JAMES CLAYWORTH v. PFIZER, INC

Filed 7/25/08

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FIRST APPELLATE DISTRICT

DIVISION TWO

Story Continued From Part II ..

Defendants respond with their own numerous excerpts from the legislative history, including from the Senate Judiciary Committee analysis; from the bill digest of the Senate Committee on the Judiciary; from the history of AB 3222 in the Senate Committee on the Judiciary; from a memorandum of the Senate Democratic Caucus; and from a bill analysis for the Governors Office. From that, defendants urge that the sole purpose of the amendment was to ensure that the California courts did not apply the holding of [Illinois Brick]that indirect purchasers could not sue under the federal antitrust lawsto the Cartwright Act.

We agree with defendants, and conclude that these passages show that passage of AB 3222 was intended simply to codify standing for indirect purchasers under the Cartwright Act, rather than as an adoption of the Illinois Brick dissent in its entirety. Indeed, and as defendants point out, if Hanover Shoe automatically and tacitly became California law in 1968 . . . then Illinois Bricks rule against indirect purchaser suits likewise became the law as soon as the Supreme Court issued its decision in that case. But if that were so, the 1978 Amendment could not have been declaratory of existing law as the Legislature stated, and instead would have altered existing law by overruling Illinois Brick in California.

We end our discussion of legislative history with the observation that, however vigorous plaintiffs presentation, it necessarily concedes that any adoption of Hanover Shoe was by implication. As plaintiffs candidly put it at one point, the legislative history manifests a tacit approval of the rule of Hanover Shoe. Such concession is appropriate, as one thing is clear: not once in the numerous pages of legislative history on which plaintiffs rely is Hanover Shoe even mentioned. Such fact militates strongly against plaintiffs, as we recently observed in State Building & Construction Trades Council of California v. Duncan (2008) 162 Cal.App. 4th 289, 323: At the federal level, the United States Supreme Court has observed that  Congress . . . does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisionsit does not, one might say, hide elephants in mouseholes. (Whitman v. AmericanTruckingAssns. (2001) 531 U.S. 457, 468; see FDA v. Brown & Williamson Tobacco Corp. (2000) 529 U.S. 120, 160 ([W]e are confident that Congress could not have intended to delegate a decision of such economic and political significance . . . in so cryptic a fashion). (Gonzales v. Oregon (2006) 546 U.S. 243, 267.) California courts have adopted a similar skepticism. (Garcia v. McCutchen (1997) 16 Cal.4th 469, 482; In re Christian S. (1994) 7 Cal.4th 768, 782; Ailanto Properties, Inc. v. City of Half Moon Bay (2006) 142 Cal.App.4th 572, 589; Pleasant Hill Bayshore Disposal, Inc. v. Chip-It Recycling, Inc. (2001) 91 Cal.App.4th 678, 680, fn. 7.)

Finally, plaintiffs rely on Union Carbide, supra, 36 Cal.3d 15 to support their position that the 1978 amendment reflected the Legislatures claimed adoption of the Illinois Brick dissenting opinion in its entirety, including recognition of Hanover Shoe. Such reliance is misplaced.

Plaintiffs in Union Carbide were indirect purchasers of industrial gas and alleged that defendants, producers of industrial gas, conspired to fix prices of the gas, causing plaintiffs to pay more for it than they would have paid in the absence of the conspiracy. As pertinent here, defendants demurred to the complaint, claiming a defect of parties (Code Civ. Proc., 430.10, subd. (d); see 430.30, subd. (a)), and moved to dismiss under section 389 for absence of indispensable parties. (Union Carbide, supra, 36 Cal.3d at p. 19, footnote omitted.) The trial court overruled the demurrer and denied the motion.

Defendants petitioned for a writ of mandate ordering plaintiffs to join all persons in the chain of distribution between plaintiffs and defendants, arguing that the absence of such parties subjected them to multiple liability. (Union Carbide, supra, 36 Cal.3d at pp. 18-20.) This argument was driven by the existence of a federal action in Illinois brought by residents of states other than California, who alleged that they purchased gas directly from defendants and were injured by the same price-fixing misconduct at issue in the California case. (Id. at p. 20.) Defendants also expressed concern that other indirect purchasers in California not involved in the suit would create a substantial risk of multiple liability because the intermediate purchasers might independently sue petitioners under the Cartwright Act, contending that they absorbed, rather than passing on to the present plaintiffs, all or part of the overcharges for which plaintiffs now seek damages. (Id. at p. 21.)

The Supreme Court denied the writ, noting that it was raised at the pleading stage, where the operative papers included only plaintiffs complaint, the complaint in the Illinois federal case, and proceedings regarding class certification in the federal case. (Union Carbide, supra, 36 Cal.3d at p. 22.) These papers, according to the Supreme Court, did not demonstrate a substantial risk of multiple liability sufficient to require that additional parties be joined in the complaint (or named therein with sufficient reasons for nonjoinder) as a prerequisite to [defendants] being required to answer the complaint in order to avoid default. (Id. at p. 22.) The Court continued, however: We do not foreclose the possibility that through discovery or other means petitioners may be able later to make a showing of substantial risk of multiple liability that would entitle them to a joinder order. (Id. at p. 24.)

Citing one paragraph in Union Carbidea paragraph of dictum, no lessplaintiffs argue that the Union Carbide court adopted the view of the dissent in Illinois Brick that the risk of multiple liability was remote and that it could in any event be addressed through existing procedural mechanisms [] . . . [] [and] the fact that the Supreme Court recognized that a danger of multiple liability could exist in any situation at all (albeit remote and procedurally ameliorated) necessarily presumes the recognition of Hanover Shoe.[1] Hardly.

To begin with, the issue in Union Carbide was one of joinder, not the pass-on defense. Moreover, the opinion begins by describing precisely which part of the Illinois Brick dissenting opinion the Legislature had approved in the 1978 amendment to the Cartwright Act, that indirect purchasers are persons injured by illegal overcharges passed on to them in the chain of distribution. (36 Cal.3d at p. 20.) Nothing in Union Carbide supports the contention that the 1978 amendment included codification of Hanover Shoewhich, not incidentally, is not even mentioned in the majority opinion.

In sum, the legislative history does not establish the Legislatures intent to adopt Hanover Shoes rejection of the pass-on defense. Nor does the public policy argued by plaintiffs.

b. Public Policy

Plaintiffs vigorously argue that public policy concerns mandate adherence to Hanover Shoe, asserting first that California policy requires that offensive and defensive pass-on be treated differently. This is so, plaintiffs argue, because [a]llowing indirect purchaser plaintiffs to use offensive pass-on adds an additional group of plaintiffs to an existing lawsuit, or it allows an antitrust violation to be redressed. Both of these situations are consistent with Californias strong stated policy in favor of enforcing the antitrust laws. On the other hand, allowing defendants to assert an affirmative pass-on defense runs contrary to that policy, giving rise to the danger that no plaintiff will be able to sue a defendant, even where it has confessed to wrongdoing.

Plaintiffs argument ignores the principle which calls for the equal treatment of claims and defenses, a principle fundamental to the holding in Illinois Brick, supra, 431 U.S. at p. 728: [W]hatever rule is to be adopted regarding pass-on in antitrust damages actions, it must apply equally to plaintiffs and defendants. This rule, called the golden rule by Judge Sabraw, finds support in California law, illustrated, for example, by Civil Code section 1717, which provides that in an action based on a contract containing a provision that affords attorney fees and costs to one party to the action, the prevailing party is entitled to reasonable attorney fees whether or not he or she is specified in the contract.

Plaintiffs second public policy argument is that where the choice is between a windfall to plaintiffs and letting guilty defendants go free, liability must be imposed. As plaintiffs describe it, they were involuntarily subjected to an illegal price-fixing agreement that forced them to pay more than they should have; [defendants] masterminded this unlawful scheme and now seek to escape liability with their illegal profits intact. This result, plaintiffs submit, is expressly forbid[den] by California policy.

Citing nothing in support of the adjective expressly, plaintiffs go on to discuss the deterrent and disgorgement purposes of actions under the Cartwright Act as recognized in Bruno, supra, 127 Cal.App.3d at p. 132. And while deterrence and disgorgement are no doubt significant considerations, plaintiffs argument ignores the fact that compensation is the primary rationale for the allowance of private antitrust lawsuits . . . . (Bruno, supra, 127 Cal.App.3d at p. 132.) In essence, plaintiffs reading of Bruno stands the case on its head, placing the goal of deterrence above that of compensation, despite Brunos express language to the contrary.

Furthermore, overlooked by plaintiffs is the fact that they themselves have already been paid for the claimed overcharges, so any recovery of the overcharges from defendantsnot to mention treble recoverywould be a windfall to plaintiffs. In other words, whether a windfall is to be tolerated apparently turns on who receives it. Finally, we cannot help but note that the only thing that would keep plaintiffs from having damages sustained is that they have passed on all the claimed overcharges. A plaintiff who passed on only some of these charges would maintain damages for which it could state a Cartwright Act claim.

Plaintiffs also argue that recognizing the pass-on defense will deprive plaintiffs of incentive to sue for an antitrust violation, claiming that the availability of the pass-on defense would virtually wipe-out all but end-consumer overcharge cases. Maybe it will deprive plaintiffs of incentive, at least in the circumstances here, but those with damages have incentive indeed. The Cartwright Act itself provides ample incentive, in the form of treble damages, prejudgment interest, attorney fees, and costs. There is, in addition, the parens patriae provision, which authorizes the government to bring enforcement actions on behalf of private individuals who may lack incentive to bring a lawsuit to obtain compensation for their individual injuries.

To the extent that plaintiffs argument intimates that recognition of the pass-on defense may discourage lawsuits by indirect purchasers because of the amount of damages, such is belied empirically. We saw this firsthand in the consolidated class action cases in In re Vitamin Cases (2003) 110 Cal.App.4th 1041, 1046 [class of indirect purchasers of vitamins; total settlement of $80 million]. Other courts have seen it, too, as in In re Microsoft I-V Cases (2006) 135 Cal.App.4th 706, 710 [two classes of indirect acquirers of licenses; billion-dollar settlement agreement] and In re Natural Gas Antitrust Cases (2006) 137 Cal.App.4th 387, 390-391 [seven coordinated class action lawsuits; settlement of $1.55 billion].

For each and all of the above reasons, we conclude that Hanover Shoe is notthe law in California. But even if it were, plaintiffs would still lose, based on Hanover Shoe itself.

5. Even Assuming Hanover Shoe Were the Law in California, the Pass-On Defense Is Available in the Setting Here

As discussed above, Hanover Shoe did not establish an absolute bar to the assertion of the pass-on defense. To the contrary, the Supreme Court recognized that there might be situationsfor instance, when an overcharged buyer has a pre-existing cost-plus contract, thus making it easy to prove that he has not been damagedwhere the considerations requiring that the passing-on defense not be permitted in this case would not be present. (Hanover Shoe, supra, 392 U.S. at p. 494.) This, we conclude, is one such situation.

While the contracts between plaintiffs and their customers were perhaps not true cost-plus contracts, they were certainly analogous. Moreover, and unlike Hanover Shoe, this is not a particularly complicated problem with respect to the pass on issue. (B.W.I. Custom Kitchen, supra, 191 Cal.App.3d 1341, 1352.) While plaintiffs certainly resisted discovery on various grounds, Judge Sabraw specifically found that plaintiffs had not shown it was unduly burdensome or oppressive for them to produce data regarding purchases and sales of drugs, since the information was maintained electronically and could apparently be extracted and compiled with relative ease.

Again, UtiliCorp. is persuasive.As distilled above, the issue there was whether the state could bring a parens patriae action on behalf of the indirect purchasers of natural gas. And one of plaintiffs arguments was that the Court should apply an exception, suggested in Illinois Brick, for actions based upon cost-plus contracts. (UtiliCorp., supra, 497 U.S. at pp. 207-208.) While the Court ultimately declined to do so under the particular facts there, it acknowledged that Illinois Brick and Hanover Shoe allowed for a departure from the rule forbidding the assertion of the pass-on theory in certain circumstances: that it might allow indirect purchasers to sue only when . . . the direct purchaser will bear no portion of the overcharge and otherwise suffer no injury. (UtiliCorp. at p. 218.) This, of course, is the situation here.

The case here is as neat and clear a setting as recognized in Hanover Shoe and in UtiliCorp. where an exception should apply. Indeed, a clearer scenario of a  perfect and provable pass-through, as Justice White described it, is difficult to imagine. The undisputed facts established that plaintiffs passed the alleged overcharges in their entiretyto their customers. They admitted that. They also admitted that they do not seek damages for any other loss, such as lost or delayed sales or any other diminution in business or profits. And all this was apparently easily developed in discovery.

As early as 1978 commentators were noting the significance and utility of the computer in antitrust litigation. (See, for example, Board of Editors of the Federal Judicial Center, Manual for Complex Litigation (1978) 2.717, p. 80.) The technological developments in the ensuing 30 years can hardly be described. Suffice to say that the ease with which computers can gather and distill data has ameliorated, if not eliminated, the nearly insuperable proof problems presented in the circumstancesand at the timeof Hanover Shoe.

In their motion below, plaintiffs acknowledged Hanover Shoes cost-plus contract exception to the rejection of the pass-on defense, but argued that it did not apply here because the contract between plaintiffs and their customers was not a cost-plus contract. As we have said, maybe it is not, but it is the next best thing. In any event, plaintiffs construe Hanover Shoe too narrowly, as the case does not state that a cost-plus contract is the only exception allowing the pass-on defense; rather, a cost-plus contract was an instance of situations where the concerns compelling the rejection of the pass-on defense would not be present. (Hanover Shoe, supra, 392 U.S. at p. 494.) This is such an instance.

6. The UCL Claim Has No Merit

In addition to their Cartwright Act claim, plaintiffs also alleged that defendants committed illegal business practices in violation of the Unfair Competition Law (UCL), (sections 17200, et seq.), which defines unfair competition to include any unlawful, unfair or fraudulent business act or practice. . . . ( 17200.)

Defendants moved for summary adjudication on this claim on two different grounds. First, they argued plaintiffs were not eligible for restitution, the sole monetary remedy available to private plaintiffs under the UCL, because they did not have an ownership interest in any monies defendants wrongfully obtained from the overcharges. Defendants also argued plaintiffs lacked standing under section 17204 because they did not lose money or property as required by that section.

Granting summary adjudication, Judge Sabraw first addressed the standing argument, concluding that plaintiffs lacked standing because they had not lost money or property. Alternatively, he concluded that the court could not award monetary relief under section 17203 because [p]laintiffs do not have an ownership interest in whatever funds they paid as a result of any overcharge and were therefore not eligible for restitution. We agree on both counts, but address the issues in reverse order, as briefed by the parties.

Section 17203 provides: Any person who engages, has engaged, or proposes to engage in unfair competition may be enjoined in any court of competent jurisdiction. The court may make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition.

The exclusive monetary remedy available to private plaintiffs under the UCL is restitution. ( 17203; Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144 (Korea Supply); Madrid v. Perot Systems Corp. (2005) 130 Cal.App.4th 440 (Madrid); Industrial Indemnity Co. v. Superior Court (1989) 209 Cal.App.3d 1093, 1095-1096.) Madrid provides particular insight into the meaning of restitution in the context of the UCL:  Restitution is an ambiguous term, sometimes referring to the disgorging of something that has been taken and sometimes referring to compensation for injury done. [Citation.] However, in the context of the UCL, restitution is limited to the return of property or funds in which the plaintiff has an ownership interest (or is claiming through someone with an ownership interest). [Citation.] [] Thus, the California Supreme Court has defined a UCL order for restitution as one  compelling a UCL defendant to return money obtained through an unfair business practice to those persons in interest from whom the property was taken, that is, to persons who had an ownership interest in the property or those claiming through that person. [Citation.] [Citations.] Restitution under the UCL is not limited to money that was once in the plaintiffs possession but also includes money in which the plaintiff had a vested interest. [Citation.] (Id. at p. 453.)

Plaintiffs suggest that the overcharges at issue here fall within the meaning of restitution because there is no dispute that the overcharge was originally in their possession. They argue that [i]f a defendant violates the law and extracts an overcharge from a plaintiff, it is taking money that was once in his possession, which must be restored. Plaintiffs then submit that no California authority holding that restitution awards must be lessened to the degree they were mitigated. Plaintiffs are wrong. Madridis dispositive.

Plaintiff Madrid, a customer of an electric company, filed a class action on behalf of electricity customers against various entities involved in restructuring the electricity market, alleging among other things UCL violations. Madrid sought recovery of  restitution to restore all funds acquired by means of any act or practice declared by this Court to be an unlawful or unfair business act or practice ; he also sought equitable and injunctive relief, alleging that [d]efendants unfair and unlawful business practices include conspiring to establish phoney strategies designed to game the California markets. (Madrid, supra, at pp. 445-446, 449.) Defendants demurred, and the trial court sustained the demurrer without leave to amend.

Madrid appealed, addressing only his UCL claim, arguing that [r]estitution is measured by defendants wrongful gain, not [plaintiff]s loss (i.e., overcharges). Thus, the focus of restitution is on defendants unjust enrichment. Restitution simply returns that which defendants obtained from [plaintiff] as a result of their wrongful conduct. That remedy is measured by defendants gain, not [plaintiff]s loss. (Madrid, supra, 130 Cal.App.4th at pp. 448, 450, 454.) The Court of Appeal expressly rejected Madrids attempt to define restitution in terms of the amount gained by defendants, rather than the loss suffered by him: Although this restitution serves to thwart the wrongdoers unjust enrichment, courts ordering restitution under the UCL are not concerned with restoring the violator to the status quo ante. The focus instead is on the victim.  (Id. at p. 455, quoting People ex rel. Kennedy v. Beaumont Investment, Ltd. (2003) 111 Cal.App.4th 102, 134-135.)

Plaintiffs argument here is in different words the same argument rejected in Madrid. We also reject it.

Likewise persuasive is the comment in the Restatement of Restitution. As the authors there put it, [a] person under a duty of restitution to another is discharged from his liability to the other for the restitution of the subject matter or its value if subsequent to his receipt of the subject matter (a) the other transfers his entire interest therein to a third person. (Rest., Restitution,  141, com. (2), p. 564.) Once plaintiffs resold defendants products, and thereby recovered all of their costs, plaintiffs relinquished any ownership interest in the claimed overchargesand forfeited any possible UCL claim. (See Woodward, Passing-on the Right to Restitution (1985) 39 U.Miami L.Rev. 873.)

Shersher v. Superior Court (2007) 154 Cal.App.4th 1491, the authority cited by plaintiffs after briefing was completed, is not to the contrary. There, a purchaser of a wireless product manufactured by Microsoft Corporation and purchased at a retail store sued Microsoft for, among other things, violations of the UCL. Microsoft moved to strike the restitution claim, arguing that only direct purchasers could assert a UCL claim. The trial court granted the motion, concluding that the availability of restitution under the UCL was limited to direct purchasers and excluded plaintiffs such as the [consumer] in this case, who purchased Microsofts product from a retailer. (Id. at p. 1494.) The Court of Appeal issued a writ of mandate ordering the trial court to vacate its order granting the motion to strike, concluding that the recovery of restitution was not conditioned on the customer having made direct payments to the manufacturer. (Id. at p. 1498.) Shersher is of no help to plaintiffs, because the question is not whether they can assert a claim for restitution as indirect purchasers but whether such a claim is viable where they suffered no monetary loss.

The focus of the UCL law is restitution. It is not punishment. [I]n the absence of a measurable loss [the UCL] does not allow the imposition of a monetary sanction merely to achieve [a] deterrent effect. (Day v. AT & T Corp. (1998) 63 Cal.App.4th 325, 339.) Or, in the words of the Supreme Court in Korea Supply, supra, 29 Cal.4th at p. 1148, A court cannot, under the equitable powers of the [UCL], award whatever form of monetary relief it believes might deter unfair practices. [2]

Having decided that plaintiffs could not be awarded restitution, we need not analyze in detail the standing issue. We briefly observe that in 2004 Proposition 64 amended section 17204 to limit standing for UCL claims to any person . . . who has suffered injury in fact and has lost money or property as a result of such unfair competition.  (Californians for Disability Rights v. Mervyns, LLC (2006) 39 Cal.4th 223, 228; Madrid, supra, 130 Cal.App.4th at p. 445 fn. 1.) In other words, the California electorate voted to eliminate UCL representative actions brought on behalf of the general public where plaintiff has not suffered a loss of money or property. (Californians for Disability Rights v. Mervyns, LLC, supra, 39 Cal.4th at p. 228.)

Plaintiffs position herethat they can bring what amounts to a representative action and keep for themselves any potential recovery despite the fact they suffered no monetary lossflies in the face of the intent of Proposition 64. (See Hall v. Time Inc. (2008) 158 Cal.App.4th 847, 853 [The voters intent in passing Proposition 64 and enacting the changes to the standing rules in Business and Professions Code section 17204 was unequivocally to narrow the category of persons who could sue businesses under the UCL.].)

DISPOSITION

The summary judgment for defendants is affirmed.

_________________________

Richman, J.

We concur:

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Kline, P.J.

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Haerle, J.

A116798, Clayworth v. Pfizer

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[1] The cited paragraph includes this quotation, with the italics as supplied by plaintiffs: Moreover, the fact of purchasers intermediate between plaintiffs and direct purchasers in the chain of distribution, even if assumed, would not establish a substantial risk of multiple liability. There is no showing of any actual assertion of a Cartwright Act claim on behalf of any such intermediate purchaser. We turn again to the views expressed by the Illinois Brick dissenting opinion that seem to have met with theCalifornia Legislatures approval when it amended section 16750, subdivision (a), in 1978 . . . .

[2] Plaintiffs UCL claim also prays for injunctive relief, though their brief does not address the point. The same rationale that applies to the restitution analysis would preclude any right to any action for injunction, which can be brought only by prosecutors or by a person who has suffered injury in fact and has lost money or property. ( 17204.)