in AGC and Illinois Brick, massive and complex damages litigation undermines the effectiveness of treble damage suits. The poor results obtained in settlement in the North Carolina cases confirms this view.
{74} There is no bright line test: each situation must be considered on its facts and the factors applied. Different factors might be important in different cases. Accordingly, the Court turns to the application of those factors to these two cases.
A. The Crouch Case
{75} The Court’s analysis is premised on the underlying proposition that defendants have engaged in illegal price fixing in the market for rubber chemicals.
{76} Both Crompton and Bayer have pled guilty to conspiring to fix prices and suppress competition in the sale of certain rubber compounds and chemicals. On October 13, 2004, the Associated Press reported that Bayer pled guilty to a criminal charge involving a rubber compound used in hoses, belts, seals, adhesives and sealants. Crompton pled guilty in Canada to fixing prices on chemicals used in the manufacture of tire-quality rubber and non-tire applications such as automobile parts, conveyor belts, weather stripping and rubber latex gloves from July 1995 to 2001. Certain of the findings in the Agreed Statements of Facts in the Crompton plea agreement are instructive. It states:
On a commercial basis, rubber chemicals are produced synthetically through highly sophisticated processes. It is apparent that rubber chemicals are now a commodity product and over capacity in the industry has been a constant restraint upon profitable operation and re-investment. Rubber chemicals are significant in the production of useable modern rubber products, principally tires. There are no practical or reasonable economic substitutes to certain rubber chemicals which are the subject of this proceeding, although innovation in both application and production does from time to time cause some products to be superseded. The accused and its co-conspirators are best situated from the perspective of size, experience and incentive to participate in such developments. Based upon facts obtained by the Commissioner, which Crompton is not aware of but does not contest for the purposes of this proceeding, rubber chemicals are said to constitute about 1% of the value of finished tires, they are a practical sine qua non to the manufacture of over $2 billion worth of tires produced in Canada annually. An additional approximately 30% of rubber chemical sales are devoted to non-tire uses in various automobile parts, surgical gloves and other commercial, industrial and health applications.
The rubber chemical producers identified above manufactured and/or sold the substantial majority of the rubber chemicals that were sold or distributed in Canada during the period of the offence for use in the tire, automobile parts, industrial applications and health industries. Indeed a significant amount (approaching 50% in some instances) of the rubber chemicals manufactured in Canada are exported. Each of the above referred to entities participate, to varying degrees, in the globally organized tire manufacturing industry. The principal Tire Producers buy centrally (not in Canada) for delivery to their regional production facilities. The rubber chemical producers in turn organize their delivery logistics to best meet customer demands and their own production facilities. There is a significant buyer power within the tire-destined rubber chemical business.
It is a matter of some debate between Crompton and the Commissioner as to the quantum of commerce affected by the illegal activity herein referred to. This requires specifically a consideration of the “lasting effect” of various price increases on certain specific rubber chemicals. This analysis however, given the prevailing conditions in the market, does not give credit to the fact that price increases may not have been appropriate at all and one or more producers may have had to exit the market, in the absence of such restraints upon the normal market processes. If Crompton’s analysis is correct the gap between the opposing views of affected commerce may be measured in hundreds of millions of dollars. In any event it is agreed that the assessment of competitive injury is largely one of judgment in all of the relevant circumstances.
The Queen v. Crompton Corp., [May 2004] F.C.__ (Can.) (Agreed Statement of Facts).
{77} The Canadian plea agreement highlights two problems significant to the standing determination. First, the calculation of the impact on prices of the conspiracy will be difficult to determine. As noted, “In any event, it is agreed that the assessment of competitive injury is largely one of judgment in all of the relevant circumstances.” That factor is complicated by the significant buyer power within the tire-destined rubber chemical business. Second, the impact on the retail consumer will be minimal. The example in paragraph 79 below highlights the degree of impact on the retail purchaser.
{78} The problems inherent in the Crouch claims are the same alluded to by Judge Posner in his noted article on pass through economic analysis.[36] First, the price-fixed item is a product consumed or altered in the manufacturing process. Accordingly, its use will vary with the type of rubber product being made. It may also vary with the nature of the product (chemical) being used and how it is used in the manufacturing process. Different direct purchasers (here, tire manufacturers) might use the various chemicals in various ways in differing products.
{79} The price today for a set of four BF Goodrich® Touring T/A SR4-P195/70R14 90S tires, which are similar in size and quality to those purchased by Crouch, is $222.64 at Sam’s Club’s posted price on the Internet. If the value of the chemicals represents 1% of the value of the tires,[37] the chemicals in the tires have a total value of $2.23 or $0.56 per tire. If we assume that in an industry with overcapacity and strong buyer power the conspirators were able to artificially inflate prices by as much as 20 %[38] and assume that all of that can be proven to be passed through to retail consumers, Crouch’s injury can be calculated to be $0.44 for the set of tires or $0.11 per tire. Bigger tires will cost more, smaller tires less. Thus, it is likely that the recovery per tire sold in North Carolina will be in the range of $0.01 to $0.11. That number represents a remote impact on its face. Certainly it would not represent a meaningful recovery for consumers. In any event, the costs associated with litigation and administration of any settlement would far outweigh the benefits to consumers. Few consumers are likely to fill out a claim form for $0.44 or even $1.32 (trebled damages). While the above calculations would affect class certification, they also are relevant to a determination of the remoteness of injury.
{80} In this instance, Crouch would be required to establish tire prices in North Carolina by manufacturer both before and after the alleged conspiracy period. Because this case involves a product used in the manufacturing process, regression analysis would be required to disaggregate any effect of other changes in the manufacturing process for each manufacturer for each product category. Further regression analyses would be required to disaggregate the impact on price, if any (by product category and by manufacturers), of other influences on the manufacturer’s price. As the product moved down the distribution chain into various avenues of distribution, each step would require additional regression studies to disaggregate other impacts on prices until the final price paid by a consumer for different products purchased in different markets is determined. To perform such studies the economists will require enormous amounts of information, parts of which will constitute trade secrets or confidential information of nonparties, principally tire manufacturers. Many manufacturers are foreign companies. Determining a price differential per tire for tires sold in North Carolina which were manufactured using price-fixed chemicals during the relevant time period would be a Herculean task and one which the Court believes would not be free from speculation given the enormous number of disaggregating factors to be considered in the process.
{81} Clearly, the tires made for SUVs will differ from those made for compact cars. The market for these tires will vary. There is a range in quality and price of the products made using the price-fixed chemicals. If, as is usually the case, there is cheating among the price fixers, additional variations are created.[39] In this situation there are a small number of large producers, some or all of which could exert great pressure on price. Thus, at the outset the multiple of variations in pass through analysis is daunting. The discovery involved in ascertaining the production methods, costs and pricing strategies of tire manufacturers would intrude into their most fundamental confidential business information and trade secrets, insuring a long and difficult battle over access. If that information is available, the demand and supply curves must then be calculated for this myriad of products and suppliers and the prices determined by the intersections of those curves tested against rigorous regression analysis to insure that no external factors affected the pricing and pass through at the manufacturer level.
{82} Then the process of determining the subsequent pass through begins. Demand and supply curves and regression analysis must be created for the various lines of distribution and for the various companies and for the various products. Here, it is significant that consumers are at least three steps removed from the original offense. That makes apportionment of damages/pass through extremely difficult and raises a greater risk of double recovery.
{83} Again, the distribution processes may vary with producers and products. Are there tires on the market which were made with non-price-fixed chemicals? If so, how do they affect price? What is the effect of foreign competition? Do company owned stores or franchises sell at different prices than Sam’s Club or Wal-Mart? Does the corner gas station price yet another way? Must the pass through expense be determined with reference to the customer base? These are but a sampling of the difficulties inherent in determining pass through in this case.[40]
{84} Each case must be analyzed individually. There will be cases where the economic analysis is not difficult. Hyde may have been one of those cases. There could be other examples where a component, such as a computer chip, is price fixed, and its costs passed through directly to purchasers of the product in which it is incorporated.[41] Individual cases will vary, and the factors must be considered in each case. The relevant reliability of economic analysis is a key factor in applying those factors. The economic analysis cannot be oversimplified. See In re Aluminum Phosphide Antitrust Litig., 893 F. Supp. 1497, 1503 (D. Kan. 1995). There, the court rejected an expert report which failed to apply standard economic methodology to test the conclusions reached. In ruling on a motion in limine the court said:
The goal of a prudent economist in performing the “before and after” analysis is to determine the hypothetical or “counter-factual” prices that would have prevailed during the conspiracy period, but for the conspiracy. In applying the “before and after” model of damages, it is fundamentally necessary to explain the pattern of forces outside the violation period using factors that might have changed (i.e., supply, demand, and the differences in competition) to predict the prices during the conspiratorial period. In this context, as in most economic problems, failure to keep “other things equal” is one of the known “pitfalls … in the path of the serious economist.” Samuelson, P. and Nordhaus, W.D., Economics (13th ed.) at p. 7. This case presents two potential normative periods, a “before” period and an “after” period that have distinctly different price levels. One therefore must identify the reasons for the disparate price levels. According to Dr. Siegfried, the field of economics supplies a statistical methodology for making this determination on a scientific basis, and the generally accepted means of predicting the prices that would have prevailed absent the conspiracy is regression analysis. At a minimum, regression analysis addresses supply and demand factors by looking at price trends over time. A prudent economist must account for these differences and would perform a minimum regression analysis if utilizing the “before and after” model.
Id. at 1503-04 (footnotes omitted).
{85} The five key factors are analyzed with respect to Crouch below.
1. The relevant market. The chemical manufacturers accused of price fixing sold to rubber manufacturers. Because the number of sellers and the number of buyers was relatively small, the price fixing scheme had to have at its core an effort to affect price pressure from the oligopolists in the tire manufacturing business. The antitrust laws are designed to see that customers in the relevant market get the benefit of price competition. This is a mixed case, as there are two relevant markets: the first is the market for chemicals, and the second is the market for rubber products indirectly affected by the artificial influence in the chemical market. As a purchaser at retail of a rubber product, Crouch is in a market secondarily affected by the restraint in the original chemical market. That is a complicating factor for standing. This factor weighs slightly against standing, as the alleged price fixing was directed at the market for chemicals, not the market for tires. Prices were allegedly fixed for chemicals used to manufacture other rubber products. However, the plaintiff purchased a product the price of which may have been influenced by the illegal restraint.
2. Directness of impact on plaintiff. The fact that the artificially restrained price impacts the manufacturing process removes it at least one level of directness. Unlike a component that remains unchanged when incorporated in the final product, manufacturing costs are less directly passed through and may be affected by differing manufacturing processes used by producers. While it is clear that in most instances some portion of a price-fixed cost gets passed along, the directness can be impacted by the nature of the item subject to price fixing, be it a component, labor cost, or something used in the manufacturing process.
The nature of the item can influence the directness of the impact on the price of the end product at retail. Because these chemicals are products used in a manufacturing process, the direct impact at retail is less clear and subject to variation among manufacturers using the chemicals. The smaller the component, the less likely there will be impact on the final price. Here the chemicals only comprise 1% of the value of a tire, reducing the likelihood that total final price was significantly affected.
There is also an additional question of the length of the distribution chain. While plaintiff purchased from Sam’s Club, which may have purchased directly from a manufacturer, other class members may have purchased through other lengthier distribution chains.
This factor weighs against standing.
3. Other indirect purchasers. This is the factor which gets most confusing when Illinois Brick is eliminated. State courts should focus this inquiry on whether or not the existence of other indirect purchasers in the chain of distribution gives rise to other claims against the fund representing the amount by which the price of the retail item has been artificially inflated. It becomes more of an examination of whether there will be double recovery on the state claim (eliminating the concern about double recovery created by standing holdings in Hanover Shoe/Illinois Brick). Here the other indirect purchaser claimants may be distributors and retailers who claim to have absorbed some of the price increase. No claims have been filed on their behalf. This factor would adversely impact standing in Crouch based on this record.
4. & 5. Speculative nature of damage claims and complexity. These items sometimes overlap. That is the case with Crouch. In this case there are multiple factors which render valid economic analysis either impossible or unmanageably complex. While the number of manufacturers is not great, each will have different manufacturing processes. Those processes and the use of alleged price-fixed chemicals will vary from product to product. Products will vary in size, quality and costs. There will be different markets for the products — retailers like Wal-Mart, Sam’s Club, K-Mart and Sears, local tire stores, gas stations, company franchise stores and Internet sales. In a typical price fixing scenario, some, if not a substantial portion, of the price increase is absorbed at the earliest stages in the distribution chains. Some retailers will buy direct; some will buy from distributors. Foreign competition, not insignificant in the tire industry, can affect price. Tracing the price of the processing chemicals through foreign manufacturers provides other problems. The price of tires may be affected by external factors such as high gas prices, which could lower demand. Each variation in manufacturer’s process, price, size, quality, market, distribution method and changes in applicable externalities requires individual supply and demand analysis and may require multiple regression analyses in order to eliminate the speculative nature of any damage calculation. Given the many variables, the issues surrounding allocation of the alleged price fixing fund in this case would be exceptionally complex and the results of economic analysis speculative.
Unlike direct purchasers who may recover for costs which they do not incur, state indirect purchasers may recover only for injury actually incurred. Thus, they must prove pass through of the artificially inflated cost. To prevent double recovery for the same alleged injury there must be a reliable means of allocating the effects of the price fixing among the various participants in the distribution chain. It must take into account other externalities. For example, how would purchasers of tires that were recalled and replaced be treated? Factor 5 takes this complexity into account when drawing the line on remoteness of claims. The size of the impact on tire prices is relevant here. As demonstrated in paragraph 78 above, any increase in tire prices will be relatively insignificant. In Crouch, factors 4 and 5 dictate heavily against standing.
There may well be occasions on which the Court should defer a standing determination until there has been far ranging discovery and expert evidence produced on pass through and allocation. The problem inherent in delay is the enormous cost involved in getting the information and expert analysis. If it proves insufficient, substantial resources will be wasted. Where, as here, it is apparent from the pleadings that any analysis will either be speculative or allocations enormously complex, the Court should rule on standing early in the process. Where, as here, counsel have not made any attempt to ascertain facts relating to standing prior to filing suit, the court’s job is made more difficult. The rush to file in indirect purchaser states works against adequate investigation prior to filing.
{86} Considering all five factors, Crouch lacks standing to pursue indirect purchaser claims.
B. The Morris Case
{87} The Morris case presents a far easier analysis. It is not a price fixing case.
{88} In Morris, the underlying antitrust claim is for illegal tying of credit and debit cards under the “Honor All Cards” policy. For purposes of analysis here, the Court assumes the tying arrangement was illegal. Tying cases present unique damages issues.
In tying cases, the measure of damages to an injured purchaser is described as “the difference between the price actually paid for the tied product and the price at which the product could have been obtained on the open market.” However, several courts have held that damages can be recovered only if the combined fair market value of both the tying and tied products is exceeded by the amount actually paid for both.
Private Antitrust Suits, A.B.A. Sec. Antitrust Law, Antitrust Law Developments 875 (5th ed. 2002) (footnotes omitted).
{89} Here, not only would Plaintiff be required to show the underlying complicated damage to merchants,[42] but also how those damages got passed on in each and every consumer transaction by the merchant. In the case of a hot product which sells on its label (Calvin Klein jeans, for example) so that the price is unrelated to costs of sale, manufacture or distribution of the product, how could plaintiff possibly show what part of the price included a pass through cost resulting from the tying arrangement which would not have been included in the absence of the tying arrangement?[43] How could the Court administer a trial where every consumer transaction might be subject to that proof for every merchant? It cannot be done. More compelling is the fact that a determination would have to be made for every product since price elasticity varies between products.[44]
{90} The five key factors with respect to Morris are analyzed below.
1. The relevant market. Defendants refer to plaintiff as a “non-purchaser.” That is shorthand for not being a purchaser in a relevant market. The relevant market in Morris is the sale of credit and debit card services. Morris did not make a purchase in that market. Morris simply made purchases of consumer goods. Antitrust laws are designed to see that customers in the relevant market get the benefit of price competition. In this case the customers in the relevant market would be the retailers who purchase debit and credit card services, not all consumers of retail products. This factor alone would strongly support a finding of no standing in Morris.
2. Directness of impact. The underlying restraint alleged in Morris was a tying arrangement, not price fixing. It is founded on the proposition that retailers paid more for debit card services than necessary without the tying arrangement. Morris does not even allege he is a debit card holder. He seeks to represent a class consisting of consumers who paid by a credit card, paid cash, paid by check, bought on credit or used a debit card. The impact of the alleged tying arrangement (which applied only to retailers using debit card services) on consumers is as remote as this Court can conceive.
3. Other indirect purchasers. Since consumers are not a part of the relevant market for credit/debit card services, there are no other indirect purchasers. This is a situation where the impact, if any, of the tying arrangement falls directly on the direct purchaser.
4. Speculative nature of damage claims. This is not a price fixing case. It is at bottom a tying case which carries additional proof problems affecting the speculative nature of damages to indirect purchasers. Indirect purchasers would first have to prove what the damages were to retailers. Retailers would be required to show that the tied price of debit and credit cards was higher than the price of each sold separately in competitive markets. Indirect purchasers would then be required to show how those damages got passed through or had a direct impact on each consumer purchase they made in North Carolina, whether by cash, check, credit card or debit card. Two examples come to mind. When a teenager pays $100 cash for a pair of designer label jeans that cost $10 to make because they are the hot fashion item, are they paying more than they would have paid had there been no tying arrangement involving debit or credit cards? How could that be proven? What about the item that is put on sale below cost because it is outdated and needs to be cleared from inventory?
Assuming that injury at the retailer level could be quantified somehow, that injury would be attributable only to the increased use of debit cards, a minor part of the market. According to plaintiff, that cost is then spread over every consumer product sold by every retailer. If plaintiff is correct, the recovery per product will be infinitesimal. In addition, the manageability of the litigation and the administration of any settlement present insurmountable barriers. If the Court of Appeals asked today if there is an example of “an impossible complex situation,” the Morris case would provide such an example. The Court cannot conceive of an economically feasible way to administer a trial which would require inquiry into how every retailer set the price for every consumer good sold in this state. Nor is it conceivable that any judgment would be in any amount which could be economically allocated and paid to every consumer in North Carolina.
5. Complexity. It is difficult to imagine a more complex damage case. Plaintiff’s case would require an analysis of pricing of virtually every product sold at retail in North Carolina. The litigation could last an interminable period, and it is difficult to conceive of how a claims process would work. It is likely the price increases attributable to the excess cost to the retailer of using debit cards would be such a small measure that there would be no cost effective way to administer a claims process that would compensate consumers directly.
{91} Each AGC factor in Morris supports dismissal of the claims. Morris asserts remote claims outside the relevant market which involve speculative and complex damages. Eight other jurisdictions have agreed and thus placed limits on indirect purchaser standing. Plaintiff’s counsel urged the Court to permit amendment to the pleadings to assert only claims for debit card holders. Such an amendment would make no difference in the outcome on this motion.
{92} Having found that the complaint is subject to dismissal, the Court does not need to address defendants’ argument that plaintiff seeks relief that would violate the Commerce Clause of the United States Constitution.
{93} If state antitrust laws are to have any impact, they must work. Compromise cy pres settlements that provide no payments to consumers have little deterrent effect and no benefit for those actually injured. Where actual injury can be shown with reasonable certainty, defendants should pay those damages to the injured parties and be subject to statutory penalties. That is a real deterrent, and it benefits those injured.
{94} Part of the problem in dealing with indirect purchaser cases is the race to the courthouse which follows a triggering event at the federal level. Despite the fact that the case was two years old, when asked at oral argument, plaintiff’s counsel in Crouch had no idea what the pass through per tire would be, either in cents or in dollars. His suggestion was for the Court to wait until class certification and address the issues in that context. Where, as here, it is apparent from the pleadings that either (1) sound economic analysis can only produce speculative damages or (2) the complexity of the required sound economic analysis is staggering and virtually impossible to accomplish given the inability to get at all the required information, deferral to class certification is unnecessary. The Court is not required to nor should it defer standing determinations to class certification. While there may be some overlap in the factors considered in each determination, the tests are different.
{95} As Justice Brennan noted in his dissent in Illinois Brick, the complexity of damage proof should not foreclose a claim.[45] That policy must be balanced with the need to control the manageability of litigation. Judge Posner has correctly noted that indirect consumer class actions frequently do little to provide redress for injury in indirect purchaser cases,[46] and the North Carolina cases support his conclusion.[47] The proper focus should be on insuring that those cases in which there is non-speculative proof of direct impact on consumers at something other than a negligible level get tried and those cases which fall outside the limits of rational accepted economic analysis are dismissed. The modified AGC factors provide guidelines for making those determinations at the trial level. Applying those factors to these two cases results in their dismissal. Other cases may come out differently or may require some discovery before ruling. Class actions which provide no redress to those actually injured do not fulfill the purpose of the state statute which is to redress injury to those directly impacted by the price fixing.
{96} State statutes do not provide as effective a deterrent as the federal scheme. There is an adequate and more effective deterrent to antitrust violations at the federal level. State indirect purchaser cases should be designed to provide relief to those directly injured by antitrust violations. Since they permit double recovery they should be narrowly construed. Similar to the judgments the legal system makes on “foreseeability” in negligence cases, judgments on “standing” are designed to place limits on what would otherwise be limitless claims. The two concepts are similar in that they set a boundary beyond which claims are determined to be too remote. Where a class action will provide no actual benefit or an insignificant benefit to class members, there exists a strong inference that the class claims are too remote or speculative to withstand scrutiny under the modified AGC factors. Sometimes, as here, the standing determination can be made early in the process and save significant resources. Other times the determination should await further discovery before decision. In either case, the five factors set out above should be applied and each case determined on its own facts. Applying the factors to the claims in Crouch and Morris results in dismissal.
1. Defendants’ Motion to Dismiss in Crouch is granted, and plaintiff’s claims are hereby dismissed.
2. Defendants’ Motion to Dismiss in Morris is granted, and plaintiff’s claims are hereby dismissed.
This the 26th day of October 2004.
[1] Am. Compl. ¶ 20. At oral argument the Court understood plaintiff’s counsel to say that the class would be limited to retail consumers, excluding, for example, customers who purchased used cars with new tires.
[2] Miles Moore, U.S., EU Probing Rubber Chemical Suppliers, Rubber & Plastics News, Oct. 14, 2002, at 1.
[3] William Landes and Richard Posner, Should Indirect Purchasers Have Standing to Sue Under the Antitrust Laws? An Economic Analysis of the Rule of Illinois Brick. 46 U. Chi. L. Rev. 602, 634-35 (1979). The authors stated:
Our analysis has suggested that the rule of Illinois Brick, which bars indirect purchasers from bringing private antitrust damage actions, is probably the soundest rule from the standpoint of maximizing the effectiveness of antitrust enforcement. We anticipate the argument that, however abstractly desirable it may seem to confine enforcement to direct purchasers, to do so is to alter the fundamental character of the private antitrust action in a way that cannot be squared with the intent of Congress in creating private damage remedies for antitrust violations. One way of characterizing our position is that it allows someone who may not be injured (or not injured much)—the direct purchaser—to recover (treble) damages while denying the right to recover any damages to other people—indirect purchasers—who may in fact be injured. There is an element of paradox in this result, but it is dispelled by careful analysis. As we have shown, even if indirect purchasers were given the nominal right to sue, they would often fail to receive significant compensation. And anyone troubled by the windfall element in the judgment received by the direct purchaser must in logic reexamine the entire structure of private antitrust enforcement. Two-thirds of every private antitrust damage judgment (the punitive component of the judgment) is a windfall to the purchaser. In a class action, much of even the compensatory portion of the judgment may end up in the pockets of lawyers or in state treasuries, rather than in the pockets of the people who were actually harmed by the antitrust violation. The windfall element cannot be purged by the private antitrust suit without a complete reworking of antitrust enforcement. Until that is done, society will be well-advised to allow some direct purchasers to enjoy windfalls if, as we have argued, the direct purchaser suit is on balance a more effective instrument for enforcing the antitrust rule prohibiting price fixing than the indirect-purchaser suit.
[4] See D.C. Code Ann. § 28-4509(a) (1981).
[5] Justice Brennan suggested a target area test as one possible approach to standing, but did not actually endorse it as a test to be adopted. It is worthy of note that Justice Brennan was among the majority in its holding in Associated General Contractors of California, Inc. v. California State Counsel of Carpenters, 459 U. S. 519 (1983) (“AGC”), which was decided subsequent to Illinois Brick and prior to the 1996 amendments to the North Carolina statute.
[6] See Landes and Posner, supra note 3, at 609, 615, 619-20.
[7] See Landes and Posner, supra note 3, at 611-12, 617-18, 620, 625.
[8] The application of the AGC standing requirements was not originally argued in Crouch, but was argued in Morris. Subsequent to the oral argument in Morris, counsel in Crouch were afforded the opportunity to address the application of the AGC requirements as well as the application of a target area test to the fact situation in Crouch. Each side filed supplemental briefs on those questions.
[9] 15 U.S.C. § 15 (2004). That provision is the model after which the North Carolina statute is patterned. See infra ¶ 46.
[10] See Pl.’s Opp’n Defs.’ Mot. Dismiss at 8-9 in Morris; Pl.’s Mem. Opp’n Defs.’ Mot. Dismiss at 4-9 in Crouch.
[11] See infra ¶ 49; N.C.G.S. § 75-1 (1999); Act of June 3, 1996, ch. 550, 1995 N.C. Sess. Laws 550 (titled “An Act to Revise the Statutes Regarding Antitrust Law to Ensure That These Provisions are Internally Consistent and Consistent with Federal Antitrust Laws”).
[12] The Hyde court held: “Unlike Texas, our General Assembly has not mandated that our antitrust laws be construed in harmony with federal antitrust laws.” 123 N.C. App. at 581, 473 S.E.2d at 686.
[13] See discussion infra Part V.B (describing the indirect purchaser litigation since Hyde was decided).
[14] The Hyde court specifically found that there were no complex damage or proof issues before it and further held that there was nothing in the record in that case to establish that other cases would pose difficult damage and administrative issues. The Hyde court said:
It is clear that a suit by indirect purchasers under our antitrust laws will be complex. However, when asked at oral argument whether “chaos reigned” in states which have allowed indirect purchaser suits, defendants were unable to cite a single example. This failure to cite a single indirect purchaser case in which a court has been faced with an impossible complex situation counsels us that a fear of complexity is not a sufficient reason to disallow a suit by an indirect purchaser….
123 N.C. App. at 584, 473 S.E.2d at 687-88.
The facts in Hyde presented a fairly simple case. The product was a commodity which was not altered or incorporated in another product in the distribution chain, and the price fixing took place at the wholesale level, only one level removed from the consumer. Direct impact on the consumer and pass through were not difficult issues to prove. The question of whether the fixed price was absorbed by the consumer was not difficult. The complexity presented by Morris and Crouch differs dramatically from Hyde.
[15] The Hyde court found: “However, there are few, if any, reported instances of a defendant paying treble damages to two different classes of purchasers based on a single antitrust violation.” 123 N.C. App. at 583, 473 S.E.2d at 687. In Crouch, plaintiffs seek to recover the same damages for which direct purchasers such as tire companies may seek treble damages. In Morris, defendants have already agreed to a multibillion dollar settlement with the direct purchaser class. In Bruggers, the class recovered for the same offenses which were the subject of federal direct purchaser actions. Likewise, in Microsoft, the plaintiffs recovered on the same claims which were asserted by direct purchasers. The problems recognized with possible double recovery are obvious.
[16] The settlements in Long v. Abbott Laboratories, 1999 NCBC 10 (No. 97CVS8289, Mecklenburg County Super. Ct. July 30, 1999) (Tennille, J.), Bruggers and Microsoft demonstrate the difficulties inherent in consumer class action cases. Long was a cy pres settlement that provided no benefit to the class. Bruggers resulted in a settlement that went to class members under a cumbersome administrative process which did not likely reach anything more than a small minority of the class. Microsoft is a classic example of the complex administrative problems that can be created. It will likely result in primarily a cy pres settlement. All of these cases fit the forecast of difficulties made by Landes and Posner in their article. See supra note 3.
[17] Cornelison v. Visa U.S.A., Inc., Civ. No. 03-1350 (Pennington County Cir. Ct., S.D. Sept. 29, 2004).
[18] Beckler v. Visa U.S.A., Inc., Civ. No. 09-04-C-00030, at 5 (Cass County Dist. Ct., N.D. Aug. 23, 2004).
[19] Stark v. Visa U.S.A., Inc., No. 03-055030-CZ (Oakland County Cir. Ct., Mich. July 23, 2004).
[20] Gutzwiller v. Visa U.S.A., Inc., No. 14-C4-04-000058 (Clay County Dist. Ct., Minn. Sept. 15, 2004).
[21] Ho v. Visa U.S.A., Inc., No. 112316/00, 2004 N.Y. Misc. LEXIS 577 (New York County Super. Ct., N.Y. Apr. 21, 2004).
[22] Credit/Debit Card Tying Cases, No. CJC-03-004335 (City and County of San Francisco Super. Ct., Cal. Oct. 14, 2004).
[23] Tackitt v. Visa U.S.A., Inc., No. C103-740 (Lincoln County Dist. Ct., Neb. Oct. 19, 2004).
[24] Knowles v. Visa U.S.A. Inc., No. CV-03-707 (Cumberland County Super. Ct., Me. Oct. 20, 2004).
[25] The Adams case is an exception. In that case the plaintiffs were individual hog farmers who opted out of a class action settlement that they believed was disadvantageous.
[26] The reasons for settlement are aptly described in the ABA Report of Indirect Purchaser Cases at supra ¶ 33.
[27] See the settlements in Adams, and Thai Holding v. Archer Daniels Midland Co. (No. 03CVS15096, Mecklenburg County Super. Ct., N.C. Aug. 24, 2004) (Tennille, J.) (Order Staying Action).
[28] The court reduced the request to approximately ten percent based on the poor results for the class.
[29] Twenty three of the largest drug companies in the world.
[30] The original complaint sought a nationwide class consisting of residents of all states which had indirect purchaser standing. The complaint was amended to limit the claims to North Carolina.
[31] MJM Investigations, Inc. v. Microsoft Corp. (No. 00CVS4073, Wake County Super. Ct.; No. 00CVS1246, Lincoln County Super. Ct., N.C. Aug. 2, 2004) (Tennille, J.) (Order Approving Settlement).
[32] See the description at supra ¶ 50.
[33] Adams, 2003 NCBC 7, at ¶ 31.
[34] Thai Holding v. Archer Daniels Midland Co. (No. 03CVS15096, Mecklenburg County Super. Ct., N.C. Aug. 24, 2004) (Tennille, J.) (Order Staying Action).
[35] See Landes and Posner, supra note 3, at 617.
[36] See Landes and Posner, supra note 3, at 615-21.
[37] One percent was the actual number used by Canadian authorities in their case against Crompton. See supra ¶ 76.
[38] The calculation of this number will be difficult, but it is difficult to conceive of prices being artificially inflated at a higher level in a market with strong buyer power and overcapacity. It is also unlikely that 100% of the inflated cost was passed through to consumers or that it affected consumer prices.
[39] Price fixing schemes frequently fall apart because the temptation to cheat to get market share is great.
[40] See, Michele Molyneaux, Comment, Quality Control of Economic Expert Testimony: The Fundamental Methods of Proving Antitrust Damages, 35 Ariz. St. L.J. 1049, 1074-75 (2003).
[41] The Court notes that certain manufacturers of DRAM chips used in a variety of computer products have been accused of price fixing. See, Stephen Labaton, Infineon To Pay a Fine In the Fixing Of Chip Prices, N.Y. Times, Sept. 16, 2004, at C6. The Court expresses no opinion on standing in that situation. Each case must be judged on its own merits, and that case is not before the Court. The Court simply notes that the nature of the component can make a difference.
[42] For cases discussing the difficulty of proof in tying cases see, Will v. Comprehensive Acctg. Corp., 776 F.2d 665 (7th Cir. 1985); Kypta v. McDonald’s, 671 F.2d 1282 (11th Cir. 1982); Siegel v. Chicken Delight, 448 F.2d 43 (9th Cir. 1971).
[43] Gutzwiller v. Visa U.S.A., Inc., No. 14-C4-04-000058 (Clay County Dist. Ct., Minn. Sept. 15, 2004). Judge Vaa presented an illustrative example:
Assume that Plaintiff purchased an item at a K-Mart store which accepted Visa and MasterCards, on March 1, 2003. To recover damages, Plaintiff would first need to prove that as a result of Defendants’ alleged restraint of trade in providing debit card services to that K-Mart store, K-Mart paid excessive debit fees. Plaintiff would then need to prove that K-Mart did not absorb any such excess debit fees by making less profit, or in some other non-monetary way, such as by hiring fewer employees and/or not making major repairs to its building, but instead passed on the excess debit fees in the price of the items sold to consumers. Plaintiff would then need to prove that some identifiable portion of the item was not attributable to any factors which might affect the price of that item on that specific date. Plaintiff would then need to make the same offer of proof for any item sold by the K-Mart store not only on March 1, 2003, but for every other day in issue, and would have to make the same offer of proof relative to every other merchant involved in his claim.
[44] This fact alone would render class certification impossible since each customer would have different damages depending on each individual purchase they made.
[45] 431 U.S. at 758-60.
[46] See Landes and Posner, supra note 3, at 607.
[47] See discussion supra ¶¶ 60-65.