90,230 Court Decisions West Virginia v. Chas. Pfizer & Co., Inc. Number 513-72 4-12-71 George L. Russell, City Solicitor, Baltimore, Md.; William L. Siskind, Baltimore, Md., for Md. and Mayor and City Council of Baltimore; James A. Maloney, N. M. Atty. Gen.; William C. Marchiondo, Albuquerque, N. M.; Robert M. Robson, Ida. Atty. Gen.; James E. Barrett, Wyo. Atty. Gen.; Max P. Zall, City Atty., City and County of Denver, Colo.; Leo T. Zucherman, Denver, Colo.; Granvil I. Specks, Josef D. Cooper, Perry Goldberg, Chicago, Ill., for Conn., N. J., Md., N. M., Ida., Wyo.; Mayor and City Council of Baltimore, and City and County of Denver. Before MOORE and SMITH, Circuit Judges, and TIMBERS*, District Judge. SMITH, Circuit Judge: This is an appeal from an order of the United States District Court for the Southern District of New York, Inzer B. Wyatt, Judge, dated September 18, 1970 entering final judgment in favor of defendants-appellees and dismissing the actions as to them. The opinion is reported at [1970 TRADE CASES ¶ 73,240] 314 F. Supp. 710. This case involves some 66 civil actions, 26 of which were commenced in the Southern District of New York and 40 of which were transferred to that district by the Judicial Panel on Multidistrict Litigation "for coordinated or consolidated pre-trial proceedings." The claim in each of these actions is that the defendants, who manufacture certain broad spectrum antibiotic drugs, are guilty of violations of the antitrust laws in the sale of these antibiotics, specifically sections 1 and 2 of the Sherman Act (15 U. S. C. §§ 1, 2). Treble damages were sought, as authorized in 15 U. S. C. § 15. [Offer of Settlement] Before these actions proceeded to trial the defendants, on February 6, 1969 (as modified on May 9, 1969), proposed an offer of settlement in the amount of $100,000,000 as to the claims of the following groups: (1) States, counties, cities and their political subdivisions and agencies and any other governmental entities (excluding the Federal Government) arising out of their direct purchases or out of payments to or for the benefit of recipients of welfare or other aid; and (2) Wholesalers, retailers, and individual consumers arising out of their purchases, including claims of the states as parens patriae on behalf of their citizens or on behalf of classes including the state as a consumer and all other consumers in the state. The terms of this settlement offer were as follows: Chief Judge, United States District Court for the District of Connecticut, sitting by designation. ¶ 73,540 (1) The appropriate actions would be determined to be maintained as class actions pursuant to Rule 23 of the Federal Rules of Civil Procedure and the appropriate notices with option to be excluded from the class would be directed to all class members; (2) If the exclusions were "substantial" and "material" the defendants could withdraw the offer; (3) The $100 million settlement figure would be reduced appropriately to reflect the exclusions from class membership; (4) Any plaintiff accepting the settlement could present to the Court a proposed plan for the allocation of the amount received within each class; (5) If all the plaintiffs did not agree on a common plan, then the defendants could elect to proceed with any proposed plan; (6) The plan either agreed to or selected by the defendant would be submitted to the District Court for approval pursuant to Rule 23(e) of the Federal Rules of Civil Procedure. (7) The administrative and other costs of the litigation would be paid from the settlement fund; and (8) If the settlement were approved, all claims covered within its terms would be "satisfied or otherwise terminated." On May 26, 1969, after the settlement had been accepted in principle by nearly all the plaintiffs, the district court issued an order containing the following provisions: (1) The several states, Puerto Rico, and the District of Columbia were designated as a "temporary national class" from which any of these plaintiffs not accepting the offer of settlement could by notice exclude themselves. As to those states accepting the offer of settlement, each action commenced by them was to be maintained as a class action as to two classes: (a) claims of states, counties, cities and their political subdivisions and agencies arising out of their purchases or out of payments to or for 1971, Commerce Clearing House, Inc. Number 513-73 4-12-71 Cited 1971 Trade Cases the benefit of recipients of welfare or other aid; and (b) individual members of the consuming public who bought antibiotics in the state. (2) City and county government entities which as plaintiff or intervenor plaintiff had pleaded by June 10, 1969 a class claim on behalf of consumers resident within their territorial limits could maintain a class action as proper representatives of the class. (3) Actions commenced by wholesale drug stores which had accepted the offer of settlement were consolidated into the "consolidated wholesaler-retailer class" whose members were specified to be all purchasers of broad spectrum antibiotics who bought for "resale at wholesale or retail." [Notice] Having determined that certain actions were to be maintained as class actions, the district court pursuant to Rule 23(c)(3) in an order dated June 16, 1969 directed that notice be given to the various classes in the following manner. (1) As to government entities and institutions, notice was to be by first class mail, the mailing list of class members to be supplied by the parties, usually the class representatives. This notice described the situation generally and included a copy of the settlement plan. The class members were given until August 1, 1969 to exclude themselves from the class. (2) As to the consumer class members, notice was to be given by publication of the prescribed form on or about July 1, 1969 in every daily English and Spanish language newspaper of general circulation in each state. The consumer class members were given until August 1, 1969 to exclude themselves from the class, and they were also notified that if they wished to make a claim in the settlement they were required to file by August 16, 1969 a verified statement or a statement certified by their supplier. The notice to consumers also contained the following statement: "If you do not make an individual claim by August 16, 1969, that will constitute an authorization to the Attorney General [or other government official] to utilize whatever money he may recover as your representative for the benefit of the citizens of your State in such manner as the Court may direct." (3) As to the consolidated wholesalerretailer class, notice was to be given by first class mail, the mailing list of class members to be supplied by Clark-O'Neill, Inc., a Trade Regulation Reports 9 0,231 business engaged in maintaining a mailing list of wholesale drug houses and retail drug stores in the United States. The wholesaler-retailer class members were given until August 1, 1969 to file an individual claim or to exclude themselves from the class. Notices of exclusion were timely filed by 61 members of the classes consisting of government entities and institutions, 42 members of the classes consisting of individual purchasers, and by about 1500 members of the class consisting of wholesalersretailers. Claims amounting to $16,500,000 were filed by 38,000 members of the class consisting of individual purchasers, and 4100 wholesalers and retailers filed claims. The face amount of the purchases made by these claimants was in excess of $345,000,000. ["Alabama Plan"] Thereafter, in accordance with the terms of the settlement, several plaintiffs submitted separate plans for the allocation of the $100 million settlement fund. The most detailed and comprehensive of these, the so-called "Alabama Plan," was, with some modifications, the one accepted by the defendants and approved by the court. The theory behind this plan was that the claims of the government entities were entitled to first priority, since the dollar amount of their purchases and payments could be calculated with reasonable accuracy and the damages were direct and provable. The dollar amount of these sales and payments was determined to have been $121,620,000, and it was also calculated that the prices actually charged contained an overcharge of 66%. Allowing for uncertainties in law and in fact, it was concluded that for settlement purposes an overcharge figure of 4041% could properly be used. Applying 41% to the sales figure yielded a figure of $49,864,200 or, rounded off, $50,000,000. On the same basis it was calculated that the appropriate settlement figure for reimbursement payments to welfare recipients by the government entities was $10,000,000. This left $40 million to be divided between claims of wholesalers and retailers on the one hand and individual consumers on the other. As to the claims of the wholesalers and retailers, many of the plaintiffs were of the view that these purchasers were not entitled to any reimbursement because the members of this class sold nearly all their antibiotics to consumers on the basis of cost plus a fixed percentage profit, which resulted in their actually making higher profits as a ¶ 73,540 90,232 Court Decisions result of the antitrust violations. However, in order to secure the agreement of the wholesaler-retailer class to the settlement, a "nuisance value" allocation of $3 million was made to the members of this class. This is one of the disputes raised in this appeal and is dealt with below. Finally, as to the remaining $37 million allocated for individual consumers, individual claims of $16.5 million had been filed by some 38,000 persons. After these were settled, the remaining amount would be retained by the states as indicated in the public notice to be disbursed in accordance with the direction of the district court. This is the other major issue raised in this appeal and is also discussed below. The plan then undertook to allocate the $50 million given to governmental institutions on the basis of the number of hospital beds in the institutions of, or represented by each plaintiff as a percentage of the total number of hospital beds in the country. As to the $10 million vendor reimbursement fund, allocation was made on the basis of each state's welfare payment program. The $37 million which had been allocated to the claims of individual purchasers was divided into the amount applicable to each class of consumers represented by each government entity plaintiff on the basis of the percentage of the total population represented by the population of each government entity plaintiff. Finally, the total amount was adjusted downward to $82,615,030 to allow for those plaintiffs who had elected to exclude themselves, except that no adjustment was made for wholesaler-retailers or for the consumer class members who had elected to be excluded. The only serious objections to this plan were raised by some members of the wholesaler-retailer class who contended that they were entitled to the entire $37 million going. to consumers. After extensive negotiations, it was agreed that defendants would deposit the settlement immediately in an escrow account, and the interest on this account, amounting to more than $8 million, would class. the wholesaler-retailer Nearly all of the committee of counsel for the wholesaler-retailers accepted this arrangement. On October 20, 1969 a plan was filed in accordance with these terms for the approval of the court, and the funds were escrow account. The deposited in the escrow agreement provided (in part): accrue to (b) if there is a final order approving the proposed compromise by November 23, ¶ 73,540 Number 513-74 1970, then on that date the escrow fund (c) if there is no final order by November 23, 1970, then the division into two separate funds will take place on December 23, 1970. The effect is thus to give the wholesaler-retailer class the benefit of an additional month's interest on the entire escrow fund; In orders dated February 4 and 6, 1969 the Clerk of the Court was directed to give notice directly and by publication to all the parties in the same manner as was prescribed in the order of June 16, 1969, supra, as to a hearing on the proposed settlement to be held on March 24, 1970. In the meantime other minor adjustments not relevant to the issues raised on this appeal were made to the total amounts going to the various classes [see, 314 F. Supp. 732-739]. At this hearing again the only serious objections raised to the settlement plan came from some of the members of the wholesaler-retailer class to the effect that they were entitled to the entire $37 million. It should be emphasized that only a minority of this class continued to raise these objections. On June 24, 1970 Judge Wyatt filed a lengthy opinion and order approving the settlement and dismissing the actions against defendants. This appeal followed by the minority members of the wholesalerretailer class. [Scope of Review] The first question to be considered is what is the proper scope of review for this court to apply. Judge Wyatt viewed his responsibilities in evaluating the settlement as follows: Whether to approve the compromise involves an exercise of discretion. The Court is responsible for the protection of the many class members whose interests are involved but who do not appear in the action. Approval should be given if the settlement offered is fair, reasonable, and adequate. These terms are general and cannot be measured scientifically. The most important factor is the strength 1 of the case for the plaintiffs on the merits, balanced against the amount offered in 2 settlement. This factor is sometimes referred to as the likelihood of success. The Supreme Court directs the judge to reach "an intelligent and objective opinion of the probabilities of ultimate success should 1971, Commerce Clearing House, Inc. Number 513-75 4-12-71 Cited 1971 Trade Cases the claim be litigated" and to "form an It appears to be well settled that in reviewing the appropriateness of the settlement approval, the appellate court should only intervene upon a clear showing that the trial court was guilty of an abuse of discretion. As Judge Brown in the Fifth Circuit recently noted in Florida Trailer and Equipment Co. v. Deal, 284 F. 2d 567, 571 (1960): Of course, the approval of a proposed settlement does not depend on establishing as a matter of legal certainty that the subject claim or counterclaim is or is not worthless or valuable. The probable outcome in the event of litigation, the relative advantages and disadvantages are, of course, relevant factors for evaluation. But the very uncertainties of outcome in litigation and expense, lay behind the Congressional infusion of a power to compromise. This is a recognition of the policy of the law generally to encourage settlements. This could hardly be achieved if the test on hearing for approval meant establishing success failure to a certainty. Parties would be hesitant to explore the likelihood of settlement, apprehensive as they would then be that the application for approval would necessarily result in a judicial determination that there was no escape from liability or no hope of recovery and thus no basis for a compromise. or It is important to take particular note of the fact that in reviewing the compromise, this court need not and should not reach any dispositive conclusions on the admittedly unsettled legal issues which the case raises, yet at the same time we are apparently required to attempt to arrive at some evaluation of the points of law on which the settlement is based. A number of years ago this court set forth the applicable standard in In Re Prudence (supra n. 1): The district court did not determine the validity of the government's claim Conn. Ry, and Lighting Co. v. New York, N. H. & H. R. R., 190 F. 2d 305, 308 (2d Cir. 1951); In re Prudence Inc., 98 F. 2d 559 (2d Trade Regulation Reports 90,233 with respect to the taxability of the ["Passing-On" Doctrine] The most interesting and difficult issue which this appeal presents is the use of the "passing-on" doctrine as regards the claims of the wholesalers and retailers, not as a defense to escape liability, as is normally the case, but rather as a basis for determining the distribution of the damages recovered among various plaintiffs. Judge Wyatt had the following comments on this question: Without attempting to decide the matter, it appears at first glance to be highly doubtful whether wholesalers or retailers suffered any damage whatever. Defendants sold only in dosage form; this means that the wholesaler then sold in the original packages (at a mark-up of 16% or more over cost) and that if the retail druggist did not always sell in the original packages but repackaged in varying quantities at least the retail druggist sold the dosage form just as received from a wholesaler or from a defendant without any addition, subtraction or com bination. To the consumer, antibiotics are sold only by prescription. In some instances the retail druggist may charge his cost, plus a flat professional fee According to affidavits or experts in the field, the overwhelming majority of drug stores in the period 1953-1966 charged a uniform mark-up of 66% over cost. If so, this would mean that any overcharge by defendants in violation of the antitrust laws was passed on to the end use. purchaser. The result is that wholesalers and retailers, far from sustaining damages, made substantial profits from any antitrust violations [314 F. Supp. at 710]. Although appellants dispute the factual accuracy of the court's finding that they suffered no economic loss, they also contend that even accepting this premise, they are still entitled to recovery under Hanover Shoe v. United Shoe Machinery Corp. [1968 Cir. 1938). See, 3B Moore 23.80[4]: Norman v. 1 73,540 90,234 Court Decisions TRADE CASES 72,4901, 392 U. S. 481 (1968). In that case United had charged Hanover more for shoe machinery equipment than would have been charged but for the violation of the antitrust laws. The cost of the machinery was one of several factors which went into the price at which Hanover sold its products to the consumer. In these circumstances, the Court relying on its prior decisions in Chattanooga Foundry and Pipe Works v. City of Atlanta, 203 U. S. 390 (1906); Thomsen v. Caysen, 243 U. S. 66 (1917); Southern Pacific Co. v. DarnellTaenzer Lumber Co., 245 U. S. 531 (1918); and Adams v. Mills, 286 U. S. 397 (1932) held that the passing-on defense was not available to United. Mr. Justice White noted: We are not impressed with the argument that sound laws of economics require recognizing this defense. A wide range of factors influence a company's pricing policies. Normally the impact of a single change in the relevant conditions cannot be measured after the fact; indeed, a businessman may be unable to state whether, had one fact been different (a single supply less expensive, general economic conditions more buoyant, or the labor market tighter, for example), he would have chosen a different price. Equally difficult to determine, in the real economic world rather than an economist's hypothetical model, is what effect a change in a company's price will have on its total sales. Finally, costs per unit for a different volume of total sales are hard to estimate. Since establishing the applicability of the passing-on defense would require a convincing showing of each of these virtually unascertainable figures, the task would normally prove insurmountable. On the other hand, it is not unlikely that if the existence of the defense is generally confirmed, antitrust defendants will frequently seek to establish its applicability. Treble-damage actions would often require additional long and complicated proceedings involving massive evidence and complicated theories. Our conclusion is that Hanover proved injury and the amount of its damages for the purposes of its treble-damage suit when it proved that United had overcharged it during the damage period and showed the amount of the overcharge; United was not entitled to assert a passing-on defense. We recognize that there might be situations-for example, when an overcharged buyer has a pre-existing "cost-plus" contract, thus making it easy to prove that he had not been damaged -where the considerations requiring that the passing-on defense not be permitted ¶ 73,540 Number 513-76 4-12-71 in this case would not be present. 392 U. S. at 492-494. In considering the question of whether the obvious reluctance of the Court to allow the passing-on doctrine to be used as a defense to treble-damage liability should dictate the result in the context of the present case, the most important thing to keep in mind is the result orientation with which the Court has approached the whole area of private treble-damage litigation. A good example of this is contained in Minnesota Mining and Mfg. Co. v. New Jersey Wood Finishing Co. [1965 TRADE CASES 171,449], 381 U. S. 311 (1965). There the question was whether the statute of limitations was tolled under section 5(b) of the Clayton Act by an FTC proceeding, as distinguished from an antitrust proceeding instituted by the Department of Justice. In spite of Mr. Justice Black's persuasive dissent on the legislative history of the statutes, the Court held the statute was tolled, while obliquely admitting that the result was difficult and perhaps impossible to justify in terms of conventional analysis of the text and legislative history, precisely because a "contrary conclusion" would “deprive large numbers of private litigants" of assistance in their treble damage litigation [381 U. S. at 322]. In Perma Life Mufflers Inc. v. International Parts Corp. [1968 TRADE CASES 72,486], 392 U. S. 134 (1968), the Court noted that it has granted certiorari "because those rulings by the Court of Appeals seemed to threaten the effectiveness of the private action as a vital means for enforcing the antitrust policy of the United States" [392 U. S. at 136]. The Court in Perma Life then went on to substantially narrow the pari delicto doctrine as a defense noting: The plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant, but the law encourages his suit to further the overriding public policy in favor of competition. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement. 329 U. S. at 139. In Hanover Shoe itself Justice White placed strong emphasis on the Court's desire to encourage private treble damage actions. These ultimate consumers, in today's case the buyers of single pairs of shoes, would have only a tiny stake in a law 1971, Commerce Clearing House, Inc. |
