July 11, 2011 Articles

Tag-Along Litigation: When an Indirect Purchaser Wants a Free Ride

Illinois Brick gives a bright-line rule barring damage claims by indirect purchasers. But it does not preclude them from pursuing injunctive relief.

By Amanda P. Reeves and Eric J. McCarthy

In 1977, the United States Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720, 735 (1977), that direct purchasers are the only parties “injured” in a manner that permits them to recover damages under Section 4 of the Clayton Act. Since that time, courts have repeatedly affirmed that Illinois Brick delineates a bright-line rule that poses an absolute bar to damage claims by indirect purchasers. Illinois Brick, however, does not preclude indirect purchasers from pursuing injunctive relief under Section 16 of the Clayton Act. As a result, when the government successfully litigates an antitrust claim against a manufacturer, the government’s win can tempt indirect purchasers to bring the same or similar claims against the same manufacturer and to leverage factual findings from the government litigation into a victory of their own and seek attorneys’ fees as a prevailing party. But as the nearly nine-year old litigation in Howard Hess Dental Labs. v. Dentsply Internat’l Inc. and Jersey Dental Labs. v. Dentsply Internat’l Inc. illustrates, manufacturer defendants are not without recourse in these circumstances: bedrock substantive antitrust principles provide at least three defenses that are useful to obtaining dismissal of an indirect purchaser plaintiff’s claims on the pleadings.

The Dentsply Litigation—Facts and Procedural History

In April 1999, Howard Hess Dental Laboratories (“Hess”) filed an antitrust complaint (“the Hess complaint”) against Dentsply, the nation’s largest manufacturer of artificial teeth. Hess sought to represent a putative national class of dental laboratories who bought Dentsply’s artificial teeth from Dentsply’s dealers. The complaint alleged that Dentsply’s Dealer Criterion 6, which provided that authorized Dentsply dealers could not add competing tooth lines to their product offerings, violated the antitrust laws. Hess alleged that, through the exclusive dealing policy, Dentsply (1) conspired to restrain trade in violation of § 1 of the Sherman Act, (2) conspired to monopolize the artificial tooth market in violation of § 2 of the Sherman Act and (3) conspired to restrain trade in violation of § 3 of the Clayton Act. The Hess plaintiffs’ suit was a tag-along case to a complaint that the Department of Justice, Antitrust Division had filed against Dentsply three months earlier. In March 2001, the district court granted Dentsply’s motion for summary judgment on the ground that, as indirect purchasers, plaintiffs lacked standing to sue Dentsply for monetary damages under Section 4 based on the Supreme Court’s ruling in Illinois Brick. The court, however, did not dismiss the Hess plaintiffs’ claim for injunctive relief because Illinois Brick does not bar such claims.

Shortly thereafter, in April 2001, plaintiffs changed their name to Jersey Dental Laboratories (“Jersey Dental”) and filed a separate complaint (the “Jersey I complaint”)against Dentsply and 26 of its dental dealers based upon the same exclusive dealing arrangements. Plaintiffs sought to circumvent the Court’s March 2001 ruling that Illinois Brick barred their damages claims with their claim that Dentsply and its dealers conspired to restrain the sales of artificial teeth and to permit Dentsply to establish and maintain a monopoly. On December 19, 2001, the Court again dismissed plaintiffs’ damages claims against Dentsply on the grounds that plaintiffs could not circumvent Illinois Brick with their allegation that Dentsply and its dealers were “co-conspirators.” The Court refused to recognize a “co-conspirator” exception to Illinois Brick and held that plaintiffs were “indirect purchasers who are barred from seeking damages by Illinois Brick.”

On January 7, 2002, plaintiffs moved to reargue the Court’s Rule 12(b)(6) decision that dismissed the Jersey I complaint, and to amend the Jersey I complaint. (Jersey D.I. 170.) Plaintiffs’ proposed “Jersey II complaint” added new allegations that the dealers and Dentsply violated Section 1 when they engaged in a vertical resale price maintenance agreement to fix the resale price of artificial teeth. On August 27, 2002, the district court denied plaintiffs’ motion to reargue and also denied plaintiffs’ request for leave to amend the complaint to add vertical price-fixing claims as futile. In September 2005, the Third Circuit affirmed the district court’s decisions that dismissed the damages claims against Dentsply on the grounds that Illinois Brick precluded the Hess and Jersey Dental plaintiffs from obtaining money damages for their exclusive dealing claims. The Third Circuit did, however, hold that plaintiffs in the Jersey Dental matter had standing under Illinois Brick to seek damages for their vertical price-fixing claim.

Meanwhile, in the DOJ litigation, the district court entered judgment in Dentsply’s favor on all counts after a five-week bench trial. In February 2005, the Third Circuit reversed the district court’s holding on the § 2 claim, which was the only claim that the government appealed.

Emboldened by the Third Circuit’s holding that Dentsply had unlawfully maintained a monopoly through its exclusive dealing policy, the Hess plaintiffs moved for summary judgment on the ground that the Third Circuit’s decision in the government litigation collaterally estopped Dentsply from challenging their § 2 claim. Dentsply opposed on the ground that (1) the Third Circuit’s holding did not collaterally estop it from contesting that neither dealers nor laboratories suffered injury from its exclusive dealing policy and (2) plaintiffs could not obtain injunctive relief because such relief would duplicate the relief that the government had already obtained in the DOJ litigation. Simultaneously, the Jersey Dental plaintiffs amended their complaint (the “Jersey III complaint”) to include new allegations that Dentsply and its dealers conspired to monopolize the artificial tooth market and entered into a group boycott of Dentsply’s competitors. Because of the Third Circuit’s ruling, plaintiffs sought only injunctive relief against Dentsply, while seeking damages from Dentsply’s dealers. Defendants moved to dismiss the Jersey III complaint on the grounds that plaintiffs (1) failed to state a § 2 claim, and (2) could not obtain injunctive relief because it was duplicative of injunctive relief that the DOJ had already obtained.

On September 26, 2007, in a consolidated opinion and order, Chief Judge Sue Robinson of the United States District Court for the District of Delaware denied plaintiffs’ motion for summary judgment in Hess and granted defendants’ motion to dismiss the Jersey IIIcomplaint. In the Hess case, the court agreed with Dentsply that the Third Circuit’s February 24, 2005 opinion in the government litigation did not collaterally estop Dentsply from contesting whether plaintiffs suffered antitrust injury because the issue of whether the Hess plaintiffs suffered antitrust injury was not litigated in the government action. The court also held that plaintiffs could not obtain injunctive relief because such relief was duplicative of injunctive relief that the government had already obtained.

The Court held in Jersey III that the plaintiffs could not obtain damages for their Section 2 exclusive dealing claims because (1) the Third Circuit’s decision in the Hess appeal precluded plaintiffs from recovering damages from the dealers absent allegations that Dentsply and its dealers fell within Illinois Brick’s co-conspirator exception, and (2) the Jersey III complaint did not plausibly allege that the dealers could have shared Dentsply’s intent to monopolize the artificial tooth market. The Court also held that the plaintiffs could not obtain injunctive relief against Dentsply because such relief was duplicative of the injunction entered in the government action.

Lessons From Dentsply—Using Substantive Antitrust Law To Prevent Free Riding

The Dentsply litigation illustrates three strategies that may be effective at the pleading stage to preclude indirect purchasers from converting a finding of liability in a government lawsuit into their own victory.

First, regardless of what happens in the government litigation, a defendant should hold the plaintiffs to their burden to plead and prove antitrust injury. In the DOJ case, the Third Circuit had held that Dealer Criterion 6 enabled Dentsply to maintain a monopoly in violation of § 2 of the Sherman Act. The Hessplaintiffs sought to leverage that holding into a finding of § 2 liability against Dentsply. While in other contexts the doctrine of collateral estoppel might have doomed a defendant, the antitrust injury requirement precluded the Hess plaintiffs from securing such an easy victory. This is because the Third Circuit’s holding did nothing to satisfy the Hess’ plaintiffs’ burden to plead and demonstrate antitrust injury, an essential element of liability in an antitrust case.

Second, defendants should aggressively resist plaintiffs’ claims in tag-along suits that they are entitled to injunctive relief. Because most judges are reluctant to waste the parties’ and the court’s limited time and resources, they may deny relief that merely parallels an injunction that the government already obtained. Illinois Brick permits indirect purchasers to sue for injunctive relief, and the plaintiffs in both the Hess and Jersey Dental cases used the prospect of “more” injunctive relief as a vehicle to keep their hopes of recovering attorney’s fees alive as the prevailing party. But Illinois Brick does not entitle any plaintiffs to duplicative relief. Although the plaintiffs modified their requested relief so that they could characterize it as both different from and more punitive than the injunction the government obtained, the Dentsply court was not so easily fooled. Thus, even if a plaintiff contends that a government injunction is insufficient, a defendant should force the plaintiff to explain why additional measures are needed. And, in so arguing, the defendant should not hesitate to point out to the court that the plaintiff’s modifications to the government injunction are, in effect, a fee petition in disguise.

Third, a motionto dismiss can be an effective weapon to prevent plaintiffs from succeeding on their claim for injunctive relief. In Dentsply, the court dismissed the Jerseyplaintiffs’ § 2 claim against the dealers and Dentsply on the ground that plaintiffs’ factual allegations did not satisfy the specific intent requirement of their conspiracy to monopolize claim. The Supreme Court’s recent decision in Twombly increases the prospect for such success in follow-on litigation because the Court held that (1) a plaintiff must plead a “plausible” conspiracy to state an antitrust claim and (2) the application of Twombly’s “plausibility” standard should turn on substantive antitrust principles. After Twombly, then, to state a claim, a plaintiff must plead facts that, if proven, would entitle it to relief under substantive antitrust law. This holding increases the likelihood that defendants will be able to obtain victories in tag-along litigation because the fact that the government has filed suit or obtained relief is not itself sufficient to prove private liability under the federal antitrust laws. Thus, as in Dentsply, a finding of liability in a government suit should not preclude a defendant from filing a motion to dismiss private antitrust claims.

In sum, although defending against tag-along litigation after the government obtains success on the same or similar claims can seem daunting, substantive antitrust law provides several weapons to obtain dismissal on the pleadings.

Amanda P. Reeves and Eric J. McCarthy


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