Business & Practice

Class Settlement Flaw Exposed in Case Over Smart Phone Batteries

April 17, 2018, 10:48 AM

U.S. consumers in about half the states are precluded from sharing the proceeds of certain class action antitrust settlements, and some competition lawyers — including the Justice Department’s antitrust chief Makan Delrahim — think that needs to change.

For example, a hypothetical consumer in Louisiana who overpaid for a laptop because of an illegal battery cartel can’t sue for damages because she didn’t buy the battery directly from a manufacturer that fixed the prices. All the consumer did was purchase a computer that contains the high-priced battery from a retailer, and federal antitrust law doesn’t allow “indirect” buyers like her sue for antitrust violations. Many state laws follow that federal rule.

But other states, such as California, have stepped in to provide consumers with remedy for that situation and allow “indirect purchasers” to sue for antitrust damages. Twenty-seven states have statutes that circumvent the federal law’s prohibition on damages for buyers who are further down a commercial chain of transactions but likely were overcharged by a cartel’s price fixing.

A possible vehicle for federal courts to revisit the inconsistent treatment comes in an appeal to the U.S. Court of Appeals for the Ninth Circuit by a class action advocacy group. The Center for Class Action Fairness is seeking to undo an October 2017 settlement in In Re: Lithium Ion Batteries Antitrust Litigation, a multi-district lawsuit on a price-fixing cartel involving sellers of the power source in most smartphones, laptops, and cameras.

The advocacy group, part of the libertarian Competitive Enterprise Institute (CEI), alleges that the settlement unfairly sweeps in all U.S. consumers who bought a device containing an overpriced battery because it defines the settlement class as “nationwide.” But only residents from the 27 states that permit those claims have a right to damages, CEI says.

Michael Bednarz contends that letting consumers from other states into the settlement dilutes the compensation available to indirect purchasers whose states do protect their right to sue. The judge’s settlement certification unfairly distributes the $44.95 million pot among millions of people who couldn’t have brought a lawsuit for damages in the first place, the complaint says.

“Class settlements should vindicate the rights of consumers,” Ted Frank, CEI’s director of litigation, told Bloomberg Law. “To the extent that different states grant those consumers different rights, you can’t just throw them into the same pot and treat them the same.”

‘Perverse Incentive’

There is a growing debate about whether it makes sense to leave the rights of indirect buyers to state law. Given that many class actions brought by indirect purchasers wind up in federal court, often in big consolidated federal actions like the lithium ion battery case, federal judges are deciding the purchasers’ rights anyway under state law. The patchwork of state laws means that plaintiffs’ recoveries and rights can vary sharply when many of them will have been subject to precisely the same harms from a cartel.

Antitrust lawyers say the disparity creates both legal problems and an imbalance of consumer rights. Delrahim said at the ABA meeting that he hopes the Supreme Court can revisit the issue. “Not allowing indirect purchasers under federal law may no longer be valid. It makes no sense that half the country can bring actions for damages that has been passed on to them through antitrust violations, but the other half cannot.”

Two Supreme Court decisions — 1977’s Illinois Brick v. Illinois and 1968’s Hanover Shoe Inc. v. United Shoe Machinery Corp. — stripped independent purchasers of the right to sue. The justices at the time were concerned about double recovery, in which buyers up and down a commerce stream received multiple damages for the same violation. Since then, Delrahim said, the law has created a “windfall” for direct buyers like wholesalers or big retailers who can pass overcharges onto consumers and then collect damages for being subjected to an illegal cartel.

“It’s created a perverse incentive for a lot of reasons,” he said. Now, with better tools to track passed-on overcharges and with class actions frequently drawn together into giant federal cases, it doesn’t make sense to forbid indirect purchasers from suing under federal law.

Vehicle Needed

The Supreme Court needs a vehicle to focus its attention on the issue. Because indirect purchaser cases usually settle, Delrahim said there hasn’t been an opportunity to litigate the question since the problems with the indirect purchaser ban have become obvious.

Bednarz’s appeal to the Ninth Circuit doesn’t speak to the disparity between state consumers. Instead, it focuses on the rights of class members who have a viable claim. But the Supreme Court can consider related issues when it takes a case. The difficulty thus far has been in finding a case that presents the right issues all the way through the appellate process. A dispute about settlement may be the only way for the justices to take a fresh look at the law on indirect purchasers.

CEI is prepared to go the distance, Frank said. “We aren’t going to be bought out” on the appeal, he said. The case is Indirect Purchaser Plaintiffs v. Michael Frank Bednarz, 9th Cir., No. 17-17367, 11/24/17.

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