The simplest measure of loss caused by an antitrust infringement is the amount of the overcharge caused by a conduct. However, customers of the infringing party may be able to pass on this overcharge to their own customers, which means that indirect purchasers may also suffer loss. The US – unlike other countries – typically limits the ability to claim damages to direct purchasers for the amount of the relevant overcharge (typically trebled). In Apple Inc. v. Pepper, the Supreme Court held that consumers who allegedly paid too much for apps sold on Apple’s App Store because of an antitrust violation could sue Apple for damages because they were “direct purchasers”.
The paper, available here, argues that, working within the context of applicable rules, the majority reached the right conclusion. At the same time, and while this judgment eliminates some of the irrationalities of the indirect purchaser rule as it has been applied, it hardly adopts a definite solution to the underlying problems such a rule creates. The correct solution would be more consistent with the statutory language granting an action to (1) “any person who shall be injured in his business or property,” and then measuring the recovery as the (2) “damages by him sustained.” All intermediaries beginning with the direct purchaser should be awarded damages for lost profits, which represents injuries from both absorbed overcharges and the loss of sales that always accompany collusion. End user purchasers who are not in a position to pass on anything should be awarded overcharge damages for the full overcharge they paid, because that measures the injury that they have sustained.
The paper begins by outlining the (lack of) standing of indirect purchasers in US antitrust damages claims.
Purchaser damages in cartel and monopolisation cases are ordinarily measured by the amount of the price increase “overcharge.” Roughly speaking, this is the difference between the actual price that the defendant(s) charged and the price that would have prevailed had there not been any price fixing. In its Illinois Brick judgment, the Supreme court held that the first purchaser in line, or the direct purchaser, should obtain the entire overcharge as damages, without any reduction for the amount that it had passed on to purchasers beneath it in the distribution chain. Accordingly, indirect purchasers are not able to claim any damages, since these have already been recovered in full by the direct purchaser.
This rule, the Court noted, was not one of “standing” but rather of entitlement to damages. In effect, the Supreme Court’s main concern was with the difficulty of calculating passing on of the overcharge. It follows that a number of exceptions have been recognised to the Illinois Brick rule. For example, purchasers under a pre-existing contract that fixed both the quantity and mark up could obtain damages, for in such cases the entire overcharge would be passed on. Other exceptions have not been addressed by the Supreme Court, but flow naturally from the Court’s focus on passed-on damages. For example, the lower courts have held that Illinois Brick does not preclude an action for an injunction, because no calculation of passed-on damages is necessary. At the same time, the Supreme Court has also held in the past that indirect purchasers will be unable to claim damages even when the direct purchaser passed on 100% of its overcharge.
We then move to a discussion of Apple v Pepper.
The owners of Apple’s iPhones are required to purchase programs, or “apps,” on Apple’s App Store, which is itself an app that can be found on the iPhone screen. Apple’s App Store is thus a bottleneck through which the apps’ producers must pass if they are to reach Apple iPhone users. In this consumer class action, iPhone owners accused Apple of monopolising the market for Apple iPhone sales, both through this exclusivity requirement and by charging app producers a very high commission of 30 percent of the app’s sale price. They claimed that customers paid their money and purchased directly from Apple. The court agreed, and found that there is no intermediary in the distribution chain between Apple and the consumer, with the latter paying the former.
The dissenting opinion disagreed with this approach. In doing so, it adopted a distinctively non-economic approach that dispensed with the pass-on problem entirely. Indeed, the dissent was not even concerned about who is injured. It reasoned that only the direct purchaser (i.e. the app providers) had an injury that was “proximately caused” by the defendant’s antitrust violation. This view harkens back to a nineteenth century tort law concept used to limit tort liability, according to which only a single entity could be said to have an injury that was proximately caused by the defendant’s conduct. This view was abandoned over a century ago. The dissent’s approach also detaches proximate cause concerns from foreseeability in a way that was irrelevant here: it was so foreseeable that overcharge injuries will be passed on that no one seriously disputed it.
The author then discusses a number of problems with not allowing indirect purchasers to claim antitrust damages.
First, such a restriction is plainly inconsistent with the antitrust damages statute, which gives an action to “any person who shall be injured in his business or property” by an antitrust violation.
Second, the Illinois Brick judgment exaggerated the difficulty of “tracing” indirect purchaser damages. Computing how damages are passed on at each stage of a distribution chain requires “incidence” analysis. The technical quantification of pass-on is quite demanding, requiring determination of the elasticities of supply and demand faced by each individual firm in the distribution chain. A further complication is that the calculations are very sensitive to the distribution of fixed and variable costs. On the other hand, in most cases antitrust experts can assess damages without computing pass on. Such incidence analyses are not at all unusual, and there are decisions as far back as 1920s that adopt them as regards taxes.
Third, if we were going to give the overcharge to a single set of buyers it should be the end users, the only people in the distribution chain who are unable to pass anything on, and not to direct consumers. The impact varies from one situation to another, but in many cases the largest losses are those suffered by end users, who often absorb the entire overcharge, while the losses of intermediaries result from the volume effect (i.e. the diminution in the volume of sales as a result of higher prices). If we really want to award damages based on injury to a buyer’s business or property, as the statute requires, we should compute damages as lost profits for all intermediaries, including the direct purchaser. Only the final purchaser, or consumer, should obtain damages for the amount of the overcharge passed on to it.
This note contains an interesting discussion of the rules governing who can claim for antitrust damages in the US, and a searing critique of such rules.
The reason given for adopting such stringent rules on standing as the US has is typically that they ensure that parties closer to the infringement have more incentives to bring cases. This is important given the ‘private attorney general’ theory, according to which private enforcement is the main mechanism to identify and sanction antitrust infringements. I was a bit surprised that the paper does not mention this anywhere, while adopting a ‘full compensation’ approach that builds on a literalist approach to the Sherman Act and the European approach to compensating competition damages (the author even quotes the guidelines from the European Commission on passing on approvingly).
In this respect, I was left wondering whether the proposed approach to calculating damages would work in Europe (I am not trying to second-guess American scholars on how effective certain measures might be in the US in practice). This will require me to think more deeply about the rules of evidence that apply in various European courts, and whether the method would fit well with the proof which is usually available to the parties and courts, but it could be an avenue worth exploring.