California rejects pass-on defense for antitrust conspirators

In Hanover Shoe v. United Shoe Mach., 392 U.S. 481 (1968) (Hanover Shoe), the United States Supreme Court held that antitrust violators generally could not assert as a defense that any illegal overcharges had been passed on by a suing direct purchaser to indirect purchasers.  In Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (Illinois Brick), the United States Supreme Court concluded that only direct purchasers, not indirect purchasers, could sue for price fixing.  In 1978, in direct response to Illinois Brick, the California Legislature amended the state's Cartwright Act (Bus. & Prof. Code, § 16700 et seq.) to provide that, contrary to federal law, indirect purchasers as well as direct purchasers could sue under California law (§ 16750, subd. (a)).  However, until July 12, 2010, California had not considered the other question: whether a pass-on defense was available.

In Clayworth v. Pfizer, Inc. (July 12, 2010), the California Supreme Court considered that unresolved question, holding that "under the Cartwright Act, as under federal law, generally no pass-on defense is permitted."  Slip op., at 2.  The Supreme Court also examined whether, under the UCL, the pharmacies alleging price fixing could state a claim.  The trial court and Court of Appeal concluded that the pharmacies lacked standing and were ineligible for relief.  The Supreme Court reversed:

While Manufacturers argue that ultimately Pharmacies suffered no compensable loss because they were able to mitigate fully any injury by passing on the overcharges, this argument conflates the issue of standing with the issue of the remedies to which a party may be entitled. That a party may ultimately be unable to prove a right to damages (or, here, restitution) does not demonstrate that it lacks standing to argue for its entitlement to them. (See Southern Pac. Co. v. Darnell-Taenzer Co., supra, 245 U.S. at p. 534 [“The plaintiffs suffered losses . . . when they [over]paid. Their claim accrued at once in the theory of the law and it does not inquire into later events.”]; Adams v. Mills, supra, 286 U.S. at p. 407 [“In contemplation of law the claim for damages arose at the time the extra charge was paid,” notwithstanding any subsequent reimbursement].) The doctrine of mitigation, where it applies, is a limitation on liability for damages, not a basis for extinguishing standing.

Slip op., at 39.  Turning to the separate issue of remedies, the Supreme Court said:

The Court of Appeal affirmed summary judgment on a second, overlapping ground: Pharmacies were not entitled to any remedy. Pharmacies' complaint seeks two forms of relief: restitution and an injunction. We need consider only the latter. If a party has standing under section 17204 (as Pharmacies do here), it may seek injunctive relief under section 17203. (See § 17204 [authorizing without limitation “[a]ctions for relief pursuant to this chapter” to be brought by parties who satisfy the provision‟s standing requirement].) Manufacturers‟ papers identify no obstacle that would preclude Pharmacies from obtaining injunctive relief if they establish Manufacturers were engaged in an unfair business practice.

Slip op., at 40.  "Section 17203 makes injunctive relief 'the primary form of relief available under the UCL,' while restitution is merely 'ancillary.' (In re Tobacco II Cases (2009) 46 Cal.4th 298, 319.)"  Slip op., at 41.

While the discussion about the pass-on defense issue is much longer, it leads inevitably to the unanimous conclusion that California would apply the federal approach of denying a pass-on defense.  Thus, unless you practice in that specific area, the discussion would not be interesting, despite the thoroughness.  There are also some brief comments about the respective burdens on summary judgment.  The decision is worth scanning for just the UCL and summary judgment remarks.