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The states now have pending in federal courts throughout the nation numerous cases like Illinois Brick which allege that the defendants violated the antitrust laws and, as a result, injured the states when the states purchased items which the defendants produced. The value of these cases is at least $200 million. Some of the cases even follow federal indictments and findings of guilt (such as in Illinois Brick) and the issue of violation, therefore is not even seriously in doubt.

Under Illinois Brick, the states are prevented from proceeding with their evidence in these cases since they bought from the defendants only "indirectly". This is so even though the states are willing and able to prove that the illegal overcharges were passed on to them by the middlemen. Further, under the Court's ruling, the middlemen may sue for treble the amount of the overcharge, even though they passed it on to their buyers and were not injured themselves! Since nearly all state purchases are through middlemen, the drastic result of this case is that states cannot recover the scarce tax dollars wrung from their treasuries by antitrust violators; and the middlemen may now walk off with a windfall. This is an intolerable result, which encourages further violations. At stake here is a fundamental issue of states' rights: whether the federal government will afford the state governments the opportunity to protect their treasuries from antitrust violations. In this context, it is understandable that every Attorney General in this country, Republican and Democrat, conservative and liberal, is in favor of overruling Illinois Brick.

We therefore commend you for the prompt response to the Illinois Brick problem the Subcommittee has shown up to this point. The danger we face, however, is the dismissal of these lawsuits before you act. Each case now has pending motions to dismiss based upon Illinois Brick, motions which will be granted unless you change the law. We are informed that if the Congress acts favorably at the Committee level, or at least at the Subcommittee level, before adjournment, that the District Judges may then be given some tangible grounds upon which to withhold rulings on these motions. Absent such action, the proceedings in Congress thus far rise to no greater level than mere debate in the eyes of many judges.

Even if the District Judges dismiss the cases without prejudice, that will be of no help because the statutes of limitations will prevent the cases from being refiled in any event. The fact is, if the Subcommittee fails to act on this bill, over $200 million in lawsuits will go down the drain, all without the states even being allowed to introduce a whit of evidence.

The discussions we have had with you and your staff persuade us that none of you are in fundamental disagreement with the position that the states should be permitted to proceed with these cases. But, since the hearings produced concern about the secondary and tertiary effects of overruling Illinois Brick, the question seems to be one of what specific language should be employed. Further, our talks with the business community lead us to believe that many of their concerns are proper, and could be reasonably accommodated.

Unless we all have an input into the process of developing this bill, agreement is unlikely to be reached. We therefore have this simple proposal: a meeting of the technical staff of minority and majority Senators attended by representatives of the business community, the Administration and this Association and any other interests you believe are appropriate, to draft a bill. It may be that no agreed version could be developed but we won't know that unless we try. That draft could then be considered by each of you and either sent back for further work, modified or adopted at the Subcommittee executive session scheduled for one week from today. On the other hand, if we do not meet to determine whether an agreement is possible, the fate of $200 million in lawsuits hangs in the balance.

Finally, to stimulate thinking on specific language, I enclose a copy of the proposed which we believe could be acceptable to the varying interests.

Would you be agreeable to permit your staff person to attend such a meeting on Monday or Tuesday, October 24, or 25?

Sincerely and Respectfully Yours,

C. RAYMOND MARVIN.

MERCK & Co., INC., Rahway, N.J., October 18, 1977.

Hon. PETER W. RODINO,

Chairman, Committee on the Judiciary,
U.S. House of Representatives,

Washington, D.C.

DEAR CHAIRMAN RODINO: This letter is to express our deep concern about H.R. 8359 and possible amendments to it that would change existing law as declared by the Supreme Court in the Illinois Brick and Hanover Shoe cases. The legislation would allow almost anyone in a product's chain of distribution to sue a manufacturer claiming that an "overcharge" has been passed on to him as a result of an alleged antitrust violation.

We at Merck have a firm policy of scrupulous compliance with the antitrust laws, and we support vigorous enforcement of those laws. Enactment of H.R. 8359, however, would impose great costs even on legitimate businesses without any corresponding benefit to antitrust enforcement. Indeed, the intended beneficiaries of the bill, consumers, are far more likely to suffer from the bill than to profit from it.

The basic premise of the proposed legislation is contradicted by what experienced businessmen know about the economic complexities of pricing and marketing decisions. It is impossible, even for experts who specialize in economic statistics, to reconstruct accurately how prices might have varied throughout the chain of distribution if one factor had been different at some remote level. In the real business world it is just not realistic to assume that an initial "overcharge," either of a component or of a finished product, can be measurably related to the ultimate price paid by a consumer.

In a lawsuit, the applicability of the "pass on" principle underlying H.R. 8359 would be equally unrealistic and irresponsible as well. Despite the statements by some proponents of the legislation that it would not affect the amount of a defendant's liability under the antitrust laws, this does not appear to be so. The economic uncertainties and the complexities involved in establishing how an "overcharge" is absorbed or passed on would make it virtually impossible for the businessman to disprove a direct purchaser's claim that an "overcharge" was absorbed. Yet in other suits by indirect purchasers, they too might be found to have borne the brunt of the initial violation.

That risk might not be as unfair, even when treble damages are involved, if the impact of the proposed legislation would fall only on companies that actually engaged in deliberate violations of the antitrust laws. But the threat of such duplicative recoveries, in favor of whole classes of remote purchasers, multiplied further by the potential of greatly increased defense costs, would easily make legistimate businesses more vulnerable targets of baseless lawsuits brought for the purpose of compelling settlements. Every responsible business executive realizes, I believe, that his company is less able to defend itself in court when the size of the "damages" demanded by a claimant is awesome, as is the case when claims are asserted in the name of the whole sectors of the economy.

The one method that has been proposed to avoid duplicative recoveries is to bring all potential claims into one massive lawsuit. However, even if this were procedurally feasible, it would not necessarily limit the recovery and would present further complications of its own. First, since a remote purchaser might also be claiming "consequential" damages, the proposed legislation could increase a company's total damage exposure well beyond the "ill-gotten gain" from an overcharge and beyond what direct purchasers alone would recover. Second, because the new legislation would require the tracing of products and pricing through intermediate levels of distribution, legitimate businessmen not now involved in antitrust lawsuits would be drawn into them involuntarily and forced to divulge-perhaps even to competitors--details about their marketing and pricing practices, even though not alleged to be unlawful or improper in any way,

By bringing several levels of intermediate distributors as well as large classes of ultimate consumers into a single lawsuit, the proposed legislation would add unprecedented levels of complexity to judicial proceedings. Courts and juries for the first time would be asked to determine not only whether there has been an antitrust violation and an overcharge, but also to trace the effects of the

overcharge on prices, sales, costs and profits at each level of distribution. Since the former questions have been known to involve years of trial preparation, the time and effort that would be required in a case involving all intermediate handlers of a product, including, for example, national classes of wholesalers, retailers and consumers, is mindboggling.

This complexity would result in vastly increased litigation costs, including the added expense of diverting business employees at each distribution level from their daily tasks to participate in discovery and prepare for an antitrust trial. These costs and expenses ultimately would be borne by the public in several ways directly and indirectly. Higher overhead and administrative expenses lead to higher prices. The dislocation of management of a company's business impairs its efficiency and thus its ability to compete. And nonproductive costs unfairly penalize the millions of people who own a company's stock, either directly or through their pension plan—and those are the very people on whose behalf this legislation is being pressed. Moreover, the added complexity of each case would also result in a strain upon an already overcongested court system and consequently would impose a burden on the general public when the resolution of other legal cases involving more serious individual claims was delayed. Perhaps these enormous costs could be justified if the proposed legislation either increased antitrust enforcement or compensated injured consumers. It is doubtful that either benefit would be purchased even at the great cost involved. As the Supreme Court itself explained in the Illinois Brick opinion, legal recognition of the “pass on” principle, as the proposed legislation would do, would remove the powerful incentive that direct purchasers now have to sue for undiluted treble damages, without offering an adequate new incentive to others on the distribution chain to bring similar claims. With every remote purchaser able to claim a portion of the possible recovery, the value of everyone's claim would be greatly reduced.

Anyone wishing to sue for his small share would be embroiled in the costly and arduous task of inquiring into the pricing and marketing practices of each businessman who handles a product. Additionally, I understand that experience has shown that it is not feasible as a practical matter to distribute “damages” of a few dollars to thousands or millions of consumers who ultimately purchased a product. In those cases which have attempted to do so, it appears that only a fraction of the amount involved actually reached individual consumers, with much of the money going to attorneys' fees and other administrative expenses.

For the above reasons, we at Merck believe the proposed legislation would not bestow any further protection on consumers, but rather would impose a heavy burden on businesses which ultimately would be reflected in higher prices and less satisfactory service to consumers. Since it is also our belief that the present antitrust laws provide a simpler, fairer and more efficient means of enforcement, I urge you to reconsider your position regarding the desirability of enacting H.R. 8359.

I appreciate the attention you have given to these comments and hope they prove useful in your deliberations. Sincerely,

ROBERT L. BANSE.

ALAN A, RANSOM, Esq.,

PATTERSON, BELKNAP, WEBB & TYLER,
New York, N.Y., October 24, 1977.

Counsel, Subcommittee on Monopolies and Commercial Law, Committee on the Judiciary, House of Representatives, Washington, D.C.

DEAR MR. RANSOM: Many thanks for your letter of October 12 including the draft of my testimony. I return that which has been corrected only in a few minor particulars.

Turning to the two questions which you pose in your letter, I would answer them as follows:

Question 1. If we retain the doctrines of standing and remoteness, should a defendant be allowed to prove that a plaintiff passed-on damage to a level which lacks standing to bring its own action?

Answer. No.

Question 2. Will the introduction of the pass-on defense make it any more difficult for plaintiffs to maintain a class action?

Answer. As at least implied in my oral testimony, in my opinion, no.

If you or your staff have time, please send me any subsequent drafts which may be forthcoming as a result of your hard work.

All the best,

Yours sincerely,

Enclosure.

HAROLD R. TYLER, Jr.

Hon. PETER W. RODINO,

JOHNSON, SANDS, LIZEE, FRICKER & SPRENGER,
Minneapolis, October 28, 1977.

Chairman, Subcommittee on Monopolies and Commercial Law, Committee on the Judiciary, House of Representatives, Washington, D.C.

DEAR CHAIRMAN RODINO: Supplementing my letter of August 10, 1977, I enclose a Statement in Support of Proposed Legislation Concerning the Decision of Illinois Brick Co. v. Illinois and Applicability to Pending Cases, and I respectfully request that it be made a part of the hearing record.

Thank you for your consideration.

Respectfully yours,

PAUL C. SPRENGER.

STATEMENT OF PAUL C. SPRENGER

As counsel for the State of Minnesota in the consolidated Sugar Antitrust Litigation now pending in the United States District Court for the Northern District of California, and as an active practitioner in the field of antitrust law, I urge the prompt passage of the "Bill to Restore Effective Enforcement of the Antitrust Laws" (HI, 8359) or a comparable bill such as that currently being considered in the Senate, in order to accomplish by legislation the reversal of the recent decision of the United States Supreme Court in Illinois Brick Co. v. Illinois, 97 S. Ct. 2061 (June 9, 1977).

The decision of the Supreme Court in Illinois Brick represents a stunning setback for the historic policy of the Nation favoring competition in the marketplace as the appropriate means of determining the availability, distribution and price of goods and services. Virtually everyone interested in affirmative antitrust enforcement was shocked by the decision, and all view with serious concern the potential disruption which would be occasioned should pending cases be indirect purchasers be permitted to fall through the cracks just as indirect purchasers generally are restored by remedial legislation to their position prior to the Illinois Brick decision. Specifically, the Office of the Minnesota Attorney General has expended almost 3,000 hours to date in prosecuting the Sugar Antitrust Litigation over the two years preceding the June 9, 1977 decision.

In excess of $23,471.59 has been disbursed by the State of Minnesota as costs in their joint prosecution of the case with other states and private litigants. Trial preparation was perhaps two-thirds completed when the Illinois Brick case intervened. If the state of the law is now basically to revert to its earlier status, the time and expense of the State of Minnesota and other indirect purchasers, expended in preparation for the adjudication of their claims, should not be lost by creating a conspicuous gap in the law for the period June 9, 1977 and the date of passage of a remedial bill. If the state of the law prior to the decision is to be fully restored, the legislative change should be made specifically applicable to cases which were pending on June 9, 1977.

The antitrust laws, principally the Sherman and Clayton Acts, have long served to protect competition from price-fixing, monopolization, and other varieties of trade restraint. In addition to deterring individuals and business firms from engaging in anticompetitive acts and practices and furnishing a means for imposing sanctions on violators, the antitrust laws provide (in Section 4 of the Clayton Act) a civil damage remedy to those who have been injured by anticompetitive conduct. The Illinois Brick decision, if permitted to stand, will have a seriously detrimental effect both on the deterrent function of the antitrust laws and on the remedial function of the laws in providing redress to injured persons.

"A Bill to amend Section 4 of the Clayton Act to permit consumers, businesses and governments injured by antitrust violations to recover whether or not they have dealt directly with the antitrust violator." [Referred to in this statement as the "Senate Bill"]

Until this recent decision it has long been the accepted state of affairs, both as a matter of law and as a matter of the general understanding and consensus of antitrust lawyers, that anyone (whether an individual or a governmental or business entity and wherever located in the chain of distribution) which could prove that it had been actually injured by an antitrust violation could recover damages from the violator (s) upon satisfying all the elements of the particular antitrust claim-always including proof of (a) violation by the defendant, (b) injury to the plaintiff, (c) causal connection between the violation and the injury, and (d) the amount of the damage.

So long as a party was not determined to be too remote from the alleged violation, it was permitted to come into court and attempt to establish is claim. Thus, assuming a manufacturers' conspiracy in restraint of trade in the classic pattern of distribution of a product (manufacturer-wholesaler-retailer-consumer), wholesalers, retailers and consumers could all initiate antitrust cases against the offending manufacturers, each plaintiff asserting that part of the conspiratorial overcharge caused it economic injury. In every case the plaintiff would be obliged to prove, among other things, both that it was in fact injured and the dollar amount of that injury. (No one, to my knowledge, has ever enjoyed an "automatic" recovery in such cases.) This was. I believe, the entirely proper and correct scheme of things as a matter of antitrust law, as a matter of economic policy, as a matter of Congressional intent and as a matter of com

mon sense.

The Supreme Court's decision in Illinois Brick would now limit the set of persons entitled to seek redress of injury caused by antitrust violations to those who purchased the product or service in question directly from an alleged offender, with a narrow band of exceptions. In the example given above, only the wholesalers would be entitled to attempt to prove the elements of a successful antitrust claim against the conspiring manufacturers. Both retailers and consumers, with narrow exceptions, would be left in the cold to nurse their wounds and carry on without being entitled to seek legal redress of their injuries.

The result is bitterly ironic in several respects. First, it precludes the consumer, the person for whose principal benefit the antitrust laws are intended, from seeking redress of violations which have resulted in overcharges to him in nearly all but the rare instances in which he has purchased the product in question directly from the offender (e.g., a retailers' conspiracy). Second, the decision confers the major enforcement role on middlemen, or in the above example, wholesalers.

As the average man on the street knows, middlemen customarily pass on all of their costs and are therefore rarely going to be actually injured by antitrust overcharges occurring at points above them in the chain of distribution. Moreover, such middlemen are typically reluctant to risk termination or interruption of the supply of the product that may result from suing their suppliers, as Mr. Justice Brennan tellingly noted in his dissenting opinion. With the set of persons entitled to proceed with private antitrust actions thus severely limited, the chilling effect on future antitrust enforcement and the limiting effect on the availability of the remedy are both obvious.

The Illinois Brick decision is also ironic in that the result reached by the Court is taken by the Court to be logically required by the 1968 decision in Hanover Shoe, Inc. v. United States Machinery Corp., 88 S.C. 2224 (1968). The Hanover Shoe decision manifestly rests on a policy basis-a policy of vigorous and effective antitrust enforcement, Illinois Brick now turns Hanover Shoe on its head to create a result distinctly contrary to that same policy. This is a consequence of overattention to logical niceties (in the words of Mr. Justice Blackmun's dissent, "a wooden approach") to the detriment of attention to the clear Congressional intent that victims of antitrust offenses be entitled to obtain, upon proper proof, a damage remedy for injuries imposed upon them.

By barring nearly all indirect purchasers from recovery, Illinois Brick also renders nearly meaningless the Hart-Scott-Rodino Antitrust Improvements Act of 1976. If consumers have no claims, then it accomplishes nothing to authorize state attorneys general to sue as parens patriae to recover the damages incurred by their citizens. In enacting that statute, Congress was naturally proceeding on the contrary premise that consumers injured by antitrust offenses do have a cause of action for damages under the Clayton Act. In fact, the Supreme Court refers to the Hart-Scott-Rodino Act as a device "to enforce existing rights

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