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We're Passing it Along: One Court’s Treatment of the Upstream and Downstream Pass-On in an Indirect Purchaser Case

In summer 2013, Best Buy faced off against Toshiba and HannStar in a price-fixing trial that was part of the multi-district Flat-Panel litigation, TFT-LCD (Flat-Panel) Antitrust Litigation, 07 MD. 01827 (N.D. Cal.).  Although there has been a lot of press about Best Buy’s inability to collect its $22 million verdict due to set offs, and the parties’ protracted battle over attorneys’ fees, there has been little to no coverage of the court’s treatment of the passing on of the overcharge under applicable Minnesota law.

Most antitrust practitioners know that under the twin pillars of Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968) and Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), the Supreme Court established the federal rule governing treatment of pass-on claims and defenses.  In most circumstances, indirect purchasers, i.e., those that do not buy directly from the alleged price-fixing conspirators, cannot recover under the Sherman Act.  Correspondingly, under most circumstances the alleged price fixers are barred from claiming that the direct purchasers were not injured on the theory that the illegal overcharge was passed onto downstream purchasers.

These dual principles are not necessarily true under state law.  Whether an indirect purchaser can recover and whether a manufacturer can assert a pass-on defense is a state-specific inquiry.  Anyone who has looked into these issues will know that there is often little to no case law on these topics.

And that’s where the Flat-Panel litigation comes in.  The court reached both of these issues under Minnesota law in its jury instructions.

Best Buy had sued alleged co-conspirators Toshiba and HannStar in its capacities as a direct and indirect purchaser.  For Best Buy’s indirect purchaser claims, the jury had to resolve two questions with respect to the pass-on.  First, was the overcharge passed on from the direct purchasers to Best Buy?  This is often referred to as the upstream pass-on.  Second, was the overcharge passed on from Best Buy to its customers?  This is often referred to as the downstream pass-on or the pass-on defense.  For Best Buy to prevail on its claims, the jury would need to find that there was an upstream pass-on, but there was not a complete downstream pass-on, i.e., that retailer Best Buy incurred at least some of the economic loss stemming from the alleged price-fixing overcharge.

The parties submitted competing proposed jury instructions on the issue of the pass-on.  Best Buy’s proposed instruction essentially ignored the upstream pass-on and claimed that Defendants bore the burden of establishing that a downstream pass-on existed.

For their part, Defendants argued that Best Buy had the burden with respect to the upstream and downstream pass-on.  Defendants’ most interesting argument was that Best Buy needed to show that there was not a downstream pass-on because the Minnesota statute at issue (which is similar to those in other states with indirect-purchaser statutes) only allowed plaintiffs to recover “actual damages sustained.”

The Northern District of California adopted neither side’s position in full.  With respect to the upstream pass-on, the Court instructed the jury that Best Buy “must initially show that the overcharges were passed through to the Plaintiffs.”  (Transcript of Record at 3404–3405, In re: TFT-LCD (Flat-Panel) Antitrust Litig., (2014) (No. 8558).)  As to the downstream pass-on, the Court sided with Best Buy, explaining that “the Defendants have the burden to prove by a preponderance of the evidence that the Plaintiffs passed-on some or all of an alleged overcharge to their customers.”  (Id.)

Armed with these instructions, the jury declined to award Best Buy any damages with respect to its “indirect purchases only.”  (Although the jury awarded Best Buy damages based on its “direct purchases only,” the court ultimately ruled that Best Buy could not collect this judgment due to set-offs.)

We’ll have to see whether the Ninth Circuit agrees with the District Court’s treatment of the pass-on.  One of the issues Best Buy raised on appeal was whether Defendants should have been permitted to assert the pass-on defense under Minnesota law.