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Trends in antitrust litigation the new breed of class action


									                                                                                                                    US: PRIVATE ENFORCEMENT

Trends in antitrust litigation:
the new breed of class action
The Antitrust Practice Group
Howrey Simon Arnold & White LLP1

Class action practice in the United States has become chaotic and,          ceed as a class action. This process was cumbersome and limited the
for all but the most experienced and large firms, nearly unmanage-           utility of class actions for dispute resolution. Congress amended Rule
able. Companies who find themselves in the vice of competing and             23 in 1966 to eliminate several of its complexities, thus paving the
overlapping state and federal class actions need to have courage and        way for antitrust plaintiffs to pursue private treble damage actions
nerve, as well as able counsel. There is a reason why class actions         and attorney’s fees in antitrust litigations.
have become as troublesome as they have, but there are ways to man-              The first recorded antitrust class action, which actually predated
age the class-action beast both in the short term and beyond. In an         the rule’s amendment, evolved out of the infamous electrical equip-
abbreviated way, this chapter looks at how the system got here, how         ment price-fixing debacle. It brought together as a single class a group
the problem can be managed, and a longer-term approach requiring            of municipalities that had sued the manufacturers of electrical equip-
legislation is suggested.                                                   ment after the Department of Justice indicted them in Philadelphia
     The United States competition laws are often enforced, in the          in 1960 for engaging in a massive, nationwide conspiracy to fix
first instance, by federal agencies. Both the Antitrust Division of the      prices. Ultimately, 29 companies and their employees pleaded guilty
Department of Justice and the Federal Trade Commission have the             or no contest to these indictments. Fifteen hundred cases were filed
statutory authority to investigate and prosecute violations of the          around the country by municipalities that had purchased the price-
many substantive antitrust laws to which businesses and individuals         fixed equipment, and they proceeded as a class action through trial.
must conform their conduct in this country. The Department of Jus-          These class actions resulted in massive treble damage recoveries.
tice alone investigates and prosecutes criminal antitrust violations,            Until recently, most antitrust class actions were of this type in
and it, along with the FTC, is often first on the scene to investigate       the sense that they followed a successful government prosecution for
civil non-merger conduct.                                                   price fixing. The statutory scheme favours a private plaintiff who
     Unlike many other countries, however, US antitrust law is also,        waits to sue until after the government has obtained a conviction or
and in many ways primarily, enforced through private antitrust              a guilty plea. If a defendant loses an antitrust case in which the gov-
actions. Section 4 of the Clayton Act provides that persons injured         ernment is the plaintiff, the company cannot defend the follow-on
“in [their] business or property by reason of” an antitrust violation       civil actions by requiring the private plaintiffs to prove the case on
may recover three times their damages.2 By offering litigants the dou-      the merits. Section 5(a) of the Clayton Act, 15 U.S.C. §16(a) (2000)
ble lure of both treble damages and also attorney’s fees, Congress          provides that a judgment against a defendant in an action brought
made the policy choice to provide unusual incentives for private par-       by the United States is admissible as prima facie evidence of the mat-
ties (typically customers or competitors of the challenged parties) to      ters actually and necessarily decided by it against the defendant in
serve as “private attorneys general” to protect the free enterprise sys-    subsequent private antitrust suits. In addition to the evidentiary issue
tem from the harms caused by antitrust violations.3 The treble dam-         addressed by this section of the Clayton Act, Section 5(a) specifically
ages remedy is thus intended not only to punish the wrongdoer, but          preserves the ability of private antitrust plaintiffs to use common law
also to operate as a deterrent to future antitrust violations. Moti-        principles of collateral estoppel in certain circumstances to preclude
vated no doubt by the attraction of treble damages and attorneys’           the defendant from contesting issues resolved by the judgment
fees, we are witnessing a new stage in the development of the class         entered upon its guilty plea as a matter of law.
action, which, like antitrust itself, is a uniquely American device. The         Moreover, the plaintiff loses nothing if it waits for a resolution
class action both all but frees counsel of the trouble of having a ‘real’   of the government’s case. The statute of limitations for private tre-
client, and at the same time exposes defendants to unusual and seri-        ble damages actions (normally four years) is tolled during the dura-
ous risks and pressures.                                                    tion of a government antitrust suit. This means that plaintiffs who
     In enacting Section 4 of the Clayton Act, Congress surely never        wait and hope that the government will win before filing suit have
envisioned that the antitrust laws would come to be enforced as they        an enormous advantage in obtaining redress for their wrongs. Indeed,
have been through the sorts of class action crusades that are now           the class action settlements that followed the successful international
becoming routine. In 1890, when Congress passed the Sherman                 prosecution of the vitamins cartels have so far totalled in the billions
Antitrust Act, class actions were rare and recognised as suitable only      of dollars. One case has gone to trial so far, and the plaintiff class
in equity actions in which members of a group shared a common               recovered US$150 million dollars in damages, plus attorneys’ fees,
interest in having their rights declared by a court or vindicated by an     without having to prove anything about the underlying antitrust
injunction. It was not until 1938 that Rule 23 of the federal proce-        price-fixing conspiracy.
dural rules (and soon thereafter, some state procedural rules) per-              There is change afoot, however. We are now seeing a new breed
mitted litigants to proceed in a class action to recover damages. This      of class action lawyer, perhaps less risk averse, and more willing to
original class action rule required courts to determine facts relating      invest in the proposition that defendants challenged with the prospect
to the nature of the underlying claim, before permitting a case to pro-     of a class will pay tribute to avoid the risks that attend class action

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litigation. We are thus now seeing class counsel challenging business      settlement will involve the payment of attorneys’ fees to class coun-
conduct under the antitrust laws even in the absence of a successful       sel.6 And, after a court certifies the class, class counsel represents all
government criminal prosecution for price fixing. For example, hun-         class members, even absent ones.7 This representation makes it
dreds of antitrust class actions followed the government’s successful      impossible to achieve a settlement with customers outside the con-
prosecutions of Microsoft for monopolisation, and MasterCard and           text of the litigation once the class is certified.
Visa for civil antitrust violations. Other classes, some represented by         During the period after a class action is filed but before it is cer-
less well-known counsel from firms without any antitrust expertise,         tified, (and in the absence of a local rule prohibiting any contacts
participated in this frenzy of follow-on actions as well. These class      with class members), the question arises as to whether the filing of
action cases resulted in billions of dollars in wealth transfers. Simi-    the class action alone requires the defendant to cease its direct
larly, we are seeing plaintiffs filing class actions following proceed-     approaches to putative class members, unless these approaches are
ings at the Federal Trade Commission. That agency’s initiative in          funnelled through class counsel. This is currently an area of sub-
examining—and condemning—patent settlements between brand                  stantial litigation, as defendants increasingly attempt to settle their
name prescription drug manufacturers and their rival manufacturers         cases with customers and class counsel increasingly resist defence
of generic drugs have each spawned multiple class action clusters.         efforts to settle the class out from under them.
     Class counsel now routinely file actions after an antitrust defen-          Most courts hold that a class action defendant has the right to
dant loses a civil antitrust case even when the plaintiff is a private     communicate with and settle the claims of potential class members
party and not the government, and even before post-trial motions           before certification, because those class members are not “repre-
and appeals are lodged. See, eg, class actions filed by 3M’s cus-          sented” by class counsel until class certification.8
tomers after it lost a jury verdict on a monopoly claim by its rival.4          Despite the lack of an attorney-client relationship between class
These class action plaintiffs also have the benefit of preventing the       counsel and absent class members before certification, the Supreme
defendant from re-litigating the merits of the case it lost, relying       Court has held that Rule 23(d), which authorises courts to issue pro-
on principles of offensive collateral estoppel.5 Indeed, we are aware      cedural orders relating to cases brought under Rule 23 even before
of class actions being filed against defendants who merely settled          class certification, empowers them to limit communications between
a suit brought by another! The point, for the moment, is that any          defendants and putative class members before certification in certain
company having a run-in with antitrust may face a series of class          circumstances.9 Because such an order limits a party’s free speech
actions from direct and indirect customers if the conduct at issue         rights, however, the Court held that any such order must be based
arguably caused some group of customers to pay more money for              on a “clear record” and “specific findings” that reflect that a party
a product or service.                                                      has attempted to subvert the purposes of Rule 23 through its pre-
                                                                           certification communications with absent class members.
Current management of the problem                                               In the context of limitations on a defendant’s communications
The increased frequency with which antitrust class actions are filed        of pre-certification settlement offers to potential class members,
mirrors the increased use of the class action device generally. In a       courts hold that an offer to settle a class action with a potential class
recent survey, the Federalist Society found that between 1988 and          member need only contain “sufficient information to enable a class
1998, federal class action filings increased by 340 per cent. The          member to determine (1) whether to accept an offer to settle, (2) the
increase in the filing of antitrust class actions is similar to the over-   effects of settling, and (3) the available avenues for pursuing his claim
all increase in the utilisation of this procedural device. There were      if he does not settle10.”
122 antitrust class action filings in the United States in the year             Thus, the antitrust defendant who offers fair compensation to
ended 30 September 2000 and 249 filed in the year ended 30 Sep-             those injured by its adjudicated antitrust violation should be able
tember 2003.                                                               to resolve its problems outside of the class action context if it acts
     The proliferation of antitrust class actions raises unique issues     expeditiously.
for resolution of antitrust problems because of the enhanced finan-
cial risk that treble damages will be awarded to a class of pur-           Fighting the class members
chasers. If the defendant is collaterally estopped from relitigating       We are now beginning to see class actions filed that challenge a busi-
the merits of the case, either because it has lost to the government       ness practice employed by a company even in the absence of any case
or to another private plaintiff, often the resolution of choice is set-    that has adjudicated the legality of the practice. We call these new
tlement. If there is no previous action, the endgame is less clear.        actions ‘ab initio class actions’. These ab initio class actions have
There are only a few options.                                              been filed on behalf of consumers, challenging a manufacturer’s
                                                                           refusal to sell goods or services through discount channels11, and on
Settling directly with class members                                       behalf of customers of a firm whose conduct is alleged to have
The task of the antitrust lawyer representing a defendant who will         excluded a rival or delayed a rival’s entry into a market, thus keep-
be collaterally estopped from re-litigating the merits of an antitrust     ing prices from falling to some extent.12 This new breed of class action
case is to craft a management strategy that has one goal: minimising       is far less common than the typical follow-on class action, yet it pre-
the exposure in all of these follow-on cases. Generally this means         sents a similar risk of substantial treble damage exposure and a new
achieving an early settlement, since trial of these cases is not a ques-   sort of management problem.
tion of whether the defendant is liable, but only whether the class              When ab initio antitrust class actions are filed, early settlement
members are injured by the conduct, and, if so, how much they              is likely not to be an option. Without an adjudication of liability, it
should be awarded.                                                         is hard to articulate a rationale for paying any sum of money, unless
     Early settlements with customers minimise the exposure to class       it is trivial or clearly less than the cost of a modest successful defence.
action liability because they can be achieved in a business context,       But even then, settlement may be especially complicated if its price
without any trebling of the damages and also without the payment           is also the abandonment of a business practice at issue. The task of
of attorneys’ fees to class action lawyers. Once a class action com-       the antitrust lawyer in this circumstance is to consolidate all the filed
plaint is initiated, a few jurisdictions preclude defendants from com-     class actions in one forum and then implement a strategy to defeat
municating with potential members of the class, effectively ending         the case on the liability merits, if possible.
settlements outside the litigation context and guaranteeing that any             If the cases are filed in federal court, they can be easily consoli-

60                                                                                        The Antitrust Review of the Americas 2005
                                                                                                                           US: PRIVATE ENFORCEMENT

dated through application to the Judicial Panel on Multidistrict Lit-          considering legislation that would permit defendants to compel class
igation. The panel has the statutory authority to transfer federal cases       action plaintiffs to litigate multi-state class actions in federal court.21
to one district for pre-trial coordination. After transfer, the federal        This would permit one federal judge to consider the issues implicated
judge hearing the cases makes the decisions on preliminary and dis-            by all potential classes, and would greatly aid the risk management of
positive motions, discovery, and class certification.                           this type of litigation. This sort of legislation, supplemented by the pas-
     One of the principal hurdles to the maintenance of consumer               sage of a Federal Illinois Brick repealer, is doubtless the right solution
class actions against manufacturers in federal court is the Supreme            in the very long term and serious efforts in this direction are warranted.
Court’s opinion in Illinois Brick Co v Illinois, 431 U.S. 720 (1977).          While Illinois Brick was applauded in the defence community when it
That case holds that only direct purchasers from a manufacturer are            was decided, it has become the unintended engine driving the current
“injured” in their business or property within the meaning of Sec-             class action chaos. If the indirect purchaser cases are going to exist, it
tion 4 of the Clayton Act, even if they passed an illegal overcharge           is best that they be funnelled into the federal system where coordina-
on to consumers of the product.                                                tion can occur. But in the meantime, imaginative strategies must con-
     Usually, consumers purchase good from dealers or retailers and            tinue to be developed and implemented each day to keep class action
so should not be able to maintain their claims under Illinois Brick.           counsel at bay and to protect the defendants’ balance sheets from class
Class action plaintiffs have tried several strategies to avoid this opin-      counsel’s evolving and aggressive wealth extraction strategies.
ion. Sometimes, they allege that the middlemen are in conspiracy
with the manufacturer, so that they are direct purchasers from the             Notes
conspiracy.13 Or, they allege that their damage claims do not involve          1   Howrey’s Antitrust Practice Group is the largest assemblage of private
the ‘pass-on’ of an overcharge.14 In most cases, consumer classes have             antitrust lawyers in the world. Most of them work routinely in the area of
not succeeded in overcoming the Illinois Brick bar.15                              antitrust litigation, both public and private. The firm handles an
     If the class consists of direct purchasers, and the Illinois Brick            increasing and substantial number of class actions such that the firm’s
case is therefore inapplicable, the case will proceed, in its early stages,        experience largely mirrors developments in class action law and
to class certification. A federal court may certify a class only if it is           procedure throughout the United States.
“satisfied, after a rigorous analysis” of the evidence offered by both          2   15 U.S.C. §15(a)(2000).
parties that the plaintiff has, in fact, satisfied all the conditions for       3   Hawaii v Standard Oil, 405 U.S. 251, 262 (1972).
class certification.16 In performing the required analysis, the federal         4   Bradburn Parent/Teachers Store Inc v 3M, No. 02-7676, 2004
court must “probe behind the pleadings before coming to rest on the                U.S.Dist. LEXIS 16193 (E.D. Pa. Aug. 17, 2004) (certifying a class of
[class] certification question”.17 The court must weigh the evidence                retailers that purchased transparent tape). Keystone Tobacco Co v
and resolve factual disputes to determine whether the plaintiff has                United States Tobacco Co, 238 F. Supp. 2d 151 (D.D.C. 2002)
carried its burden.18 When federal courts do so, they frequently refuse            (putative class of distributors suing after their supplier lost a $1 billion
to certify the class, and the case effectively ends at that point.                 jury verdict to a competitor).
     Given the hurdle of Illinois Brick, and the scrutiny with which           5   Parklane Hosiery Co v Shore, 439 U.S. 322 (1979).
federal courts examine the class certification question, it is not sur-         6   See, eg, In re Cigarette Price-Fixing Litig., No. 1:00-CV-0447 (N.D. Ga.
prising that class action lawyers have increasingly filed national                  Dec. 12, 2000) (Georgia local rule); Dondore v NGK Metals Corp, 152
antitrust class actions on behalf of consumers, in state courts.                   F. Supp. 2d 662 (E.D. Pa. 2001) (Pennsylvania ethical rule).
Although separate statistics are not available for antitrust class             7   Palumbo v Tele-Communications, Inc, 157 F.R.D. 129 (D.D.C. 1994)
actions alone, the Federalist Society survey found that state class                (class certification confers the status of litigant on absent class
actions filings increased 1,315 per cent [!] between 1988 and 1998.                 members and creates an attorney-client relationship with class counsel);
Our own institutional experience provides us with ample reason to                  Van Gemert v Boeing Co, 590 F.2d 433 (2d Cir. 1978), aff’d, 444 U.S.
believe that the increase in state antitrust class actions mirrors the             472 (1980).
general increase. In the wake of Illinois Brick, many state legislatures       8   See eg, Resnick v ADA, 95 F.R.D. 372 (N.D. Ill. 1982); Winfield v St Joe
passed laws permitting consumers to sue manufacturers under their                  Paper Co, No. MCA 76-28, 1977 U.S. Dist. LEXIS 13926 (N.D. Fla. Sept.
state law analogous to the federal antitrust laws and the Supreme                  19, 1977); Restatement (Third) Law Governing Lawyers § 99 cmt. l, at
Court held in 1989 that these laws did not conflict with federal                    77 (2000) (“prior to certification, only those class members with whom
antitrust enforcement.19 Even in states without these so-called “Illi-             the lawyer maintains a personal client-lawyer relationship are clients”);
nois Brick repealers”, plaintiffs may sometimes bring their antitrust              Manual for Complex Litigation (Third) § 30.24, at 233 (1995) (no
class actions under unfair trade practice act statutes. Worse yet for              attorney-client relationship exists prior to class certification.); Ralph
defendants, it is clear that state courts are more likely to certify classes       Oldsmobile, Inc v. GMC, No. 99 Civ. 4567 (AGS), 2001 U.S. Dist. LEXIS
than are federal courts. Thus, the state courts have become the forum              13893 (S.D.N.Y. Sept. 7 2001) (approving precertification settlement
of choice for many antitrust consumer class actions. There is rarely               negotiations); Jankowsky v Jewel Cos, 538 N.E.2d 689, 691 (Ill. 1989)
a federal case filed without some group of class counsel filing the                  (“[t]here is no prohibition against communications, negotiations, or
exact same case in one or more state courts.                                       settlements with persons who fall within the proposed class prior to
     These circumstances create enormous inefficiencies, burden the                class certification); cf. Manual for Complex Litigation (Third) § 30.24, at
federal and state judiciaries, and expose defendants to a multiplicity             233 (“Defendants ordinarily are not precluded from communications
of adjudications on the same conduct: the perfect environment for                  with…individual class members before certification.”)
litigation terrorism. Although some federal courts have attempted              9   Gulf Oil v Bernard, 452 U.S. 89, 100 (1981) (“[b]ecause of the potential
to achieve coordination with parallel state cases20, complete coordi-              for abuse [of the class action process], a district court has both the duty
nation is difficult to achieve and in most cases impractical, although             and the broad authority to exercise control over a class action and to
we have managed to surmount this problem in some cases and prece-                  enter appropriate orders governing the conduct of counsel and parties”).
dents are being developed.                                                     10 In re General Motors Corp Engine Interchange Litig., 594 F.2d 1106,
                                                                                   1139 (7th Cir. 1979); Keystone Tobacco Co v United States Tobacco Co,
A modest proposal                                                                  238 F. Supp. 2d 151 (D.D.C. 2002) (rejecting class counsel’s attempt
As a result of the economic and judicial inefficiencies associated with            to invalidate settlements with potential class members on the ground
overlapping and parallel federal and state class actions, Congress is              that defendant’s communications satisfied the General Motors test).

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11 See, eg, In re Disposable Contact Lens Antitrust Litig., 170 F.R.D. 524       15 See, eg, In re New Motor Vehicle Canadian Export Antitrust Litig., 307
     (M.D. Fla. 1996) (class of consumers seeking to compel contact lens                F. Supp. 2d 136 (D. Me. 2004) (dismissing consumer class damages
     manufacturers to sell to unregulated Internet sellers); Iverson et al v            claims under Illinois Brick).
     Pfizer et al (D. Minn. May 19, 2004) (putative class of consumers            16     General Tel Co v Falcon, 457 U.S. 147, 161 (1982).
     seeking to compel prescription drug manufacturers to permit the             17     Falcon, 457 U.S. at 160.
     importation of discount pharmaceuticals from Canada).                       18     Szabo v Bridgeport Machs, Inc, 249 F.3d 672 (7th Cir. 2001).
12 See eg, Franz v Quantum, No. CGC-03-423301 (Cal. Super. Ct. 2003);            19     California v ARC America Corp, 490 U.S. 93 (1989).
     In re RF Tags Antitrust Litig., Consolidated Case 02CV3730 (JEI) (D.N.J.    20     See, eg, In re Compact Disc Minimum Advertised Price Antitrust
     2002).                                                                             Litigation, MDL No. 1361, 2001 U.S.Dist. LEXIS 11043 (D. Me. May 8,
13 See, eg, Lowell v American Cyanamid Co, 177 F.3d 1228 (11th Cir.                     2001).
     1999).                                                                      21 The Class Action Fairness Act of 2004, S. 2062 108th Cong. (2004)
14 See, eg, In re Disposable Contact Lens Antitrust Litig., 170 F.R.D. 524              H.R. 1115 108th Cong. (2004).
     (M.D. Fla. 1996).

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62                                                                                                  The Antitrust Review of the Americas 2005

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