The opinion of the court was delivered by: FEINBERG
Plaintiff utility companies object to the interrogatories of defendant electrical equipment manufacturers and thereby question the validity of the so-called passing-on doctrine in treble damage antitrust suits. Under that doctrine, a purchaser from one who has violated the antitrust laws cannot recover an unlawful overcharge to the extent that the purchaser took into account his increased cost in setting the price to his own customers.
These cases are among the large number of private actions that followed the criminal and civil injunctive proceedings brought by the United States Government against electrical equipment manufacturers in 1960 in the Eastern District of Pennsylvania. The complaints allege a combination and conspiracy by defendant manufacturers to fix prices and rig bids with respect to the sale of specified electrical equipment. Plaintiffs seek to recover treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15, in the amount of the difference between prices paid for the electrical equipment bought from defendants and the prices that would have prevailed had there been no conspiracy.
As part of a program of national discovery, defendants General Electric Company, Westinghouse Electric Corporation, and Allis-Chalmers Manufacturing Company have served plaintiffs in this District in one of the product lines involved in these suits
with twenty-three interrogatories. These are directed to the economic structure of plaintiffs' companies, with particular emphasis upon rate bases and rates of return thereon. Defendants maintain that the interrogatories are relevant to the issue of damages. Their theory is that the amount of recovery should be reduced to the extent that plaintiffs have passed on any overcharge to their customers by using the cost of electrical equipment 'as a determinant of the prices (rates) charged' for their product (electricity).
This is the manner in which excess costs would have been passed on since plaintiffs apparently purchased the equipment not for resale, but only for use in generating electricity.
Plaintiffs maintain that they are entitled to recover from defendants the entire amount of an illegal overcharge regardless of whether any such increased costs were passed on to consumers, and that any evidence of such passing on would be immaterial and inadmissible as a matter of law.
For purposes of this motion only, it will be assumed that plaintiffs were overcharged as a result of price fixing and that they passed on all or part of their increased costs.
Traditionally, a party suing to recover treble damages for a violation of the antitrust laws has been permitted to recover for: (1) loss of profits that could have been earned in a freely competitive market;
(2) increased costs of business actually transacted;
or (3) decrease in value of investment in tangible or intangible property.
It is said that no two categories of injury are necessarily mutually exclusive and that recovery may be had for all three types of damages provided sufficient evidence is introduced to support each claim.
It is important to recognize that, as a practical matter, recognition of the passing-on doctrine is tantamount to a repudiation of the 'increased costs' measure of damages and a limitation of the extent of recovery primarily to lost profits. See Hale & Hale, Market Power: Size and Shape Under the Sherman Act 387 (1958); Note, 61 Yale L.J. 1010, 1023 (1952).
A clear distinction between the increased costs theory of damages in an antitrust case and the loss of profits theory was made in Straus v. Victor Talking Mach. Co., 297 F. 791 (2 Cir. 1924). In that case, plaintiffs were unable to obtain phonograph records at dealers' discounts because they had refused to participate in restrictive licensing arrangements and were compelled to purchase records at retail prices in order to meet the demands of their customers. In a treble damage action, plaintiffs were permitted to recover the amount of 'the difference between the established reasonable price and the amounts plaintiffs were compelled to pay * * *.' 297 F. at 803. The Court of Appeals for this Circuit made clear that when damages are sought under the overcharge theory, it is irrelevant whether plaintiff's profit margin increased or decreased during the period of the defendant's unlawful activity (Ibid.):
'Plaintiffs contend, and rightly, that they were not forced to sue for damages for loss of profits, and thus run the risk of no recovery, because, plainly, the restrictive arrangement prior to May 1, 1914, furnished no standard of comparison with sales made, or profits increased or lost, by plaintiffs during the period thereafter, when they could sell as they pleased. They contended for a rule of damage which seeks the proximate cause of damage and the proximate result occasioned by that cause. * * * Whether * * * plaintiffs sold to their customers at a profit or loss becomes immaterial in this case. They were entitled to goods at the reasonable price thereof. Through no legal fault of theirs, but because of defendants' wrong, they were deprived of their right * * *. It is thus unnecessary to 'go beyond' this 'first step." (Emphasis added.)
Although the Court did not refer to the doctrine of passing-on, as such, the clear import of its holding is that passing on of an illegal overcharge is no bar to recovery.
The Court of Appeals cited as authority for its conclusions two Supreme Court cases upon which plaintiffs in this case principally rely. Chattanooga Foundry & Pipe Works v. City of Atlanta, 203 U.S. 390, 27 S. Ct. 65, 51 L. Ed. 241 (1906) and Southern Pac. Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 38 S. Ct. 186, 62 L. Ed. 451 (1918).
Chattanooga was a suit by the City of Atlanta to recover overcharges in the purchase of iron water pipe used in its waterworks. The Supreme Court affirmed a verdict 'for the difference between the price paid and the market or fair price that the city would have had to pay' in the absence of the unlawful combination. 203 U.S. at 396, 27 S. Ct. at 66. The Court held, in an opinion written by Mr. Justice Holmes, that the City had been injured in its property within the meaning of Section 7 of the Sherman Act
(203 U.S. at 396, 27 S. Ct. at 66):
'(The City of Atlanta) was injured in its property, at least, if not in its business of furnishing water, by being led to pay more than the worth of the pipe. A person whose property is diminished by a payment of money wrongfully induced is injured in his property.'
The situation in Chattanooga was substantially identical to the one before this Court. Both the present plaintiffs and the City of Atlanta operated utilities and sold their services to the public. Both were overcharged in the purchase of equipment necessary to produce their product (electricity and water, respectively). The Supreme Court in Chattanooga held that a verdict for the City in the amount of the overcharge was proper on proof of the illegal conspiracy and the overcharge.
Defendants attempt to minimize the effect of Chattanooga, pointing out that the passing-on issue was not there briefed or argued.
However, Mr. Justice Holmes later made explicit what was implicit in his opinion in Chattanooga. Twelve years later, the Supreme Court specifically rejected the passing-on defense in Darnell-Taenzer. This was a suit brought to recover freight rate overcharges from defendant railroads under the Interstate Commerce Act. The trial judge initially had directed a verdict for defendants on the ground that plaintiffs had not been damaged. The judgment was reversed by the Court of Appeals for the Sixth Circuit
and remanded for a new trial, at which the jury was instructed that if they found the rate charged unreasonable, and that prescribed by the Interstate Commerce Commission reasonable, they should find for the plaintiffs in accordance with the award made by the Commission. The award was in the amount of the difference between the freight rate to which plaintiffs were entitled and the rate they were compelled to pay.
The jury found for plaintiffs and the judgment was affirmed by the Court of Appeals.
In upholding the jury's verdict, the Supreme Court stated, again per Mr. Justice Holmes (245 U.S. at 533-534, 38 S. Ct. at 186):
'The only question before us is that at which we have hinted: whether the fact that the plaintiffs were able to pass on the damage that they sustained in the first instance by paying the unreasonable charge, and to collect that amount from the purchasers, prevents their recovering the overpayment from the carriers. The answer is not difficult. The general tendency of the law, in regard to damages at least, is not to go beyond the first step. As it does not attribute remote consequences to a defendant so it holds him liable if proximately the plaintiff has suffered a loss. The plaintiffs suffered losses to the amount of the verdict when they paid. Their claim accrued at once in the theory of the law and it does not inquire into later events. * * * The carrier ought not to be allowed to retain his illegal profit, and the only one who can take it from him is the one that alone was in relation with him, and from whom the carrier took the sum. * * * Behind the technical mode of statement is the consideration well emphasized by the Interstate Commerce Commission, of the endlessness and futility of the effort to follow every transaction to its ultimate result. * * * Probably in the end the public pays the damages in most cases of compensated torts.'
Both Section 4 of the Clayton Act, 15 U.S.C. § 15,
under which plaintiffs sue here, and the relevant sections of the Interstate Commerce Act, 49 U.S.C. § 8 and 16(2),
involved in Darnell-Taenzer, allow recovery only for 'damages' sustained as a result of the violation. The language of the Court in Darnell-Taenzer was not confined to the measure of recovery under the Interstate Commerce Act but was extremely broad. The Court referred to 'the general tendency of the law, in regard to damages,' and, again in general terms, to the fact that 'probably in the end the public pays the damages in most cases of compensated torts.' 245 U.S. at 533-534, 38 S. Ct. at 186. It also indicated that the general rule which prevents attributing 'remote consequences' to a defendant
has as its corollary the proposition that a defendant will be held liable to a plaintiff which it causes to suffer a proximate loss; otherwise a defendant could escape civil liability altogether. Id., 245 U.S. at 534, 38 S. Ct. at 186. If passing on of costs did not prevent plaintiffs from recovering the overcharge in Darnell-Taenzer, this Court perceives no reason why it should prevent plaintiffs from recovering here. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 185 F.Supp. 826 (M.D.Pa.), aff'd per curiam, 281 F.2d 481 (3 Cir.), cert. denied, 364 U.S. 901, 81 S. Ct. 234, 5 L. Ed. 2d 194 (1960); cf. Central States Elec. Co. v. City of Muscatine, 324 U.S. 138, 145, 65 S. Ct. 565, 89 L. Ed. 801 (1945), stating in dictum that if a natural gas distribution utility sued a natural gas producer utility to recover excessive rates, the producer could not defend on the ground that the distributor had passed on the excess to its consumers, and citing Darnell-Taenzer.
Defendants seek to distinguish Darnell-Taenzer on the ground that a reparation order of the Interstate Commerce Commission is enforced without 'any' factual inquiry into the 'pecuniary loss' of the plaintiff, whereas the right of recovery under the Clayton Act is dependent upon specific proof of pecuniary loss.
This alleged distinction rests upon the erroneous premise that the Supreme Court in Darnell-Taenzer enforced the Commission's order without requiring any showing of the pecuniary loss suffered by plaintiffs. In fact, Mr. Justice Holmes in Darnell-Taenzer specifically stated that 'the plaintiffs suffered losses to the amount of the verdict when they paid (the overcharge),' 245 U.S. at 534, 38 S. Ct. at 186, and the Circuit Court had held that 'the amounts awarded represent(ed) the actual pecuniary loss of the respective plaintiffs.' 221 F. 890, 892 (6 Cir. 1915). (Emphasis added.) If by their assertion that proof of pecuniary loss is required under the Clayton Act, defendants mean to say that plaintiffs must show loss of profits, then their statement merely reformulates the basic issue presented here, that is, whether plaintiffs may use increased costs as a separate and distinct measure of damages without regard to gain or loss of revenue.
The real significance of Darnell-Taenzer is ...