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The 3rd U.S. Circuit Court of Appeals has greenlighted a class action antitrust suit brought by purchasers of corrugated paper products that accused paper manufacturers of conspiring to decrease their production so that supply would plummet and prices would rise. Plaintiffs’ lawyers Thursday hailed the court’s decision in In Re: Linerboard Antitrust Litigation as a major victory because the court flatly rejected two defense arguments that could have made it impossible to pursue class remedies in many antitrust cases if they had been accepted. The plaintiffs in the suit are two classes of purchasers — those who purchased corrugated containers directly from the defendants, and those who purchased corrugated sheets. The defendants are manufacturers of “linerboard,” a term that refers to any grade of paperboard suitable for use in the production of corrugated sheets, which are in turn used in the manufacture of corrugated boxes and for a variety of industrial and commercial applications. Corrugated sheets are made by gluing a fluted sheet, known as the corrugating medium that is not made of linerboard, between facing sheets of linerboard. After Senior U.S. District Judge Jan E. DuBois, of the Eastern District of Pennsylvania, certified the suit as a class action, the defendants invoked a relatively new Federal Rule of Civil Procedure — Rule 23(f) — that allows either side to petition the Court of Appeals to hear an immediate appeal of class certification decisions. Two high-powered lawyers were hired to argue the appeal for the defense — Kenneth Starr of Kirkland Ellis in Washington, D.C., a former federal appeals judge who later served as solicitor general and as independent counsel in the investigation that led to President Clinton’s impeachment, and Barbara W. Mather of Pepper Hamilton. In the appeal, the defendants argued that Judge DuBois erred by failing to hold that the two classes of plaintiffs had “individual issues” that made class certification inappropriate. The defense insisted that since the plaintiffs are relying on a theory of “fraudulent concealment” to avoid dismissal on statute of limitations grounds — meaning that the defendants conspired to hide their price-fixing scheme — the court would be forced to examine whether each plaintiff was truly entitled to make such a claim. The 3rd Circuit flatly disagreed, saying the focus in such a claim is not on what the plaintiffs knew, but on the alleged conduct of the defendants in conspiring to hide the alleged scheme. “It is the fact of concealment that is the polestar in an analysis of fraudulent concealment,” Senior 3rd Circuit Judge Ruggero J. Aldisert wrote in an opinion joined by 3rd Circuit Judges Theodore A. McKee and Julio M. Fuentes. “It is the camouflage that demands attention, the cover up, the acts of obscuring or masking. These allegations of proof are all common to the defendants, not the plaintiffs. It is not the conspiracy of the defendant that is relevant on the issue of tolling the statute of limitations, it is the act of concealing the conspiracy,” Aldisert wrote. Aldisert found that while individual issues may exist, they were not fatal to class certification, but instead could be dealt with later. “Any individualized facts of fraudulent concealment may be adjudicated in the same fashion and at the same time as individual damages issues,” Aldisert wrote. In the suit, lead plaintiffs’ attorneys Howard I. Langer of Sandals & Langer and Eugene A. Spector of Spector, Roseman & Kodroff argued that even though demand for linerboard was strong and rising between 1989 and 1992, the manufacturers’ prices for linerboard had fallen. They said the linerboard manufacturers attempted to increase prices during 1991, 1992 and the first half of 1993, but the price increase announcement did not “stick” and, therefore, the manufacturers had to rescind them. At that point, they alleged, Roger Stone, the president of Stone Container Corp., the largest corrugated paper manufacturer, masterminded a twofold plan among the manufacturers to lower the industry inventory to a five-week supply for a 2.5 million ton threshold, in order to implement price increases. In the first step of Stone’s alleged plan, the manufacturers would close their mills for “market downtime,” thereby reducing industry inventory at mills and box plants. Stone then planned to purchase inventory from other manufacturers while idling its own mills. The suit said Stone conducted a telephone survey of his competitors and coordinated the industrywide downtime, agreeing to have his company purchase a significant volume of linerboard from its competitors rather than meet the requirements from its own production. Stone shut down six of its mills during the following months. The plan allegedly worked. By October 1993, the linerboard manufacturers had concerted their actions and had lowered total inventories to the desired level of less than a five-week supply. The suit said inventory reached “a 20-year low” and that the manufacturers successfully increased their prices for containerboard and boxes for the first time in more than two years. Each manufacturer allegedly raised its container prices by an identical amount. Linerboard prices in the eastern United States rose in six consecutive escalations from a low of around $270 to $290 per ton in the third quarter of 1993 to $530 per ton by April 1995. The plaintiffs’ theory of antitrust liability was based on the logic that prices in the marketplace are controlled by the economic laws of supply and demand, and that a conspiracy to reduce supply is therefore a conspiracy to fix higher prices. Defense lawyers argued that DuBois erred in accepting the plaintiffs’ theory that the court could presume impact on purchasers. Aldisert found that DuBois had employed the so-called “ Bogosian shortcut,” named after the 3rd Circuit’s seminal 1977 decision in Bogosian v. Gulf Oil Corp. Bogosian held that if a “nationwide conspiracy” is proven, the result of which was to increase prices to a class of plaintiffs, an individual plaintiff could show damages simply by proving that the free market prices would be lower than the prices paid and that he made some purchases at the higher price. Aldisert found that DuBois was correct to apply Bogosian. “A strong argument can be made that the Bogosian concept of presumed impact was properly applied here. The economic laws of supply and demand run in tandem with the tenets of logic. A reduction in supply will cause prices to rise. A deliberate cut in supply, as alleged here, is a deliberate interference with market forces,” Aldisert wrote. The defense, Aldisert said, was arguing that there was no correlation between the reduction in supply of linerboard and the subsequent price increases. “What they really contend is that plaintiffs’ argument is anchored on the familiar fallacy of post hoc propter hoc, the fallacy of inferring causation from temporal succession only, a reasoning from what happens in sequence is merely an assumption of a causal connection,” Aldisert wrote. But Aldisert found that the post hoc accusation was “trumped … by the laws of economics.” “If the facts do, in fact, support plaintiffs’ theory that ‘an individual plaintiff could prove fact of damage simply by proving that the free market prices would be lower than the prices paid and that he made some purchases at the higher price,’ … this would be a demonstration of the laws of supply and demand at work,” Aldisert wrote. But Aldisert found that DuBois had premised his ruling on more than the Bogosian shortcut. “The district court used a belt and suspenders rationale to support its conclusion that the putative class had met its burden of showing impact. In addition to relying on the Bogosian short-cut, it credited the testimony of plaintiffs’ experts, opinions that were supported by charts, studies and articles from leading trade publications. These experts suggested that advanced econometric models could be effectively prepared to establish class-wide impact,” Aldisert wrote. Plaintiffs’ attorney Langer said Thursday that the ruling was extremely significant, especially in today’s business climate, because the 3rd Circuit has not written a major opinion on class issues in antitrust cases since 1977′s Bogosian and has now strongly reaffirmed that decision. “The 3rd Circuit made crystal clear the importance of the class action as a vehicle for remedy of antitrust violations and other market manipulations,” Langer said.

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