Later, however, when the eager young economist encounters antitrust litigation, and specifically the framework for calculating damages in a pricefixing case under Section 4 of the Clayton Act, confusion ensues. She is informed that, given the Supreme Court’s Illinois Brick ruling, only direct purchasers are entitled to recover damages in such cases and that these damages take the form of overcharges on actual purchases. Indirect purchasers, including final consumers, are out of luck under federal law. But, the economist asks, how does denying damages to indirect purchasers square with the idea that compensatory damages should return injured parties to the position they would have been in absent the challenged conduct? Well, she is told, limiting damages to direct purchasers and basing direct purchaser damages on overcharges avoids duplicate recovery, saves courts from the complex task of determining the damages sustained by downstream entities in the distribution chain, and, by making antitrust litigation more effective, enhances deterrence. But, the economist points out, the overcharge may not be a good measure of the economic injury the direct purchaser actually sustained, a further apparent departure from compensatory damages. Yes, the economist is told, but overcharge damages give direct purchasers a stronger incentive to sue and, anyway, do not worry about indirect purchasers because a number of states have enacted “Illinois Brick repealer” laws or otherwise allowed indirect purchasers in those states to recover damages. At this point, the young economist is likely to decide that the framework for awarding damages in overcharge cases in the United States is something of a mess and not the result of a thoughtful, coherent design.
Economists are not alone in questioning how damages are calculated in overcharge cases. Legal scholars and practitioners have also been troubled by the divergence of the Illinois Brick framework from the compensatory principle, as well as the shortcomings of the defendant’s overcharge as an appropriate measure of the actual damages. These concerns are longstanding, dating back to the Illinois Brick decision itself, which was controversial when issued and motivated the enactment of overrides and other measures by state lawmakers.
Despite various efforts to do away with Illinois Brick, its approach to how damages are calculated in overcharge cases survives to the current day. With the Supreme Court’s recent Apple v. Pepper decision, however, another door may have opened for reconsideration. But, what should replace the Illinois Brick framework? And what would the implications of replacing it be?
Part I discusses what economics has to say about the economic losses sustained by downstream entities resulting from overcharges imposed by entities at the top of a distribution chain and how the economic losses caused by the overcharges compare to the overcharges themselves. An important takeaway is that, in realistic settings, economic losses can diverge substantially from overcharges, and in either direction. A second important takeaway is that the extent to which the overcharge is passed on by an intermediary to its downstream customers is not a “summary statistic” for the economic losses sustained by the intermediary.
Part II describes how damages in overcharge cases are calculated under the existing legal framework and explores the implications of changing that framework so that damages align more closely with economic losses.
I. Economic Losses Due to an Overcharge
As noted above, this Part puts aside the existing legal framework and considers, from a purely economic point of view, the nature of the economic losses sustained by downstream entities as the result of overcharges attributable to an antitrust violation by one or more entities at the top of a distribution chain. Examples of antitrust violations that may lead to economic losses are a single firm that has engaged in monopolization or a firm that has conspired with its rivals to fix prices.
I use the term “economic losses” to mean the effect on a downstream entity’s financial position caused by the unlawful overcharges. Thus, by definition, a damages award would be “compensatory” if it was equal to the downstream entity’s economic losses. Importantly, and as discussed below, the way that damages are calculated under the existing legal framework do not necessarily meet this definition.
The issues of concern arise when the defendants sell their products into distribution chains that consist of one or more intermediary entities as well as a “final purchaser.” The first entity in the distribution chain is termed the “direct purchaser.” This is the entity that purchases the product from the defendants at a price that includes an overcharge. The other entities in the distribution chain (including the final purchaser) are called “indirect purchasers.” A direct purchaser or an indirect purchaser may resell the product it purchased from the immediately upstream entity in largely unaltered form, such as a retailer (an indirect purchaser) who purchases a packaged consumer good from a wholesaler (the direct purchaser) and sells it to consumers. Alternatively, a direct purchaser or indirect purchaser may incorporate the product it purchases from the upstream entity as a component in the product it sells downstream, such as a personal computer manufacturer (a direct purchaser) that incorporates a semiconductor product into a personal computer that is then sold to retailers (indirect purchasers). I discuss the economic losses to direct purchasers, other intermediaries, and final purchasers that flow from an overcharge imposed at the top of the distribution chain.
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