On Monday, May 3, 2010, the Supreme Court heard oral argument in Clayworth v. Pfizer, Inc., no. S166435.
The seven-Justice court included three pro tem members. Justice Ignazio J. Ruvolo of the First Appellate District, Division Four, sat in for Justice Kennard. Justice Ronald B. Robie of the Third Appellate District sat in place of Justice Chin. And Justice Douglas P. Miller of the Fourth Appellate District, Division Two, took Justice Corrigan's seat.
Joseph M. Alioto, Jr. of the Alioto Law Firm argued for the plaintiffs, while William J. Fenrich of Davis Polk & Wardwell presented the defense position. Procedurally, the case was before the court following entry of summary judgment in the defendants' favor on Cartwright Act and UCL claims.
Mr. Alioto began by restating the question on review -- whether the Court should recognize a "pass-on" defense that would allow defendants to escape all liability for their wrongful conduct.
Justice Werdegar interrupted, wanting to know if that was a fact, that there would be no way the defendant would be accountable. Mr. Alioto replied that it was a fact, and that it was one of four facts he wanted to impress upon the Court. First, plaintiffs paid an overcharge. Second, plaintiffs passed it on as any reasonable business would do.
Justice Moreno then interrupted asking when do you maintain the injury was suffered? Alioto: At the moment the purchase was made. Justice Moreno: Do you agree there was no net loss because it was passed on? Alioto: You could say that if later events are taken into account; but defendants have not made a showing that the plaintiffs have suffered no injury; only that the overcharge was passed on. And there is a difference.
He went on. Third, defendants are presumed liable for purposes of this appeal. They are presumed to have fixed prices. Fourth, no other plaintiff (such as an end-user) has brought suit, which goes to Justice Werdegar's question a moment ago.
The Cartwright Act must be interpreted such that the plaintiff suffers injury at the moment of purchase. Justice Baxter then interjected: Are you saying that the pass-on defense does not apply only if the ultimate consumers are not involved, or that it would not apply in any case? Alioto: We contend the latter but as an alternative holding, adopt the reasoning of the dissent in Illinois Brick. Baxter: Then how does the court avoid the issue of duplication of damages? Alioto: That's what drove the decision in Illinois Brick, and some history behind that decision may be helpful. He discussed three lines of authority leading up to that decision. In one line of cases, the one adopted by the Illinois Brick dissent, the courts held that the possiblity of duplication of damages can be avoided through existing procedural mechanisms such as compulsory joinder.
Justice Moreno: How did our Legislature react to Illinois Brick? Alioto: They roundly rejected it. In fact, 25 states rejected Illinois Brick. And, eleven of those jurisdictions have considered the pass-on defense, and every one of those rejected it.
Chief Justice George put in his first question: Are you relying on legislative acquiescence? Alioto: Not exactly because the Legislature acted so quickly as to overrule Illinois Brick, but what we are relying on is the purpose behind the law, which should drive the interpretation; on the fact that the Legislature did seem to adopt certain parts of Hanover Shoe in several enactments; and that in 1978 the Legislature added a provision to deal with multiple liability in parens patriae actions, one patterned after the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Justice Robie: You mean the provision that says no double recovery? Alioto: Yes.
Justice Ruvolo: Regarding your argument that no pass-on defense should ever be allowed, in your case the plaintiffs used percentage-based pricing so that when the price went up so would the profit. Would you exclude that profit from the recovery or would you allow that and treble it?
Alioto: No. The damages are those calculated at the time plaintiff made the purchase. Ruvolo: So would the defendant be entitled to an offset for profit? Alioto: No. Nothing that happens after the purchase should be considered. This effectuates the purpose of the law. This is no different than what California law already provides. It's no different from the collateral source rule.
Justice Ruvolo: Then how do you account for consequential damages? Doesn't your theory wipe that remedy out?
Alioto: No because there are three types of damages in Cartwright Act cases. First, the overcharge. Second, lost sales (i.e., when prices are higher you sell less). Third, loss of the business value as a going concern. Those are all available. Justice Ruvolo: The first one is the only type calculated at the time of purchase? Alioto: Yes. The other two we've waived in this case.
Justice Werdegar: In other cases where they are not waived they would be available if proven? Alioto: That's correct.
Alioto then discussed the UCL claim. He said the first issue is one of standing. The First District said in its opinion that the plaintiffs lacked standing because restitution was not an available remedy. Justice Robie here interrupted: Standing depends on whether the plaintiff suffered damage or not. Is the damage suffered under the Cartwright Act enough to confer standing? Alioto: There are two parts to standing. The first is injury in fact under the U.S. Constitution. Plaintiffs have standing by virtue of the purchase. Justice Robie: Are you saying that's not enough? Alioto: No. The second element is lost money. This Court has not had an opportunity to address this elelement. The Court of Appeal has in Aron v. U-Haul and Hall v. Time, Inc.
[Note: As a plaintiffs' attorney I would not have chosen those particular cases to illustrate the "lost money "element of UCL standing. They are not exactly the most plaintiff-favorable cases.]
Justice Ruvolo: Is there any difference between the standing requirements under the UCL and the Cartwright Act? Alioto: Not for all practical purposes. I'm arguing that the Court should adopt the reasoning of Aron and Hall. Here, it's uncontroverted that plaintiffs paid more for the drugs than they were worth and they did not get the benefit of their bargain. [Note: I guess I can see why he thought those cases were good ones to cite given the particular facts of his case, but this leads straight into the Benson v. Kwikset problem.]
Alioto: Now on to the restitition issue. The First District relied almost exclusively on Madrid v. Perot Systems. The defendants have abandoned Madrid and not cited it in their briefs. In Tobacco this Court said that the restitution language is "patently less stringent" than the standing language. If the plaintiffs have standing then they necessarily can recover restitution.
And that was the end of his time.
Mr. Fenrich began by observing that at the beginning of Mr. Alioto's presentation he conceded that the plaintiffs have not sustained damage. He said the lower courts properly applied the plain meaning of the Cartwright Act and the UCL under the unique facts of this case. On this unique record, plaintiffs strategically chose only to seek one kind of damages -- the overcharge. The record is undisputed that plaintiffs passed on 100% of the overcharge.
Justice Werdegar: But the argument they make is depending on when the overcharge was paid. Fenrich: We think they've conflated two elements, injury and damages. Justice Miller: So are you conceding they have standing and suffered injury? Fenrich: Well it's an interesting issue on these unique facts. This Court need not decide it because for the Cartwright Act claim, they have suffered no damages that could be recovered under the Cartwright Act's private right of action. This centers on plaintiffs' ability to recover damages. For the UCL claim, it's fair to say plaintiffs have not lost money or property, but again the Court need not reach that issue because they can't recover restitution.
Justice Werdegar: You keep saying this case is unique. Why is this case unique? Fenrich: In another case a plaintiff might seek a variety of damages for an antitrust violation, but here, for strategic reasons, they chose to waive much of it and also concede that they passed on 100%. It's only in this case and on this record that the result would be that the defendant escapes liability. Nor do we concede that defendants should be presumed to have violated the law. Whenever defendants' prices went up so too did plaintiffs'. This would not be the result in other cases.
Chief Justice George: What interpretation do you have of the State legislative history? Fenrich: You're referring to the 1978 amendments? [The Chief Justice nods.] It's California's reaction to Illinois Brick. Chief Justice George: What about Hanover Shoe? Fenrich: There's no mention of Hanover Shoe surrounding the 1978 amendments. Nor can it be interpreted as consistent with Hanover Shoe because once indirect purchasers have standing California is implicitly disagreeing with the policy underpinnings of Illinois Brick and Hanover Shoe, including (a) that pass-on is too difficult to show; and (b) the choice to place full recovery in the hands of the direct purchasers. California is free to make different policy choices and this is reflected in what the Legislature did.
Justice Miller: What is the purpose of the Cartwright Act? Is it deterrence, compensation, disgorgement? Fenrich: All of the above. Justice Miller: Then there'd be no deterrence in this case. Fenrich: Compensation is the primary purpose. Our argument would continue to allow damaged persons to recover treble damages. Therefore our argument is consistent with all three purposes. Plaintiffs' would denigrate the compensation purpose. It's the Legislature's job to balance these purposes. When a court is faced with two interpretations, one consistent with one purpose and the other three with all three purposes, the court should choose the one consistent with all three.
Justice Ruvolo: Do you agree that for purposes of damage one looks solely at the time of purchase, and if so, what do you do with the Hanover Shoe language about cost-plus contracts? Fenrich: No we do not agree. Going back to the 1800s (and he cited cases) damages has meant actual loss and recoupment. One must necessarily look at what happened after. Nothing shows that the Legislature in 1907 when it enacted the Cartwright Act meant to adopt some other rule.
Justice Robie: Isn't passing it on a subsequent act? They paid too much for the product so they then charge too much. They are two separate actions. Fenrich: That's injury, but not damages. (And then he discussed several cases to support this point.) California did not adopt Hanover Shoe in 1978 or otherwise. It's a rule based on policy not text. California made other policy choices regarding where the incentives should lie in the distribution chain. As for other states, there is no uniformity. In eleven states the pass-on defense was rejected through legislative action. There's no authority for courts doing that when interpreting language that's silent.
Justice Ruvolo: You would be better off if the end-user consumers had been joined because there would be an offset of the profit? In response, Fenrich acknowledged that the consumers would have suffered that damage. Ruvolo: But you've got a different case here. Where the consumer plaintiffs are barred by the statute oflimitations you've developed a case that's symmetrical with federal law. Fenrich: This case could not have been brought under federal law because the pharmacies are not direct purchasers. They bought from wholesalers who were direct purchasers. There may be less risk of multiple recovery where the ultimate purchasers have a statute of limitations problem. Justice Ruvulo: Federal courts would rather have direct purchasers recover than let defendants get away with it entirely.
Justice Werdegar: You said that the issue was decided in the federal courts based on policy not language. But here is a quotation, and she read some language from California v. ARC America Corp., which did appear to say that the holding in question was text-based. Fenrich: What the court did not do was start with the language. Justice Werdegar: But the language is similar isn't it? Fenrich: Yes. Justice Werdegar: So they've told us what it means. Fenrich: Yes as a matter of federal law but we think it's not a reasonable interpretation under state law.
Fenrich: Plaintiffs' lost profit waiver is unequivocal. So the lost profits argument is a distraction. The Utilicorp (phonetic) decision cemented the Illinois Brick ban on indirect purchaser recovery. Pass-on is too hard to prove. Regarding the 1978 enactment of the parens patriae multiple-liability provision (Bus. & Prof. Code section 16760), plaintiffs say this reflects California's adoption of Hanover Shoe. We say the Legislature would have done it explicitly.
Fenrich then turned to the UCL claim. For the same reasons plaintiffs aren't entitled to damages, they are not entitled to restitution.
Justice Werdegar: Are they entitled to an injunction? Fenrich: That claim has been waived in this case, so no. The Court doesn't have to answer that question. On restitution, though, it is our position that whatever interest they had in the overcharge was passed on. Plaintiffs say they somehow kept it, but when the wholesalers sold to them ithe interest passed, and then it passed again.
Mr. Fenrich then concluded his argument before his time had been called.
In rebuttal, Mr. Alioto first addressed the UCL claim. First, the Tobacco II case said that restitution must be read to prevent a wrongdoer from retaining the fruit of its illegality. Second, regarding the injunction waiver, plaintiffs were opposing defendants' motion, which said nothing about the injunction claim. And here he read from the statement of undisputed material facts. Justice Ruvolo: You pleaded that as an alternative? Alioto: That's correct. Defendants' motion did not mention injunctive relief. They waived it.
Justice Robie: But if you have standing don't you have it regardless of the remedy? I'd think if you have standing you can seek either remedy. They are separate issues, standing and remedy, are they not? Alioto: That's correct. That's what the Court said in Tobacco. Restitution is patently less stringent. Otherwise you violate the maxim that a wrongdoer shall not profit from his wrong.
Alioto then turned to the Cartwright Act and read a quotation from the 1978 amendment's legislative history. It's a pro-enforcement amendment, he said. It cannot be read to create a loophole for defendants. Bruno rejected federal cases that said compensation was the only purpose. Prevention and punishment is not an insignifcant purpose. As for cost-plus contracts, that is not an issue in this case. Plaintiffs have no contracts requiring them to buy a fixed amount regardless of price. The issue was not briefed before the Court of Appeal and on rehearing, that court struck its discussion of that issue from its opinion.
Alioto then turned back to Justice Ruvolo's question: You are right this is a perfect case to apply Hanover Shoe.
Then he, too, concluded his argument before his time was up.
If I were to try to read some tea leaves, I'd say the argument with the most traction was that the pass-on defense would allow a defendant to keep its ill-gotten gains. Several of the justices' questions suggested that they did not think this should happen. We can expect an opinion within 90 days (i.e., by August 1, 2010).