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2016 Highlights From Indirect Purchaser Class Actions

Competition Law360
December 23, 2016

By Christopher T. Micheletti and Christina S. Tabacco
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As 2016 comes to a close, we review some of the more interesting court decisions in the indirect purchaser class action arena over the past 12 months and provide practitioners with some key takeaways for 2017 and beyond. While there were no major U.S. Supreme Court decisions that impacted indirect purchaser cases, and only a few circuit court decisions, the rulings below shed light on strategies related to class certification, Article III and antitrust standing, settlement objectors, and other indirect purchaser-related issues that practitioners are certain to face in the future.

Class Certification

Landscape Unchanged by Supreme Court Decision in Tyson FoodsOver the past five years, the Supreme Court has issued several class certification decisions, the effect of which has been hotly contested by commentators and parties in indirect purchaser and other antitrust class actions.[1] This year, the Supreme Court decided Tyson Foods Inc. v. Bouaphakeo,[2] which did not involve antitrust claims, but did involve the use of statistical evidence to establish class-wide liability. Earlier this year, the district court in In re Delta/AirTran Baggage Fee Antitrust Litigation discussed the effect of Tyson Foods on class certification standards in the antitrust context, and “reject[ed] the notion” that Tyson Foods and other decisions “broke new ground or materially altered the landscape of class certification.”[3] Rather, the court “consider[ed] Comcast, Dukes, Amgen [and] Tyson Foods ... for precisely what they are — helpful illuminations, applications and explanations of pre-existing law — [and] ... decline[d] defendants’ invitation to treat them as something they are not.”[4] Indeed, that court reaffirmed the propriety of the use of “aggregated damages calculations” in antitrust class cases, and cited Tyson Foods to support the proposition that “individual damages allocation issues” that may follow an aggregate damage award “are insufficient to defeat class certification.”[5] As such, the antitrust class certification landscape appears to be unchanged by Tyson Foods.

24-State Indirect Purchaser Class Certified Under California Law: There was only one published decision on indirect purchaser class certification in 2016: In re Optical Disk Drive Antitrust Litigation.[6] In Optical Disk Drive, the court certified a class of indirect purchasers of optical disc drives (ODDs) from 23 states and Washington, D.C., under California law. ODDs are devices that allow data to be read and written to optical discs such as compact discs and digital video discs. The plaintiffs alleged that the defendants — one of which pleaded guilty to antitrust violations — engaged in bid-rigging that was part of an industry-wide price-fixing conspiracy that involved agreements, exchanges of price, output and other confidential information.[7] The defendants did not dispute that there were instances of anti-competitive conduct, including bid-rigging during ODD procurements by Dell, HP and Microsoft, but disputed whether the anti-competitive conduct went beyond the occasional rigged bid. The district court had previously denied the indirect purchasers’ motion for class certification on the grounds that the indirect and direct purchasers failed to establish that impact at the direct purchaser stage could be shown on a class-wide basis.[8]

Proof of Impact to Direct Purchasers and the Incremental Showing Needed on Renewed Motions for Class Certification: Optical Disk Drive provided guidance on the incremental showing needed to succeed on a class motion the second time around. In the renewed motion, on the issue of whether impact to all or nearly all class members may be shown on a class-wide basis, the indirect purchasers’ expert presented a “cointegration test”[9] that was “more extensive” than that presented in the initial motion, a new “Granger causality” analysis,[10] and modified his overcharge regression model in several respects that the district court found persuasive. The court noted that while the defendants challenged the expert’s model implementation, “they d[id] not challenge the propriety of employing such models in the first instance.”[11] Additionally, defendants posited the oft-used argument that the expert’s use of “aggregated” data masked individual variations among class members, while plaintiffs insisted that large sample sizes are necessary to ensure statistical reliability of the results. The Optical Disk Drive court found the plaintiffs’ argument more persuasive.[12]

Pass-Through: On the key issue of pass-through — which was not addressed in the first order — the court analyzed several issues frequently raised by defendants, and provided a road map for indirect purchaser plaintiffs to rebut them.

  • “Price point” challenges to overcharge pass-through blunted in product markets with declining prices:In Optical Disk Drive, the defendants claimed — as they often do — that retailers’ use of price points, i.e., selling products costing in the hundreds of dollars at prices just under the next $100 mark (e.g., $999 for a computer), would prevent pass-through of a relatively small cost increase (e.g., $4), and that the retailer would keep the price at $999 rather than increase it to $1,003. The court rejected the defendants’ hypothetical, however, noting that the price-fixing alleged in the case sought to “slow the decline in prices that otherwise naturally was occurring,” and that cost declines were not limited to ODD components, but were occurring vis-à-vis all or nearly all computer components.[13] The plaintiffs’ expert also empirically analyzed the price point issue through a “quantile regression” analysis. Based on this analysis, which was designed to test the relationship between cost and price changes for computer price points at $99 increments, the plaintiffs’ expert opined that the pass-through rate was 100 percent or greater at all price points.[14]
  • Reduced product quality as a basis for supporting consumers’ overpayment for finished products and components: The plaintiffs’ renewed motion also argued that manufacturers, rather than attempt to adjust product price in the face of cost changes, will adjust the “quality” of particular computer systems, and thereby preserve their desired profit margins for a particular target retail price.[15] The defendants argued that such a focus on product quality necessarily implicates consumers’ subjective desires and requires a consumer-by-consumer inquiry regarding the desirability of product features. The court rejected this argument, noting the “harm” to consumers lies in paying more than the product is worth, and does not turn on the individual user’s desire for a particular feature.[16]  
  • Below-cost sales do not preclude pass-through: The plaintiffs also successfully dispensed with the defendants’ argument — also frequently made in indirect purchaser cases — that no pass-though can occur where sales, discounts or rebates result in below-cost sales. The court recognized the validity of the simple response that, in the actual world, the overcharge remains embedded in the discounted price — which is higher than it should be, while in the but-for world, the discounted price is even lower.[17]

Finally, the plaintiffs’ renewed motion relied on several well-established qualitative and quantitative methods of addressing pass-through on a classwide basis. The plaintiffs relied on well-settled economic theory that where the relevant markets are highly competitive, pass-through rates will be at or near 100 percent. The plaintiffs also relied on quantitative pass-through studies covering companies responsible for approximately 80 percent of personal computer sales, 45 percent of top distributor sales and including over 273 million Optical Disk Drive products, which showed pass-through rates that, while varying, are “uniformly high and positive.”[18] The above arguments convinced the court that, while the indirect purchasers’ proof may or may not carry the day with the fact-finder at trial, the relevant decisions will be made on a classwide basis.[19]

Article III and Antitrust Standing Challenges

Article III and antitrust standing challenges continued to be raised in 2016 by defendants seeking dismissal of indirect purchaser claims. These arguments generally rely, respectively, on the Supreme Court’s decisions in Lujan v. Defenders of Wildlife[20] and Associated General Contractors of California v. California State Council of Carpenters (AGC).[21] For example, such arguments assert that indirect purchasers’ antitrust injuries are too remote from the defendants’ unlawful conduct, or are not the type of injury the antitrust laws were intended to prevent. Typically, the less “traceable” the allegedly price-fixed product is through the chain of distribution to the end consumer, or the more “remote” the claimed injury is from the unlawful conduct, the more likely a defendant will raise an Article III challenge and/or antitrust standing.

Chemical Ingredients — Alleging Facts Supporting Article III Standing and Pass-Through: In Harrison v. E.I. DuPont De Nemours and Company,[22] the court addressed allegations regarding both Article III and antitrust standing, and provided guidance on what is needed to establish standing at the pleading stage when the product at issue is a chemical or ingredient used in a product.

In Harrison, indirect purchasers of titanium dioxide, a pigment used for whiteness, brightness and masking of colors in paint and coating products, alleged that artificially inflated titanium dioxide prices were passed-through to end consumers of end products containing the chemical. In a prior dismissal order, the court found the plaintiffs’ broad pass-through allegations pertaining to the use of titanium dioxide in “architectural coatings” deficient given the breadth of that finished product market and variation in the amount of titanium dioxide used in those products.[23] Noting that some architectural coatings contained only “trace amounts” of titanium dioxide, and that the plaintiffs had provided product composition detail as to only one paint product, the court dismissed for failure to meet the requirement of Lujan that the plaintiffs’ injury be “fairly traceable” to the defendants’ conduct.

In their amended complaint, the indirect purchaser plaintiffs limited the class to end purchasers of “architectural paint” (eliminating resellers). The plaintiffs substantially beefed-up their factual allegations related to pass-through, including identifying the specific paint product purchased by each plaintiff and, in some cases, disclosing what percent of the paint constitutes titanium dioxide. The amended complaint also alleged (1) that titanium dioxide is the costliest component of architectural paint (50 percent of “flat coatings” cost and 33 percent of “high-gloss coatings” cost), thereby preventing manufacturers from absorbing an increase in the cost of titanium dioxide; (2) the presence of certain architectural paint market characteristics that economic theory indicates will yield nearly 100 percent pass-through of cost increases; and (3) that manufacturers made statements acknowledging that recent increases in paint prices were due to increases in the cost of titanium dioxide.[24] The court found these and other allegations sufficiently alleged an injury traceable to defendants’ conduct, and relied on many of the same allegations in rejecting the defendants’ further argument that the plaintiffs failed to meet the antitrust standing requirements under AGC.[25]

Key Takeaways from Harrison for Indirect Purchasers of Chemical Products or Other Ingredients Incorporated Into Finished Products: Do not overreach on the class definition by incorporating finished products that contain trace or minimal amounts of the alleged price-fixed chemical or ingredient. Do your homework on finished-product composition and the percentage of the chemical or ingredient at issue contained therein, and include detailed pass-through allegations regarding market conditions that predict pass-through, downstream market commentary regarding the impact of costs on price, and quantitative evidence of cost changes affecting prices.

Location of Class Representatives’ Purchases Affecting Article III Standing: In re Capacitors Antitrust Litigation[26] involved indirect purchaser (and other) plaintiffs alleging that defendants, foreign manufacturers of capacitors, participated in a decade-long global conspiracy to fix capacitor prices. Capacitors are “ubiquitous component[s] in electronic devices of all types.”[27] The court addressed whether Article III standing may be satisfied by a general allegation that “each named plaintiff paid artificially inflated prices for capacitors as a result of defendants’ price-fixing conspiracy,” regardless of whether the named plaintiff’s product purchase occurred in the state under which the state law claim is asserted.[28]

The court noted the “trend in this district and in other courts is to require an in-state purchase to establish Article III standing for state antitrust and related consumer protection claims,” and held that “in-state injury in the form of an in-state purchase of a capacitor at a supracompetitive price is required here to satisfy Article III standing for each of the state law claims asserted.”[29] The court emphasized that “residence in a state-alone — without a purchase or any other conduct amounting to ‘injury’ — cannot be sufficient, or even relevant ...”[30]

Indirect Purchaser that was Assigned Direct Purchaser’s Claims Satisfies Article III Standing Based on Indirect Purchases: A decision that seems, in some respects, at odds with the above-referenced Capacitors decision is the Third Circuit’s decision in Hartig Drug Company v. Senju Pharmaceutical Co. Ltd.[31] In that case, an indirect purchaser brought suit for damages under the Sherman Act based upon an assignment of claims received from a direct purchaser — thereby sidestepping the Illinois Brick bar to indirect purchaser claims under Section 4 of the Clayton Act.[32] Notwithstanding that the indirect purchaser plaintiff was, by virtue of the assignment, suing under federal law, the Third Circuit found that Article III standing was established by “allegations ... that it was in fact harmed by the downstream effects of the defendants’ anti-competitive behavior.”[33] Thus, unlike the court in Capacitors, the Third Circuit looked more generally to overcharge-related injuries (i.e., indirect purchases) that were not the subject of the claim (i.e., direct purchases) it was asserting in the action.

No Consideration Required to Assign Direct Purchaser Claims to Indirect Purchaser: Another case involving an assignment of rights to an indirect purchaser was Wallach v. Eaton Corporation.[34] There, the plaintiff trucking company, Tauro, alleged that Eaton, a transmission supplier, entered into exclusive dealing agreements with original equipment manufacturers to maintain monopoly power in the market for transmissions used by class 8 trucks. Tauro was an indirect purchaser, and received an assignment of antitrust claims from another trucking company, R&R, a direct purchaser of Eaton transmissions. The Third Circuit addressed whether such an assignment required consideration. The court, applying federal common law and the restatement of contracts, held that consideration is not required. In so ruling, the court examined the purposes of antitrust law generally and the doctrine of direct purchaser standing, including Illinois Brick. The court concluded that requiring consideration “has little role to play in advancing the goals of Illinois Brick,” and could actually undermine one of them by discouraging private enforcement actions.[35]

Adding Named Plaintiffs for Class Certification Motion

In 2016, district courts remained open to indirect purchaser plaintiffs’ efforts to add new plaintiffs to support existing state law claims alleged in opening or operative complaints.[36] In these cases, new or additional named plaintiffs were necessitated by narrowed class definitions, discovery that some plaintiffs made nonqualifying purchases, by named plaintiffs simply withdrawing from the case, as well as where the opening complaint asserted 29 indirect purchaser state classes but only included named plaintiffs from eight states. Addition of named plaintiffs in these cases was sought through Rule 21 (adding or dropping parties) or Rule 24 (intervention).

Indirect Purchaser Settlements — Objectors

Imposition of an Appeal Bond and Sanctions on Settlement Objector. As many indirect purchaser counsel are aware, a troubling abuse of the class action settlement approval process has emerged as certain lawyers repeatedly orchestrate canned objections that ultimately do not benefit settlement classes. Such objections are overruled by trial courts and objectors then appeal orders approving class action settlements. In re Polyurethane Foam Antitrust Litigation[37] provides insight on strategies that may be employed in deterring “professional” or “serial” objectors from continuing to assert bad faith objections.

In Polyurethane, the indirect purchaser plaintiff classes alleged that firms in the polyurethane foam market engaged in a decade-long conspiracy to fix the prices of foam products. The indirect purchasers settled with the defendants, and after the settlements were finally approved, certain objectors appealed, and the court required those objectors to post an appeal bond. The court analyzed a number of factors in determining whether a bond should be imposed, including whether the objectors acted vexatiously or in bad faith.[38] After recounting the objectors’ histories as “professional” or “serial” objectors, the court found that each of the objectors had “shown bad faith and vexatious conduct, both in prior cases and in this action,” and that “their conduct here resembles scavenger ants on a jelly roll, scrambling to extort money from the approved settlements.”[39]

Concluding that an appeal bond should be imposed, the court next analyzed whether to include amounts in addition to taxable costs.[40] Ultimately, a $145,463 bond was imposed, which included taxable costs of $10,000, increased administrative fees due to protracted claim administration of $15,000, lost interest of $30,463, and attorneys’ fees of $90,000.[41] None of the objectors posted the appeal bond. One untimely objection was dismissed, and three of the other appeals were voluntarily dismissed about one month after the bond order was entered.

With respect to the objector that remained, the plaintiffs later sought and obtained sanctions against him.[42] Notably, the hold-out objector failed to post the appeal bond, had his to motion to reverse or stay the bond denied, and had his appeal dismissed by the Sixth Circuit.[43] He also filed a petition for rehearing en banc, which was denied, and unsuccessfully sought to stay the ruling pending his planned Supreme Court petition for writ of certiorari. Recognizing that the objector was continuing his vexatious use of the judicial system, the district court imposed a penalty of $15,303, representing interest lost by the plaintiff class from April to October 2016.[44]

While the hold-out objector’s appeal efforts continue to delay distribution of settlement proceeds to class members in Polyurethane, these orders provide guidance — particularly in the Sixth Circuit — for indirect purchaser counsel seeking relatively expeditious methods to dispose of serial objectors’ frivolous objections in future litigation.

Christopher T. Micheletti is a partner and Christina S. Tabacco is an associate in Zelle LLP’s San Francisco office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Compare 2 Years After Comcast, Little Has Changed, Competition Law360 (March 18, 2015), http://www.law360.com/articles/632983/2-years-after-comcast-little-has-changed, with Plaintiffs Face High Class Cert. Bar in Antitrust Cases, Competition Law360, (Feb. 8, 2016), http://www.law360.com/articles/756305/plaintiffs-face-high-class-cert-bar-in-antitrust-cases. [2] ––– U.S. ––––, 136 S.Ct. 1036, 1045 (2016).

[3] No. 1:09-md-2089-TCB, ___ F.R.D. ___, 2016 WL 3770957, at *6 (N.D. Ga. July 12, 2016) (citations omitted).

[4] Id.

[5] Id. at 9 (citations omitted).

[6] No. 3:10-md-2143 RS, 2016 WL 467444 (N.D. Cal. Feb. 8, 2016).

[7] Id. at *1.

[8] Id. at *5.

[9] A “cointegration” test is a test for “structural economic cohesion among variables with time trends,” and is designed to filter out “’spurious’ correlations that would arise even in the absence of a conspiracy." Id. at *6.

[10] “‘Granger causality’ analysis refers to the Engle–Granger regression form created by Robert F. Engle and Clive W.J. Granger — who shared the Nobel Prize for Economics in 2003 on the basis of their development of this methodology,” (id. at *6 n.5), and “asks the question, ‘does the history of a series x assist in forecasting a series y when one also knows the history of y?’” Id. at *6.

[11] Id. at *7.

[12] Id.

[13] Id. at *8; emphasis in orig.

[14] Id. at *9.

[15] Id.

[16] Id.

[17] The court reasoned: “The IPPs’ response is simple. If, for instance, a retailer obtained a computer at $600, including a $5 overcharge, and for whatever reason sold it ‘below cost’ at $500, then it is reasonable to assume in the but-for world the retailer would have paid $595 for the computer and sold it at $495. The overcharge is passed through to the IPP without regard to whether the retailer sells above or below cost. A similar analysis can be applied where there is ‘bundling,’ discounts or rebates.” Id. at *10.

[18] Id. at *9.

[19] Id. at *11.

[20] 504 U.S. 555, 560-61 (1992).

[21] 459 U.S. 519, 539 (1983).

[22] No. 13-cv-01180-BLF, 2016 WL 3231535 (N.D. Cal. June 13, 2016).

[23] Id. at *2.

[24] Id. at *3.

[25] Id. at *4-6.

[26] 154 F.Supp.3d 918 (N.D. Cal. 2015).

[27] Id. at 921.

[28] Id. at 924.

[29] Id. at 926–27.

[30] Id. at 927.

[31] 836 F.3d 261 (3d Cir. 2016).

[32] Id. at 271.

[33] Id. at 272 (emphasis added).

[34] 837 F.3d 356 (3d Cir. 2016).

[35] Id. at 371 (citing Illinois Brick Co. v. Illinois, 431 U.S. 720, 745–46 (1977)).

[36] See, e.g., In re: Domestic Drywall Antitrust Litigation (Drywall), No. 13-MD-2437, 2016 WL 4409333 (E.D. Pa. Aug. 18, 2016); In re: Lithium Ion Batteries Antitrust Litigation, No. 13-MD-2420 YGR, 2016 WL 948874 (N.D. Cal. March 14, 2016); see also Wallach v. Eaton Corporation, 837 F.3d 356, 373 (3d Cir. 2016) (holding that in addition to motions to intervene after class certification and before the opt-out deadline, the presumption of timeliness is also applicable to such motions filed prior to class certification because “fair notice and the rights of persons who may otherwise be bound by the judgment in a class action carry just as much weight for putative class members before a court has ruled on class certification.”).

[37] 178 F.Supp.3d 635 (N.D. Ohio 2016).

[38] Id. at 638 (“courts typically consider (1) the appellant’s financial ability to post a bond; (2) the risk that the appellant would not pay appellee’s costs if the appeal is unsuccessful; (3) the merits of the appeal; and (4) whether the appellant has shown any bad faith or vexatious conduct”).

[39] Id. at 640.

[40] Id. at 642 (note that “Circuits disagree on the allowed scope of ‘costs on appeal’ under Federal Appellate Rule 7. But all Circuits agree that, at a minimum, Rule 7 costs include those listed in 28 U.S.C. § 1920 and Federal Appellate Rule 39.”).

[41] Id. at 642-45.

[42] Id. at 640.

[43] No. 16-3168, 2016 WL 6599570 (6th Cir. June 21, 2016).

[44] In re Polyurethane Foam Antitrust Litigation, No. 1:10-MD-2196, 2016 WL 6599969 (N.D. Ohio Oct. 24, 2016).

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