We regard this as antitrust legislation of paramount importance. Thus, it is appropriate to welcome as our first witness the Honorable John Shenefield, Acting Assistant Attorney General for Antitrust. Before asking Mr. McClory for his opening remarks, I should like publicly to commend Mr. Shenefield and his staff for their consistent support of and work on this legislation. It is both refreshing and welcome. With that, let me yield to the ranking minority member, Mr. McClory, for his remarks.

Mr. McCLORY. Thank you very much, Mr. Chairman. I want to join in the welcome you are extending to Mr. Shenefield and make a brief statement, if I may. I am pleased that hearings are opening on legislative responses to the Supreme Court's decision in the Illinois Brick case. As a representative from Illinois, I have a particular interest in this subject, and I know that our Attorney General William Scott, is likewise extremely interested in this legislation.

I hope that the hearings are thorough and searching, for H.R. 8359 appears to me to raise certain questions which require responsible answers. Rather than merely addressing the Illinois Brick case, the bill authorizes suits by persons indirectly injured by any antitrust violation, beyond price fixing. By adopting an "in fact" standard of injury, it may push the courtroom search for the truly injured parties to such remote levels in the chain of distribution as to make the proposed legislation illusory. If H.R. 8359 becomes law in this Congress, Mr. Chairman, I am fearful we will be back here in the next Congress to bring order out of some new chaos we will have created in the law of standing and will be asked to figure out why plaintiffs have suffered so many defeats under the "in fact" standard contained in this bill.

Mr. Chairman, it does not follow that by legislatively overuling Hanover Shoe the losing arguments in that case will become the law of the land. It should not go unnoticed that before Hanover Shoe was decided, courts were placing the burden of proof regarding the so-called defensive use of pass-on on plaintiffs and not on defendants, for plaintiffs must prove the extent to which they are in fact injured. Those courts reasoned they must also prove by a preponderance of the evidence that they did not step aside and pass on the injury. But even if the burden of proving defensive pass-on is placed on defendants, indirect plaintiffs will have varying degrees of difficulty prov ing their cases. I hope that the subcommittee will explore the nature of these difficulties.

In my opinion, plaintiffs who sue under an "in fact" standard will not have the advantages that similarly situated plaintiffs had before Illinois Brick. Then, most courts employed a more or less commonsense approach in picking the proper plaintiff. In order to avoid the absurd results that an unqualified "in fact" standard would produce, courts would permit suits at some indirect level if the next level of plaintiffs were thought too remote or if the product illegally priced was transformed into a different product. Under such a procedure, the indirect plaintiffs might obtain a windfall not unlike that of a direct plaintiff under Illinois Brick. But if the "in fact" standard precludes windfalls for direct plaintiffs, I assume it does also for indirect plaintiffs. Thus, under the bill, indirect plaintiffs would face greater obstacles than they have ever faced before. How great those obstacles

are will, I hope, be revealed through expert testimony presented to this subcommittee.

The pitfalls that await antitrust enforcement under this bill bring us to where we should begin : Will antitrust enforcement be improved by authorizing the litigation of pass-on questions? Certainly, as a general principle, it is desirable for those injured by antitrust violations to recover. But the hypothesis that indirect purchasers are more likely to sue does not necessarily lead to the conclusion that they are more likely to win. And if they are not more likely to win, what have we accomplished?

The subcommittee has much work to do before it can rest. The issues before us are far more complex and far more fundamental than those we considered in last year's legislation. The parens patriae provisions, which I supported actively last year, were premised on the belief that indirect purchasers had a cause of action. We did not legislate this premise last year. We did not vote in favor of granting indirect purchasers a cause of action which they did not have. We assumed that such a cause of action existed in indirect purchasers, and that we were merely providing the remedy or vehicle by which an existing cause of action could proceed through the participation of the various state attorneys general.

Mr. Chairman, I am not satisfied with the Illinois Brick decision. However, I am not entirely satisfied with the bill before us, as you gathered. I look forward to the wise counsel that the witnesses may provide for us, Mr. Chairman. Thank you, Mr. Chairman.

Chairman RODINO. Thank you very much. Mr. Shenefield, you may make your presentation. We have your statement and will insert it in the record without objection. You may proceed as you desire. [The prepared statement of Mr. Shenefield follows:]

STATEMENT OF JOHN H. SHENEFIELD, ACTING ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

I am pleased to be here today to express the Justice Department's strong support for H.R. 8359. This proposed legislation, which is similar to S. 1874 currently being considered by the Senate, would grant indirect purchasers the right to sue for damages under the antitrust laws by amending sections 4, 4A and 4C of the Clayton Act, 15 U.S.C. § 15, 15A an 15C. It would permit all persons who are injured in fact by an antitrust violation to recover for those injuries.'

Section 4, as presently interpreted by the Supreme Court in Illinois Brick Co. v. Illinois, only allows direct purchasers, those in privity with antitrust violators, or their functional equivalent to obtain monetary relief for illegal overcharges. The Department of Justice believes this rule severely damages private enforcement of the antitrust laws and undermines the deterrent effect of private rights of action.

Antitrust damage actions, particularly private treble damage actions, have two important, broad objectives: compensation of victims of antitrust violations and deterrence of future violations. While the material resources of the Justice Department to investigate antitrust violations have grown somewhat and the criminal sanctions for such violations have been increased, treble damage actions remain a vitally important part of the antitrust arsenal.

1 As discussed below, we understand that the bill is not intended to alter existing law regarding those injuries that are so remote or unrelated to the purposes of the antitrust laws as to preclude recovery of damages. See Brunswick Corp. v. Pueblo Bowl-O-Matic. 45 U.S.L.W. 4138 (U.S. Jan. 25. 1977). We also assume that it is not intended to alter existing standing requirements for plaintiffs not directly in the chain of distribution. See, e.g., Loeb v. Eastman Kodak Co., 183 F. 704 (3rd Cir. 1910) Mulvey v. Samuel Goldwyn Productions, 433 F. 2d 1073 (9th Cir. 1970), cert. denied, 402 U.S. 923 (1971). Moreover, we do not read the bill as in any way limiting recoverable damages to the amount of the overcharge.

245 U.S.L.W. 4611 (U.S. June 9, 1977).

In recent years, private antitrust cases filed in the district courts outnumber government cases by a factor of more than ten. Damage recoveries from these cases have also substantially increased in recent years. Private parties recovered about $450 million from the electrical equipment manufacturers; about $240 million from the antibiotic manufacturers; and about $70 million from the gypsum manufacturers.

Treble damage actions provide a significant deterrent for antitrust violations by removing the profit incentive for such violations. This means that from the perspective of effective antitrust enforcement, it is important to maximize the chance that some plaintiff will be available to challenge a violation and that any recovery will be large enough to serve the deterrent objective of private damage actions. As a former private antitrust lawyer, I am personally familiar with the fact that private treble damage liability is taken very seriously indeed by businesses-sometimes more seriously even than the possibility of government

prosecution.

To insure that the treble damage remedy remains fully effective, indirect purchasers must be allowed to bring damage actions. In many cases, the direct purchaser will not sue. The direct purchaser may have passed on a substantial part of the overcharge to its customers and, therefore, may have little incentive to bear the risks of litigation. In some instances, where the direct purchaser's selling price is set by a fixed percentage mark-up, it may actually be a beneficiary of a price-fixing scheme. Even if damaged, the direct purchaser may not bring suit in order not to risk disrupting an important source of supply. Thus, in a substantial number of cases, indirect purchasers are the only available parties to see that an antitrust violator is not allowed to retain its ill-gotten gains.

Moreover, in cases where the direct purchaser has in fact passed on an overcharge, the rule of Illinois Brick leaves most indirect purchasers with substantial injuries without a means to obtain just compensation. For instance, in many cases, state and local governments (and the federal government) have suffered millions of dollars of damages as indirect purchasers. This result alone requires Congresional action.

Additionally, the present rule may vitiate the parens patriae title of the Hart Scott-Rodino Antitrust Improvement Act of 1976. This law was intended to allow state attorneys general to sue to recover antitrust damages for natural persons residing in their states. It was designed to insure that individual consumers received compensation for antitrust injuries without the complexities and burdens of traditional class actions. An additional purpose was encouragement of state antitrust enforcement programs. Since individual consumers most often suffer damages as indirect purchasers, neither purpose of the parens remedy can be fulfilled unless indirect purchasers represented by state attorneys general can sue for antitrust damages.

The majority in Illinois Brick expressed two principal reasons for its holding that indirect purchasers could not recover for overcharges passed on to them by upstream purchasers. In Hanover Shoe, Inc. v. United Shoe Machinery, Corp. the Court had held that defendants could not attempt to avoid liability in suits by direct purchasers by arguing that any overcharge was passed on down the distribution chain. The majority in Illinois Brick believed this rule by necessity precluded indirect purchasers from recovering for overcharges passed on to them. Otherwise, defendants would be subject to possible multiple liability for the same injury. Moreover, the Court believed that passing-on, used either offensively or defensively, would unduly complicate private damage actions, reducing the incentives for any plaintiff to sue.

In our view, the approach taken by this bill addresses the Court's fear of multiples liability by permitting any plaintiff to recover who can prove injury in fact. Under its provisions, a defendant would not be faced with the prospect of being denied the right to use passing-on defensively in a suit by direct purchasers, while nevertheless being subject to an award of damages in a suit by purchasers further down the distribution chain based on an allegation that the illegal overcharge was passed to them. Thus, the approach taken by this bill is entirely fair.

We continue, however, to be convinced that the danger of multiple recovery for the same injury is largely theoretical. The defendant could protect itself from this possibility by a number of procedural devices. If suits by direct and indirect

The Court recognized in Illinois Brick that in certain "cost plus" situations, indirect purchasers would be permitted to prove that an overcharge was passed on to them. 392 U.S. 481 (1968).

purchasers are pending in different courts, they may be transferred and consolidated in one or more of the ways suggested by the Manual for Complex Litigation. Once cases are consolidated, damages may be allocated under Rule 42(a) of the Federal Rules of Civil Procedure."

In addition, our discussions with various members of the antitrust bar indicate that any danger of multiple liability arising from subsequent lawsuits is remote. Given the usual length of antitrust litigation and the four-year statute of limitations for private antitrust actions, few would-be plaintiffs will be willing or able to wait for a previous case to be completed before filing suit.

In any case, by permitting passing-on to be employed both offensively and defensively, this proposed legislation would avoid much of this largely theoretical possibility of multiple liability. Multiple liability for the same injury would be possible only in the remote case where different courts in subsequent cases reach substantially inconsistent conclusions on the passing-on issue. We do not believe that possibility is sufficiently probable to warrant any more than passing mention in a law review article footnote. It is certainly not comparable to the tremendous damage we see having been done to the treble damage remedy by the Illinois Brick rule.

In both Illinois Brick and Hanover Shoe, the Court was anxious to avoid making antitrust litigation more complex by introduction of the passing-on issue. Undoubtedly, this issue would provide some additional complications for these cases. We are satisfied, however, that this issue is not in any sense unmanageable. As the Supreme Court recognized in Bigelow v. RKO Radio Pictures, Inc., measuring damages in an antitrust case often requires a good deal of estimation based upon reasonable inferences about the nature of the market. A similar approach can be adopted regarding the passing-on issue. In fact, the Ninth Circuit in In re Western Liquid Asphalt Cases, directed the district court to follow such a common sense approach to resolution of the passing-on issues present in that case. There is every reason to believe that the courts will be able to fashion practical means for handling this issue in the same way that means have been found to handle such complex issues as proof of the amount of an overcharge.

Furthermore, we do not believe the additional complexity created by permitting proof of passing-on will significantly reduce the incentives for plaintiffs to sue antitrust violators. With the substantial recoveries involved, direct purchasers who are actually injured and who are otherwise disposed to sue are unlikely to be deterred by the requirements of this legislation that proof of injury in fact be established.

From the perspective of maximizing the more significant deterrent function of private antitrust actions, permitting indirect purchasers to sue clearly outweighs the additional burden placed on direct purchasers by introduction of the passing-on issue. For the reasons previously discussed, direct purchasers may in some instances not be the most likely plaintiffs, and it is important that suits by indirect purchasers be available as a backstop for such circumstances. Moreover, those persons actually injured by a violation, rather than those merely seeking a windfall are, in our view, more likely to further the remedial purposes of Section 4 of the Clayton Act.

One further point deserves mention. In the hearings last July on S. 1874 before the Senate Subcommittee on Antitrust and Monopoly, some witnesses expressed concern that the language in the bill might be construed by the courts as affecting the standing requirements for certain plaintiffs not directly in the distribution chain. There is a line of authority, for example, in some circuits that denies standing to persons not "directly injured" by an antitrust violation. Such persons would include suppliers, stockholders and employees."

We understand that neither this bill nor S. 1874 is designed to have any broader effect on the present standing requirements or the related remoteness rules than is necessary to permit indirect purchasers to sue for their injuries. In our view, this fact could be made sufficiently clear in the legislative history to insure that these doctrines remain intact. In addition, there are a number

51 Pt. Moore's Federal Practice: Manual for Complex Litigation, §§ 5.20-5.40 (2nd ed.. 1976).

See, e.g., West Virginia v. Chas. Pfizer & Co., Inc., 440 F.2d 1079 (2nd Cir. 1971). 7327 U.S. 251 (1946).

8487 F.2d 191, 201 (9th Cir. 1973), cert. denied, 415 U.S. 919 (1974).

'See, e.g., Loeb v. Eastman Kodak Co., supra.

of ways to make the language of this bill more explicit so as to remove any doubt concerning its intended effects. We would be happy to work with the Committee to develop other language to accomplish the important purposes of this legislation.

In conclusion, the Department strongly supports the approach adopted by H.R. 8359 and recommends the swift passage of such legislation.

TESTIMONY OF JOHN SHENEFIELD, ACTING ASSISTANT ATTORNEY
GENERAL FOR ANTITRUST OF THE UNITED STATES

Mr. SHENEFIELD. Thank you, Mr. Chairman, and members of the subcommittee.

I am delighted to be here today to express the Justice Department's strong support for H.R. 8359. This proposed legislation, which is similar to S. 1874 currently being considered by the Senate, would grant indirect purchasers the right to sue for damages under the antitrust laws by amending section 4, 4A, and 4C of the Clayton Act, 15 U.S.C. 15A and 15C. It would permit all persons who are injured in fact by an antitrust violation to recover for those injuries. Section 4, as presently interpreted by the Supreme Court in Illinois Brick Co. v. Illinois, allows only direct purchasers, those in privity with antitrust violators or their functional equivalent, to obtain monetary relief for illegal overcharges. The Department of Justice believes this rule severely damages private enforcement of the antitrust laws and undermines the deterrent effect of private rights of action.

We believe that antitrust damage actions, particularly private treble damage actions, have two important broad objectives: First of all, compensation of victims of antitrust violations and second, deterrence of future violations. While the material resources of the Justice Department available to investigate antitrust violations have grown somewhat and the criminal sanctions for such violations have been increased, treble damage actions remain a vitally important part of the antitrust arsenal.

In recent years, for instance, private antitrust cases filed in the district courts outnumber Government cases by a factor of more than 10, and the damage recoveries from these cases have obviously also had substantial deterrent effects; I elaborate in my written statement on the precise nature of those damage recoveries.

So, if we agree that treble damage actions do provide a significant deterrent for antitrust violations, that means that from the perspective of effective antitrust enforcement, it is important to maximize the chance that some plaintiff will be available to challenge a violation, and that any recovery will be large enough to serve the deterrent objective of private damage actions. As a former private antitrust lawyer (for a period of 12 years), I am personally aware that private treble damage liability is taken very seriously indeed by businesses-I may say sometimes more seriously even than the possibility of Government prosecution.

Now, to insure that the treble damage remedy remains fully effective, we believe indirect purchasers simply must be allowed to bring damage actions. There are three reasons for this:

First, in many cases, it is a historical fact and a logical necessity that direct purchasers will simply not sue. They may fail to sue because