Court of Appeal Rules Pass-On Defense Applies in Cartwright Act Anti-Trust Suits

    California has long had its own anti-trust law, the Cartwright Act (Bus. & Prof. Code §§16700 and following), and the California anti-trust jurisprudence is similar, but by no means identical to, that deriving from the Federal Sherman Anti-Trust Act (15 U.S.C. § 1, and following).  Last month, the Court of Appeal for the First District decided a case of first impression, creating another clear difference between the two.
    In Clayworth v. Pfizer, Inc. (July 25, 2008) ___ Cal.App.4th )___ (A116798), the Court held that the “pass-on defense” is available to defendants accused of price-fixing.  The issue, previously discussed by the U.S. Supremes in Hanover Shoe v. United Shoe Mach. Corp. (1968) 392 U.S. 481, is this:  Plaintiffs (in our case, a large number of retail pharmacists) buy products (here, prescription drugs) from Defendants (in our case, a large number of pharmaceutical companies).  Defendants unlawfully conspire to keep the prices artificially high.  Plaintiffs pass along every last nickel of the supra-market price to its customers.  Do Plaintiffs have a claim under the anti-trust laws?
    In Hanover Shoe, the U.S. Supremes said “yes,” or “maybe,” depending on how you interpret the decision.  Nine years later, in Illinois Brick v. Illinois (1977) 431 U.S. 720, the Court said that only the Plaintiffs had such a claim – not the customers to whom the unlawful increases were “passed on.”  This is what is known as the “indirect purchaser” doctrine, and it was eliminated by statutory amendment in a number of states, including California.  (Stats. 1978, ch. 536,§ 2, p. 1696).
    Surprisingly, the “pass-on defense” was never directly considered by a California Court of Appeal until last month.  And the Court held that it applied and barred Plaintiffs’ Cartwright Act claims.  The theory was this: since the unlawful increases were all passed on to somebody else, there were no damages, and you can’t have a Cartwright Act claim without damages.
    OK, I understand the decision, but here is what I don’t understand:  is it so clear that the plaintiffs didn’t have any damages?  If I recall my economics classes at Cal oh so many years ago, there is such a thing as “price elasticity of demand.”   If product has negative price elasticity (as I assume pharmaceuticals, like most consumer products, do), then an increase in price results in a decrease in demand.  If demand decreases, unit sales decrease, and if a retailer’s unit sales decrease as a result of a price increase which does not affect per-unit profits (as would be the case when price increases are “passed on”), isn’t the retailer damaged by a reduction in profits?  The pass-on defense might prevent the plaintiffs from recovering as damages the price increases.  But why couldn't they recover other damages, such as lost profits?  What am I missing here?

Comments

[Kimberly A. Kralowec]

The opinion states that the plaintiff, for whatever reason, chose to waive lost profits: "The undisputed facts established that plaintiffs passed the alleged overcharges in their entirety to their customers. They admitted that. They also admitted that they do not seek damages for any other loss, such as lost or delayed sales or any other diminution in business or profits. And all this was apparently easily developed in discovery." Slip op. at 36. I believe you are correct, and that a plaintiff who can show lost profits could still recover them under the Cartwright Act after Clayworth.

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