The argument for overruling Illinois Brick while keeping Hanover Shoe requires a bit of background. At first blush, it could seem that eliminating the direct purchaser rule entirely would enhance private enforcement of federal antitrust law. It would expand the group eligible to seek damages beyond direct purchasers to include indirect purchasers. That might enable federal law to compensate all the victims of antitrust violations, including indirect purchasers in states without a state law remedy. It also might increase the law’s deterrence effects—imposing liability for harm done not only to direct purchasers but also to indirect purchasers. It might. But appearances can be deceiving.
We contend that repealing the direct purchaser rule entirely in federal antitrust cases would diminish compensation and deterrence through private enforcement. A key reason is that developments in federal class certification doctrine in recent decades have made obtaining relief on behalf of indirect purchasers quite challenging. As a result, indirect purchaser classes tend to recover damages in far fewer cases than direct purchaser classes, and in relatively modest amounts. Eliminating both prongs of the direct purchaser rule would make it more difficult—potentially much more difficult—to obtain class certification in direct purchaser antitrust cases. Meanwhile, class actions play a crucial role in private antitrust enforcement. It follows that shifting the primary burden for antitrust enforcement from direct purchasers to indirect purchasers would greatly reduce the deterrence effects of federal antitrust law and likely would benefit antitrust violators far more than antitrust victims.
That would be unfortunate. The best theoretical work suggests that private enforcement is valuable but does not adequately deter antitrust violations. Antitrust violations occur far too frequently. Crime pays. Repealing the entire direct purchaser rule would make antitrust violations that much more profitable and, presumably, that much more common.
The alternative we support begins with recognizing that the direct purchaser rule actually comprises at least two separate prongs. The Supreme Court adopted one of them in Illinois Brick. The first prong provides that only direct purchasers—not indirect purchasers—can obtain monetary damages under federal antitrust law. Illinois Brick and the direct purchaser rule are at times treated as synonymous. So, for example, state laws that allow indirect purchaser damages actions are known as “Illinois Brick repealer” jurisdictions.
However, there is another prong of the direct purchaser rule that the Supreme Court established in Hanover Shoe. The second prong deprives defendants of a pass-on defense in damages actions under federal antitrust law. Direct purchasers can recover the full overcharges that they pay as a result of an antitrust violation. This is true regardless of whether direct purchasers are able to mitigate their damages by passing on some of the overcharge to their customers.
Repealing Illinois Brick while retaining Hanover Shoe should enhance compensation and deterrence in modest but valuable ways by expanding the rights of indirect purchasers under federal antitrust law. And it would avoid damaging the rights of direct purchasers.
How proponents of repealing the direct purchaser rule would respond to this proposal likely depends on their goals. Some proponents are progressive. They tend to recognize that private antitrust enforcement is valuable and wish to strengthen it. They may not be familiar, however, with the intricacies of federal antitrust class action litigation. They likely would be receptive to keeping the law applicable to direct purchasers intact by retaining Hanover Shoe while increasing the remedies available to indirect purchasers by repealing Illinois Brick.
The story is more complicated regarding political conservatives. They generally have been hostile to private antitrust enforcement. One might reasonably wonder why some of them—such as President Trump’s Assistant Attorney General for the Antitrust Division of the Department of Justice, Makan Delrahim—have championed the repeal of the direct purchaser rule. A possibility is that they are concerned, as they claim, with ensuring that all indirect purchasers can pursue claims for damages. It would be na¨ıve, however, simply to accept that position at face value. For decades, conservative judges and lawyers have been hollowing out private rights through procedural revisions that elude public scrutiny. For example, we have seen federal courts erect numerous barriers to class certification, many of them at odds with the letter and spirit of the relevant Federal Rule of Civil Procedure Rule 23, as discussed below. We should at least entertain the possibility that conservative proponents of repealing the direct purchaser rule recognize that doing so now could devastate antitrust class actions and undermine private antitrust enforcement.
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