dealt with the remedial rather than the substantive question, I suppose that if we do enact this legislation we could make it retroactive to, say, the date of the Illinois Brick decision.

Mr. HILL. That is correct. We have attempted to explore that in our office, and I know other offices in the States have tried to do the same, and I don't think anyone has discovered any hurdle or any barrier to this legislation being applicable to all cases pending on June 9 or cases filed thereafter. There is neither a constitutional nor any other hurdle to that being done, and I would urge the committee to do so.

Mr. SEIBERLING. Well, I suppose that it might be possible to argue with the district courts that they should at the very least pose some sort of temporary stay of any motions to dismiss based on Illinois Brick until it is clear whether or not Congress is going to take remedial

action.

Mr. HILL. I am certainly sympathetic in urging that upon the courts. I think as a practical matter, even today, it is too late to do that in some cases. Some courts have already responded. Other courts have advised that they will be responding and will not be awaiting legislation.

Mr. SEIBERLING. Of course, if the case is actually dismissed, that ends the tolling of the statute of limitations.

Mr. HILL. That is correct, and we are going to have enormously complex procedural questions if the legislative response is delayed unduly.

Mr. SEIBERLING. Proceed. I interrupted you.

Mr. HILL. One question which gives the committee-and I will be very brief and pass it to others--some sense of the impact of this is simply a reference to the brief of the Bristol-Meyers Co., which is a defendant in the Ampicillin litigation which many of the States are participating in, as well as the U.S. Government.

The brief notes at one point:

The present case is not a price-fixing case. The present case is a monopolization case. The alleged violation consists of exclusionary conduct aimed at competitors and defendants.

The brief then goes on to suggest any time an antitrust case raises complex issues, Illinois Brick precludes any plaintiff from recovering. In summary, the effect of this is described, and I quote:

The various aspects of impacts may be characterized as follows:

(a) Dismissal of Claims of indirect purchasers, including claims asserted by Attorneys General based on purchases by individual consumers.

In that action there had been a consumer class.

Claims asserted by governmental entities including the United States, based on reimbusement for purchases by individual consumers; claims of retailers who purchased from wholesalers; claims of wholesalers, private hospitals, and private entities who purchased from a middleman rather than a defendant.

(b) Dismissal of damages claims of direct purchasers, including wholesalers, retailers, private hospitals, and governmental entities on the merits or, at least, as class actions.

(c) Dismissal of governmental claims for purchase of drugs.

(d) Dismissal of all government welfare claims.

(e) Simplification of certain discovery preceedings now pending before the court.

So you can see we are addressing a question here today as to what

should be done with Illinois Brick to permit indirect purchasers under antitrust laws; we are litigating as an aftermath of Illinois Brick basic issues concerning not only indirect but also direct purchasers.

Mr. SEIBERLING. This bill, of course, would not prevent defendants from arguing that there were other implications of Illinois Brick beyond the particular question of direct or indirect purchasers. And I suppose that would take separate legislation if that materializes in order to correct any problems resulting from that.

Mr. HILL. That is correct, although I think a prompt legislative response dealing with the very specific problem created by Illinois Brick would greatly simplify and expedite the pending cases. Mr. SEIBERLING. All right, go ahead.

Mr. HILL. I concluded my remarks.

TESTIMONY OF KENNETH R. REED, ASSISTANT ATTORNEY GENERAL, DIRECTOR, ANTITRUST SECTION, ECONOMIC PROTECTION DIVISION, OFFICE OF THE ATTORNEY GENERAL, STATE OF ARIZONA

Mr. REED. Mr. Chairman, I am Kenneth Reed, I am the director of the Antitrust Section of the Economic Protection Division, Office of the Attorney General, of the State of Arizona.

I have previously provided to the committee a prepared statement by Mr. Bruce E. Babbitt, attorney general of the State of Arizona, and would ask that that statement be included in the record.

Mr. SEIBERLING. Without objection, so ordered.
[The prepared statement of Mr. Babbitt follows:]

STATEMENT OF BRUCE E. BABBITT, ATTORNEY GENERAL OF THE STATE OF Arizona Representative Rodino and members of the Monopolies and Commercial Law Subcommittee, we welcome the opportunity to present testimony today at the invitation of the House Subcommittee on Monopolies and Commercial Law. As part of a panel appearing on behalf of the National Association of Attorneys General, we convey to this Subcommittee the unanimous support of all of the Attorneys General for the immediate enactment of legislation reversing Illinois Brick. Coming from a State which has been particularly active in treble-damage antitrust litigation, we would also bring to this Subcommittee's attention our practical experience in surmounting the supposed obstacles which are said to make recovery by indirect purchasers too difficult ever to undertake.

On June 9, 1977, the Supreme Court of the United States held in Illinois Brick Co. v. Illinois, 45 U.S.L.W. 4611 (U.S. June 9, 1977), that indirect purchasers, that is, purchasers who did not deal directly with conspirators, may not recover damages suffered by them by reason of an antitrust violation. In reaching this decision, the Court flaunted the will of Congress as expressed as early as 1890 when the Sherman Act was first enacted and as recently as the last Session in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Public Law 94-435, 90 Stat. 1383 (1976). Moreover, the decision was based on unsupported and demonstrably incorrect assumptions regarding the persons who truly suffer the injuries caused by antitrust violations and the practical difficulties involved in such lawsuits. In sum, the Court took away the ability of the state, local and federal governments as well as of consumers to be made whole for their injuries and did so not in the name of justice but of expediency. The Court did say, however, that "[s]hould Congress disagree with this result, it may, of course, amend the section to change it." 45 U.S.L.W., at n.14. In the interest of the fair and effective enforcement of the antitrust laws, we strongly urge the Congress to accept the Court's invitation to amend Sections 4, 4A and 4C of the Clayton Act in order to allow indirect purchasers to recover any damages that may be proved by them.

I.

"ILLINOIS BRICK" IS CONTRARY TO THE RECOGNIZED POLICIES UNDERLYING THE FAIR AND EFFECTIVE ENFORCEMENT OF THE ANTITRUST LAWS

At least until the Illinois Brick decision, the conventional wisdom had it that the antitrust damage remedy was founded on the dual objectives of providing compensation to those actually injured and of creating an incentive for the enforcement of the antitrust laws. E.g., Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 139-40 (1968). The remedy was to be read broadly: "The statute does not confine its protection to consumers, or to purchasers, or to competitors, or to sellers. . . . The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever may be perpetrated." Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S. 219, 236 (1948).

Illinois Brick seemingly changes these accepted premises. The Supreme Court will no longer concern itself with whether a particular party has actually been injured by unlawful conduct. Instead, and in the name of expediency, it has closed its eyes to questions of actual injury and has given a windfall to a group some members of which may actually have profited by the unlawful conduct. Incentives for the enforcement of the antitrust laws have also been disserved by Illinois Brick. The Supreme Court has limited the role of private attorney general to a group which may have affirmative reasons for not instituting suit and which historically has shown little interest in antitrust enforcement.

A. Both Direct and Indirect Purchasers May Be Injured By Reason of Antitrust Violations

The Supreme Court's holding in Illinois Brick that only direct purchasers are injured by antitrust violations is belied by repeated statements of congressional intent and by the results of numerous lawsuits.

The 51st Congress which enacted the damage remedy as part of the original Sherman Act clearly contemplated that indirect purchasers would be entitled to obtain recovery. The remarks of Senator George are typical :

"An advance in the price to the middleman is not mentioned in the bill for the obvious reason that no such advance would damnify them; it would rather be of benefit, as it would increase the value of goods he has on hand. He buys to sell again. He buys only for profits on a subsequent sale. So whatever he pays he receives when he sells, together with the profit on his investment; and so on all of them; including the last, who sells directly to the consumer. The consumer, therefore, paying all its increased price advanced by the middlemen and profits on the same, is the part necessarily damnified or injured." 21 Cong. Rec. 1767 (1890).

As recently as the last session, the ability of indirect purchasers to recover for their injuries was again acknowledged by the Congress. Hart-Scott-Rodino Antitrust Improvement Act of 1976, Public Law 94-435, 90 Stat. 1383 (1976). The Senate Report on this bill expressed a clear intent that indirect purchasers not be prevented from recovering their damages :

"Section 4C is intended to assure that consumers are not precluded from the opportunity of proving the amount of their damage and to avoid problems with respect to manageability [of class actions], standing, privity, target area, remoteness, and the like." (Emphasis supplied.) S. Rept. No. 94-803, 94th Cong., 2d Sess., at 42 (1976).

The House Report likewise emphasized that the parens patriae legislation was intended to allow recovery of damages by indirect purchasers. H.R. Rep. No. 94-449, 94th Cong., 1st Sess., at 6 n.4 (1975). The Supreme Court chose to disregard these clear directions in its Illinois Brick decision.

A long line of litigated cases also refutes the Supreme Court's determination that indirect purchasers are not injured by reason of antitrust violations. The Electrical Equipment Conspiracy Cases resulted in recoveries of tens-if not hundreds of millions of dollars. Something in the neighborhood of $300 million was recovered in the Tetracycline Litigation; well over $70 million was recovered in Gypsum; over $30 million in Western Liquid Asphalt; and over $21 million in In re Master Key Antitrust Litigation. These are to cite but a few of the most notable examples. In each of these cases, indirect purchasers were awarded the majority of the recovery. (A representative list of cases in which states and

public agencies recovered substantial damages for the indirect purchases is included as Appendix "A.") The recoveries by indirect purchasers in these and other cases are the most compelling evidence to demonstrate that contrary to the Supreme Court's decision in Illinois Brick, indirect purchasers are, in fact, injured by reason of antitrust violations.

Had Illinois Brick been on the books at the time, it is problematic whether any of these cases would have been brought and, if so, whether they would have resulted in recoveries of this magnitude. There is no need for speculation, however, because convicted and accused price-fixers have already demonstrated their ingenuity in using Illinois Brick to attempt to escape liability for their wrongdoing. In Master Key, for example, defendants agreed to a settlement of over $21 million while in the midst of a trial before Judge Blumenfeld in the District of Connecticut last winter. The money was paid but following Illinois Brick the defendants have attempted to renege on their settlement and have the indirect purchasers return the moneys paid. Judge Blumenfeld has not yet ruled on the motion.

The defendants in re Petroleum Products Antitrust Litigation are verticallyintegrated petroleum companies. It is alleged that they unlawfully agreed to increase prices at each of the distribution levels. In a hearing before Judge Grey of the Central District of California on July 25-26, 1977, defendants argued that they could unlawfully increase prices at the wellhead by a few pennies a gallon, add a few more cents in the pipeline, conspiratorially increase the price still more at the refinery, add a few pennies more of illegal overcharge at the bulk plant, and cap off their conspiracy with still another overcharge at the retail level and that because of Illinois Brick they would only have to answer for the overcharge at the retail level and then only to the extent of sales from their company-owned stations. Judge Grey has not yet ruled on that motion. The defendants in In re Cement and Concrete Antitrust Litigation take an even more expansive view of the extent to which Illinois Brick shields them from antitrust liability. That is a case pending before Judge Muecke in the District of Arizona which alleges an unlawful conspiracy to increase the price of cement. Cement is the primary ingredient of ready-mix concrete and many of the cement manufacturers named as defendants also own ready-mix concrete companies. These defendants have recently argued that they are answerable to no one for overcharges for the cement which their subsidiaries resell as an ingredient in readymix concrete. Judge Muecke has not yet ruled on defendants' motion. (A list of some other pending cases which may be adversely affected by Illinois Brick is included as Appendix "B.")

Prior to Illinois Brick, hundreds of millions of dollars had been recovered on behalf of state and local governments, the United States and individual consumers all of whom were indirect purchasers. Illinois Brick signals that State Attorneys General will no longer be able to recover for overcharges paid by governmental entities or by consumers. Such a result is contrary to the history and purposes of antitrust enforcement and should not be countenanced.

B. Direct Purchasers Are an Inappropriate Group Upon Whom To Place the Entire Burden of Private Antitrust Enforcement

Treble damage actions are an important part of a broad-based policy of antitrust enforcement. An award of three times the amount of an unlawful overcharge may well represent a greater penalty (and therefore also a greater deterrent) than a $1,000 fine or a suspended jail sentence. Because the Antitrust Division and the Federal Trade Commission both have finite resources, private enforcement helps ensure that the antitrust laws will be more broadly enforced than if reliance were placed solely on the federal government. To the extent the treble damage incentive is reduced, antitrust enforcement is accordingly weakened. To the extent this remedy is placed solely in the hands of those who have affirmative reasons for not exercising it. this aspect of antitrust enforcement becomes nonexistent. The Supreme Court's Illinois Brick decision weakens antitrust enforcement in both respects.

From a historical perspective, it is clear that indirect-rather than directpurchasers have provided the major impetus for private antitrust enforcement. In cases such as Electrical Equipment, Tetracyline, Gypsum, Western Asphalt and Master Key mentioned above it was indirect purchasers who carried the burden of the prosecution and who were able to obtain a significant portion of the tital damages awarded.

In re Petroleum Products Antitrust Litigation and In re Cement and Concrete Antitrust Litigation are two more recent cases which demonstrate direct purchasers' disinclination to sue. The Petroleum Products litigation has been pending for more than three years now and the only plaintiffs who have brought suit are those who purchased at retail. Independent marketers of petroleum products have not yet evidenced any interest in filing suits. Cement and Concrete is in the same vein. That case has been pending for one year now. Even though cement companies and ready-mix companies are both named as defendants and even though ready-mix companies are substantial direct purchasers of cement, a year has passed and only one of the defendant ready-mix companies has asserted a claim against the cement company defendants.

The reluctance of direct purchasers to sue is readily understandable. As Senator Geroge noted, those who purchase directly from price-fixers may actually profit by the continuance of the conspiracy through their own percentage mark-up pricing practices. A middleman who routinely adds a ten percent markup to the costs of goods he resells will have little practical incentive to reduce the amount of his profit. In any event, the middleman's business relationships with his supplier would certainly be threatened if he were to sue his suppliers for pricefixing. In In re Western Liquid Asphalt Cases, 487 F.2d 191, 198 (9th Cir. 1973), cert. denied, 415 U.S. 919 (1974), the Ninth Circuit cited such reasons as the explanation for the general failure of the immediate purchasers to sue those who had fixed the price of liquid asphalt:

"It is understandable that contractors might not sue, in view of (1) their alleged dependence upon appellees for their supply of asphalt, (2) the possibility that they earned a percentage profit on the overcharges, and (3) the control and interdependence alleged between appellees and the contractors. Thus if the present appellants could establish antitrust violations but were precluded from recovering, no one else would sue and appellees would retain their assumedly illegal profits."

Knowing the reluctance of customers to sue their suppliers, businessmen who may be inclined towards violating the antitrust laws can readily structure their affairs so that Illinois Brick provides them with complete immunity from antitrust damage actions. Only three days after the Illinois Brick decision, Exxon announced that it would no longer sell fuel oil directly to consumers, but only through local distributors. Actions such as City of Philadelphia v. American Oil Co., 53 F.R.D. 45 (D.N.J. 1971), in which substantial recoveries were obtained on behalf of persons who would be indirect purchasers under the new regime would no longer be possible. I do not, of course, mean to cast aspersions at Exxon for this decision. I assume that its motives were entirely legitimate and that its decision had no connection with Illinois Brick. Nonetheless, Exxon's actions demonstrate how easy it would be for a price-fixer to obtain effective immunity from antitrust prosecution through a misuse of Illinois Brick.

The middleman's reluctance to sue his supplier may be based upon more than a simple desire to preserve a legitimate business relationship. In the Cement and Concrete case mentioned above, one of the allegations is that the cement company defendants agreed with certain ready-mix concrete companies not to sell cement directly to other types of businesses. Instead, the cement companies agreed only to sell through the ready-mix companies so that the ready-mix companies could add their own percentage mark-up before reselling to other types of businesses. When involved with its supplier in an unlawful boycott of this sort, a customer is not likely to sue its supplier for antitrust violations.

II.

THE INJURY SUSTAINED BY INDIRECT PURCHASERS MAY READILY BE PROVEN USING
RECOGNIZED AND ESTABLISHED METHODS OF PROOF

The Court in Illinois Brick based its decision in part on the alleged difficulty of proving pass-on. It reasoned that since the "principal basis" of Hanover Shoe was the complexity of defendants' establishing a pass-on, equal treatment of plaintiffs and defendants demanded that plaintiffs also be preclude from proving pass-on.

With regard to the alleged difficulty of proof, denying a defendant's right to assert a pass-on after liability has been proven is very different in policy considerations from precluding an injured party's suit because he did not purchase directly from the conspirator. Hanover Shoe's primary concern was