This article provides an overview of the requirements for standing for umbrella purchasers in the U.S., EU, and Canada, and demonstrates how in a marketplace with differentiated products, an analysis of the upward pricing pressure experienced by non-cartel members may contribute to an assessment of whether the requirements for standing are met.
Standing for Umbrella Purchasers Varies by Jurisdiction
The ability of umbrella purchasers to sue the participants in a cartel for damages associated with price increases implemented by non-cartel members varies across countries and jurisdictions. In the EU in 2014, the Court of Justice of the European Union ruled that EU Member States cannot categorically exclude umbrella pricing claims against cartel members, and determined that umbrella purchasers have standing in matters where the cartel’s actions created an incentive for umbrella pricing and where that effect was foreseeable.
In the United States, courts are split on the question of standing for umbrella purchasers. U.S. courts have tended to reject umbrella claims, citing the difficulty of proving injury and calculating damages; for example, in In re Vitamins Antitrust Litigation the court noted that “‘[t]he causal connection between plaintiffs’ injury and the alleged conspiracy is necessarily attenuated by significant intervening factors, such as independent pricing decisions of the non-conspiring [parties]’ . . . [and the] intervening factors . . . make it impossible to apportion damages between the overcharges and the other factors with any reasonable degree of certainty.”
But in some cases, U.S. courts have recognized the standing of umbrella purchasers, noting that plaintiffs would have to demonstrate that non-cartel members’ prices were elevated as a result of the cartel’s actions, and assessing the difficulty of estimating damages for umbrella purchasers to be no more complex than estimating damages for cartel purchasers. For example, in Costco Wholesale Corp. v. AU Optronics Corp., the court found that if “Costco has standing to pursue its version of the umbrella theory . . . Costco would have to present evidence showing that the ‘minor players’ charged their higher panel prices because of the conspiracy, not for independent reasons . . . .” and “Costco’s claims [regarding defendants] will require the court and the jury to tackle . . . evidentiary complexities . . . regardless of Costco’s umbrella damages. Eliminating the umbrella theory would not make the economic inquiries less complex.”
In Canada, courts were split on standing until September 2019, when the Supreme Court of Canada determined that plaintiffs who purchase from umbrella pricers have standing to sue cartel members for damages. The decision was made in the context of an appeal to Godfrey v. Toshiba, a class action filed in British Columbia that alleged that Pioneer, Toshiba, and other manufacturers of optical disk drives (ODDs) and ODD products had conspired to fix prices between 2004 and 2010. The proposed plaintiff class included (among others) umbrella purchasers who had purchased an ODD or ODD products from a non-defendant.
The Supreme Court of Canada was asked to address whether umbrella purchasers have the right to sue the members of a cartel for their economic losses. The majority ruled that umbrella purchasers have standing to sue if they can prove that their losses foreseeably resulted from unlawful behavior by the cartel members––that is, whether plaintiffs can show that non-cartel members increased their prices as a predictable result of the cartel members’ price-fixing agreement. The Court determined that these conditions were met in Godfrey, but noted that they might not be met in other cases, noting “I am of the view that indeterminate liability would not arise in this case in any event” but “whether indeterminate liability might properly be considered at all in the context of a claim under s. 36(1)(a) of the Competition Act––I am content to leave for another day.”
In contrast, the dissenting opinion argued that standing for umbrella purchasers exposes defendants to indeterminate liability because cartel members cannot predict or control the actions of firms that are not members of the cartel (indeterminacy), and that standing for umbrella purchasers exposes defendants to potential claims by customers of firms whose prices are only tangentially influenced by the cartel members (remoteness): “[Claimants should not be allowed] to recover from defendants for any losses that in some way flowed from the alleged price‑fixing conspiracy as it would expose defendants to liability that is potentially limitless in scope for loss and damage that are too remote from any price-fixing that occurred.”
The Court’s decision opens the door to expanded class actions with regard to the size of the class and the amount of potential damages in price-fixing matters in Canada. But it also holds that umbrella purchasers must demonstrate that their losses resulted from collusive actions that predictably undermined competition––a set of requirements similar to those in the EU and in some U.S. courts. These standards require assessing the link (or lack thereof) between the pricing of cartel members and non-cartel members. For example, when members of a cartel increase their prices, do non-cartel members have an incentive to increase their prices? Can the magnitude of the umbrella price increase be approximated (and thus be foreseen)?
An Analysis of Upward Pricing Pressure May Assist in Determining Whether the Requirements for Standing for Umbrella Purchasers Are Met
The logic underlying umbrella purchaser claims is that the prices charged by non-cartel participants are set in response to the supracompetitive prices charged by the cartel members: the elevated prices maintained by the cartel reduce the competitive restraints on non-cartel members and, as a result, the non-cartel members set their prices higher than they would have in the absence of the cartel.
Whether such claims characterize a particular matter depend on the facts specific to the matter. A non-cartel member might not increase its price for a number of reasons. For example, a non-cartel member might be unable to change prices for customers who purchase under contractual pricing agreements. A non-cartel member also might not have sufficient bargaining power to negotiate a price increase with customers. Furthermore, if a non-cartel member’s product is a somewhat distant substitute for the products produced by the cartel, it may only be able to raise prices by a de minimis amount. And a non-cartel member may increase its price for reasons unrelated to the cartel, such as an increase in marginal cost. The point is that an analysis of umbrella pricing requires a fact-specific assessment of the particular matter.
One approach that likely will contribute to understanding umbrella pricing incentives is to perform an upward pricing pressure analysis for the non-cartel members. When cartel members increase their prices, some of the cartel members’ customers may shift their purchases to non-cartel members, which may create an incentive for non-cartel members to increase their prices. Modeling these interactions can likely help to characterize and quantify the link between the pricing of cartel- and non-cartel members.
As an example of one such model, consider a market with three firms which are all at the same level in the chain of production. Each firm sells a single differentiated product, and the products are (imperfect) substitutes. The firms initially compete on price, with each firm determining the price that maximizes its profit, given the prices of the other two firms. In equilibrium, each firm’s price will be set such that any increase in price beyond that point would be unprofitable for the firm––the additional revenue it would earn by setting a higher price would be more than offset by the profit it would lose when some of the firm’s customers shift their purchases to other firms.
Now assume Firms 1 and 2 form a cartel in which they each agree to increase their price by a certain amount. (Assume Firm 3 does not join the cartel, perhaps to avoid violating antitrust laws.) Collusion between Firms 1 and 2 may change the competitive incentives for Firm 3: the price that Firm 3 set before the formation of the cartel may no longer be the price that will maximize Firm 3’s profit. That is because as a result of the price increase of Firms 1 and 2, some consumers may shift their purchases to Firm 3, and if the demand for Firm 3’s product increases, the price which maximizes Firm 3’s profits also typically increases. Firm 3’s incentive to increase price will be counterweighted, as before, by the profit Firm 3 would expect to lose when some of the Firm 3’s customers shifted their purchases away from Firm 3. Thus, in the context of this model, whether and how much Firm 3 will increase its price in response to the cartelization of Firms 1 and 2 depends on two things: (1) the extent to which the customers of Firms 1 and 2 will respond to a price increase by Firms 1 and 2 by shifting their purchases to Firm 3, and (2) the extent to which customers of Firm 3 will respond to a price increase by Firm 3 by shifting their purchases away from Firm 3.
The likelihood of these occurrences can be better understood by breaking them down into their component parts. For example, the tendency of customers of Firms 1 and 2 to respond to a price increase by shifting their purchases to Firm 3 depends on the size of Firm 1 and 2’s price increase; the sensitivity of Firm 1 and 2’s customers to price; and the extent to which Firms 1 and 2’s customers consider Firm 3’s product to be a good substitute for the products of Firms 1 and 2. Similarly, the tendency of Firm 3’s customers to respond to a price increase by shifting their purchases away from Firm 3 depends on the size of Firm 3’s price increase and the sensitivity of Firm 3’s customers to price.
Firm 3’s price increase will depend on the strength of these tendencies, as well as the respective volumes involved. For example, if Firm 3’s customer base is small relative to the customer bases of Firms 1 and 2, then all else equal, the number of customers Firm 3 expects to lose due to a price increase may be small relative to the number of customers Firm 3 gains due to the price increases of Firms 1 and 2.
In summary, Firm 3’s price increase will be larger:
- the greater is the price increase of Firms 1 and 2
- the more price sensitive are the consumers of Firms 1 and/or 2
- the greater is the substitutability of Firm 3’s product for the products of Firms 1 and/or 2;
- the less price sensitive are the original consumers of Firm 3
- the smaller is Firm 3’s quantity relative to Firms 1 and/or 2.
Firm 3’s pricing incentives can be further characterized and quantified by the following formula, which estimates the amount by which Firm 3 will increase its price in response to an percent price increase by Firms 1 and 2.