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An unlikely marriage between the Department of Justice’s amnesty program in price-fixing cases and the recent reform of federal class action law has had an unexpected but profound effect on civil antitrust actions. Indirect victims of price-fixing, those who buy items produced from a part that was subject to price-fixing, have been barred since 1977 from recovering damages in federal court after Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Many state courts rushed to fill that void with their own state antitrust protections, giving indirect purchasers a forum to bring class actions against cartel participants but leaving those plaintiffs to wage state-by-state battles for recovery. That created a two-tier system of direct purchasers — such as companies buying computer chips — suing in federal courts, while indirect purchasers — companies that bought the finished computers containing the overpriced chips — sued in state courts. Then came this year’s Class Action Fairness Act, an effort by Congress to move mass tort class actions out of what it saw as plaintiff-friendly state courts and into less-sympathetic federal courts. It opened the federal court door for indirect buyers. FLOODING INTO FEDERAL COURTS Indirect-purchaser antitrust cases have flooded back to federal court using pendent state law antitrust claims. It has put federal judges in the position of interpreting, for example, 20 separate state antitrust laws in order to decide 20 separate motions to dismiss in a single case. Or a single federal judge may have to sort out the intricacies of how damages will be apportioned if a direct purchaser passed on the increased price from a fixed-price product to downstream consumers. “Congress couldn’t have been intending this to happen,” said Daniel G. Swanson, a defense attorney with Gibson, Dunn & Crutcher’s Washington office. Swanson represents Dutch chemical giant Akzo Nobel N.V., one of several companies sued for allegedly fixing the price of hydrogen peroxide, a bleaching agent. “I think [indirect purchasers] will be an issue in virtually all treble damage suits going forward,” warned Donald Klawiter, chair of the American Bar Association Section of Antitrust Law and a partner with Morgan, Lewis & Bockius. “The question is: Can a court sort out all the damages and get it right so [defendants] are not paying six times damages? It is an important issue for the legislature and judiciary to work out,” said Klawiter, who is based in Washington. A 12-member Antitrust Modernization Commission, created by Congress in 2002, began looking at some of the indirect purchaser issues during its July meeting and has some legislative reform ideas under consideration. The American Bar Association antitrust section plans to conduct a special program for commissioners and the bar focusing on some of these questions in June 2006. Two of the first major courtroom battlegrounds for indirect purchaser disputes are shaping up at opposite ends of the country. In San Francisco federal court, direct- and indirect-purchaser suits have been filed against major computer memory chip companies, known as the DRAM case. Meanwhile, in Philadelphia, plaintiffs have gone after hydrogen peroxide producers for alleged price-fixing. Both cases stem from the Justice Department’s intense enforcement efforts against price-fixing that encourages companies to confess their role. The first company in the door gets the biggest break from prosecutors, while those who dally face criminal prosecution and severe penalties, followed by private civil suits with treble damages. In its latest permutation, federal antitrust lawyers have offered early cooperators the chance to avoid treble damages as well, something most plaintiffs lawyers have welcomed. “The program has been a good thing for the antitrust world,” according to Bruce Simon, a plaintiffs lawyer with Cotchett, Pitre, Simon & McCarthy in San Francisco. “We understand we have to be careful,” he said of companies who cooperate with investigations. “Part of the government’s job of getting them to roll over [on other price-fixers] is not to throw them to the wolves,” Simon said. In the DRAM case, revenue for the memory chips exceeds $20 billion a year, with the six top chipmakers controlling 96 percent of the market, among them Samsung Corp., The Micron Group, Hynix Semiconductor Inc. and Toshiba Corp., according to the complaint, In re Dynamic Random Access Memory Antitrust Litigation, No. MDL1486. Infineon Technologies A.G. pleaded guilty in 2004 and agreed to pay a $160 million fine for its role in the international price-fixing scheme that affected companies such as Dell Computer Corp., Hewlett-Packard Co. and Apple Computer Inc. The companies that bought the chips to install in their computers may recover damages as direct purchasers of the chips, even if they passed on the cost to consumers who bought the computers. But millions of consumers, the indirect purchasers, have a much tougher time in state courts and now in federal court actions. In the hydrogen peroxide case, In re Hydrogen Peroxide Antitrust Litigation, No. C05-0666SD, the suit alleges a global conspiracy began in 1994 among the chemical makers to sell at agreed prices, reduce production capacity and share sales information. The chemical is used in the pulp and paper industry and for textiles as a bleaching agent. The French firm Elf Atochem, and a British company, Degussa U.K. Holdings, pleaded guilty to price-fixing in federal court and agreed to pay a total of $5 million in fines for their roles in a conspiracy, according to a 2004 Justice Department statement. Both the DRAM and chemical cases have indirect purchasers who have joined the direct-purchaser suits, but the fight over their place in the litigation is still unfolding. While some defendants may want to send the indirect-purchaser cases back to state court, the new reform act now stands in the way. The CAFA statute has a number of tests that hamper remand to state court. The tests were intended to make it tough on plaintiffs. Few thought that defendants might want to get the cases out of federal court. And plaintiffs lawyers with indirect-purchaser claims have often been only too happy to leave state courts. State court judges frequently look for ways to dump the indirect-buyer claims, according to Daniel Karon, a plaintiffs lawyer and law professor at Cleveland-Marshall College of Law who has written about the issue. “State court judges ought to know their state law … but they often say, ‘Indirect purchasers can sue, but not you,’” Karon said. “They totally screw it up. The people who have losses are the consumers at the end” of the buying chain, he said. “The theoretical flaw in state reasoning [in dismissing cases] is that not one state antitrust law requires a consumer to purchase a price-fixed item. There is no purchase requirement. That has been read into the statutes by courts,” he said. In a sign of the willingness of state courts to throw out indirect-purchaser claims, Gibson Dunn’s Swanson said that in roughly 20 state court cases involving indirect purchase of rubber chemicals around the country, he successfully got state court judges to throw out all but about five cases. If they had been gathered into a single federal suit, “How many federal judges will parse through all that? I have enormous confidence in federal judges doing a good job dealing with it, but it would stagger any individual human being,” he said. Some states still struggle with standing for indirect purchasers to sue. Just last week, the Tennessee Supreme Court overruled a lower court to hold that indirect purchasers do have the right to bring an action under the state’s Trade Practices Act. Freeman Industries v. Eastman Chemical Co., No. E2003-00527-SC-S09-CV. In addition, the plaintiffs in that case successfully brought unjust enrichment claims. “That is something we throw into antitrust cases now,” Karon said. He is awaiting the outcome of a similar state appeal in Ohio for a case argued in February. DILEMMA FOR DEFENSE During the July testimony before Congress’ Antitrust Modernization Commission, a lawyer for Microsoft Corp., David Tulchin of New York’s Sullivan & Cromwell, explained the dilemma for the defense. Indirect-purchaser cases against Microsoft Corp. were filed in nearly 38 states. With matters in so many states, “the process of adjudicating what really is a national claim on behalf of indirect purchasers becomes extremely complex, extremely expensive,” Tulchin said. “There are lawyers, in some cases dozens of lawyers, in each state on each side working on what really is the same matter,” Tulchin said. It can become coercive to defendants, he said. It’s one thing to go to trial where a victory means something, “but it’s another thing where if you win you have just one victory but if you lose you have the domino effect of collateral estoppel,” Tulchin said. A defendant with pending cases in numerous states risks incurring a loss that will have the collateral estoppel effect with potential treble damages in dozens of pending cases, he said. Yet the federal courts create a different dilemma. Said Swanson: “The fight turns into whether you get federal judges to do something they are generally not asked to do: to construe individual state antitrust laws on a very detailed and granular basis.”

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