On August 25, 2008, a California court of appeals held in Clayworth v. Pfizer, Inc. that defendants in a price-fixing case under state law under California state law can assert a defense based on the fact that the plaintiffs “passed-on” any unlawful overcharge to their customers. The decision, which is contrary to federal precedent (see Hanover Shoe v. United Shoe Mach. Corp.. 392 U.S. 481 (1968)) reduces the chance of duplicative recoveries in California as a result of that state’s law permitting “indirect purchasers” to sue for damages in price-fixing cases (which is generally not permitted under federal law – see Illinois Brick v. Illinois, 431 U.S. 720 (1977)).
The case was brought by retail pharmacies under California law alleging that several pharmaceutical companies engaged in unlawful price fixing. The defendants asserted that plaintiffs could not prove damages because any supposed “unlawful overcharge” imposed by defendants on the plaintiffs had been passed-on by plaintiffs to plaintiffs’ customers. Indeed, discovery had revealed that the entirety of any overcharge had been passed-on to customers by plaintiffs, and that plaintiffs had suffered no actual damages from the challenged conduct.
The plaintiffs contended that even though Illinois Brick did not apply in California, Hanover Shoe should, and the pass-on defense should not be permitted. Plaintiffs contended that this would further the state’s goals of deterring antitrust violations to the greatest extent possible. The court, however, agreed with the defendants that California law was based on providing damages for “actual damages,” and that this principle would be violated if plaintiffs were permitted to recover for injuries that they ultimately passed on to others. Additionally, the court recognized that failing to provide for a pass-on defense would result in an imbalance whereby defendants could not avoid paying damages to plaintiffs for overcharges that the plaintiffs had passed-on to their customers, but then those customers could use that passed-on overcharge as a basis for their own independent claims. The decision brings some (limited) relief to antitrust defendants concerned that they could be subjected to multiple and duplicative recoveries in price-fixing cases.