Background.

In 1979, in its seminal opinion in Mid-West Paper Products v. Continental Group, Inc.,[1] the Third Circuit Court of Appeals rejected the concept of “umbrella damages” in an antitrust suit by dismissing a suit by a supermarket chain against manufacturers of consumer bags who allegedly fixed prices for such products. The plaintiff lacked standing, according to the Third Circuit, because it had purchased the allegedly price-fixed bags from a non-conspiring competitor of the alleged wrong doers that had raised its prices for the bags in the aftermath of the alleged price fix.

The Processed Egg Products Case.

In January of this year, in In re. Egg Products Antitrust Litigation,[2] the Third Circuit limited its prohibition of “umbrella damages” by ruling that Mid-West Paper Products did not require dismissal of a suit by food manufacturers against suppliers of egg products. The defendants, who were vertically integrated suppliers of eggs and products made from such eggs, allegedly participated in a conspiracy to reduce the supply of eggs for the purpose of increasing the price of both the eggs and egg products containing such eggs. Defendants claimed the food manufacturers lacked standing because the egg products they purchased from the defendants to a large extent were supplied to the defendants by non-conspiring suppliers. The food manufacturer plaintiffs claimed that all egg product prices were driven up by the egg price-fixing conspiracy, so the source of the eggs that went into the egg products they purchased from the defendants was not relevant to the damages plaintiffs allegedly incurred.[3]

The district court had dismissed the suit in part on the basis of the prohibition of “umbrella damages” established in Mid-West Paper. The Third Circuit declared that the reasoning of that decision did not apply, reversed dismissal and remanded the suit for further proceedings, while stressing that it was not deciding any issues on the merits.

The Third Circuit’s Reasoning.

The Third Circuit provided a diagram of the plaintiffs’ claims, as follows:

As shown in the diagram, the egg products the food manufacturer plaintiffs purchased contained some combination of internal eggs supplied directly by the vertically integrated defendants, as well as products supplied indirectly by non-conspirator egg producers. For this reason, the Third Circuit concluded that its Mid-West Paper Products prohibition of “umbrella damages” did not apply. Unlike the grocer in that case, who had purchased the products at issue from a non-conspirator, the egg product purchaser plaintiffs had a direct relationship with the egg product manufacturer co-conspirators it named as defendants. “The purchasers’ theory of injury is different, and simpler than the claims of the Mid-West Paper Products plaintiff,” the Third Circuit panel declared. “The purchasers are suing [only] the conspiring parties from whom they bought the price-fixed product. [They] were directly injured by wrongful conduct undertaken by their suppliers.”[4]

The defendants had argued alternatively that the suit also was dismissible under the rule established in 1977 in Illinois Brick Co. v. Illinois,[5] generally prohibiting suits under the Sherman Act that are brought by indirect purchasers of antitrust wrongdoers. According to the defendants, the food product manufacturers lacked standing under Illinois Brick because many of the egg products they purchased contained eggs supplied by non-conspirators. Here too, the Third Circuit reversed dismissal on that ground that the defendants were accused of agreeing to reduce the supply of all shell eggs to achieve price increases of both shell eggs and egg products derived from those eggs. Because the plaintiffs had purchased the egg products directly from alleged wrongdoers, the risks of multiple liability and complex damage allocations underlying the Illinois Brick decision did not apply.[6]

The Third Circuit panel then pointed out that the antitrust standing factors set forth by the Supreme Court in 1983 in Associated General Contractors v. California State Council of Carpenters,[7] also supported its decision allowing the plaintiffs to seek damages with respect to all of their egg product purchases, regardless of the identity of the original egg supplier. Specifically, the plaintiffs had alleged: (i) a causal relationship between the claimed antitrust violations and their injury, i.e., the defendants had conspiratorially raised egg prices with the intention of raising the resulting egg product prices; (ii) overpayments, which are the type of injury that the rule against price fixing is intended to redress; (iii) injury that flowed directly to them from the defendants; (iv) more direct victims of the alleged conspiracy did not exist; and (v) there was no risk of duplicative damages or complex damage apportionment issues. Accordingly, plaintiffs had standing to pursue damages against the defendants as to all their egg product purchases.[8]

Conclusion.

The Third Circuit’s Egg Products Antitrust Litigation decision shows that courts can define what constitutes allegedly price-fixed products broadly in order to find direct purchaser status, particularly when there appears to be no better defined “direct” victims of a price-fixing scheme. In particular, when suppliers agree to limit production for the purpose of increasing the price of a product as well as downstream products containing the product as an input, they risk potential liability for the resulting price increases in the downstream products. Of more significance, in the Third Circuit at least, recovery from the conspirators can include damages from price increases charged by non-conspirators who raised their prices because the price-fixed market would bear it.[9]