Abbott Laboratories, Inc. v. Segura

PHILLIPS, Chief Justice,

delivered the opinion of the Court,

in which HIGHTOWER, HECHT, ENOCH and OWEN, Justices, join.

In this case, we decide whether the longstanding bar to indirect purchaser recovery in antitrust suits also bars indirect purchasers who primarily allege antitrust conduct, but who sue under the Texas Deceptive Trade Practices-Consumer Protection Act (“DTPA”). Tex.Bus. & Com.Code Ann. §§ 17.41-17.63 (Vernon 1987). The court of *504appeals held that retail buyers of infant formula “staffed] causes of action for unconscionable price disparity and taking advantage of plaintiffs’ lack of capacity, knowledge, and experience to a grossly unfair degree.” 873 S.W.2d 399, 408. We hold that indirect purchasers cannot recover under the DTPA upon allegations on which recovery would have been barred if brought under the Texas Free Enterprise and Antitrust Act (“the Antitrust Act”). Tex.Bus. & Com.Code Ann. §§ 15.20, 15.21 (Vernon 1987). Accordingly, we reverse the judgment of the court of appeals and render judgment that the plaintiff-intervenors take nothing as a matter of law.1

This case began in September 1991 when the Attorney General of the State of Texas sued Bristol-Myers Squibb Company, its wholly-owned subsidiary Mead Johnson & Company, Abbott Laboratories, Inc., a division of Ross Laboratories Division, and the American Academy of Pediatrics (“AAP”), seeking injunctive relief and damages under sections 15.20 and 15.21 of the Antitrust Act. The State alleged that the manufacturers conspired with each other to fix the wholesale price of infant formula and with the AAP to monopolize markets for infant formula and infant formula advertising. Specifically, the State maintained that the manufacturers’ marketing plan created the appearance that pediatricians endorsed particular brands of infant formula, thus creating an illusion of uniqueness which was wholly unwarranted because federal regulations govern quality control and nutritional standards resulting in nearly identical products.

The State sought damages as parens pat-riae on behalf of consumers who purchased the infant formula and on behalf of the Women, Infants, and Children Program, a federally funded food distribution program administered by the Texas Department of Health. 42 U.S.C.A. § 1786 (1994); TexAgRIC.Code Ann. § 15.001-7 (Vernon Supp.1995). The manufacturers and the AAP specially excepted to the Attorney General’s pleadings on the grounds that since neither the consumers nor the WIC program were direct purchasers, they lacked standing under the Antitrust Act. See Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977) (forbidding indirect purchasers to recover under federal antitrust laws). Moreover, since the State sues as parens patriae on behalf of its consumers to recover damages caused by an antitrust violation, it has no greater right to recovery than the consumers it represents. Kansas & Mo. v. Utilicorp United, 497 U.S. 199, 219, 110 S.Ct. 2807, 2818, 111 L.Ed.2d 169 (1990). Therefore, the manufacturers argued, the State’s derivative claim on the indirect purchasers behalf was also barred for the same reason. The trial court sustained the special exceptions and dismissed the damages claim, but left the State’s injunction claim pending.

Crystal Segura and other infant formula consumers intervened in the State’s ongoing enforcement action, adding American Home Products Corporation as an additional manufacturer-defendant but omitting the AAP. The intervenors brought claims for damages against the manufacturers for the same conduct alleged by the State under the Antitrust Act. The intervenors, however, alleged that the conduct violates the Texas DTPA’s prohibition against unconscionable conduct. Tex. Bus. & Com.Code Ann. § 17.50(a)(3) (Vernon 1987). The manufacturers filed a plea to the jurisdiction and specially excepted to the in-tervenors’ pleadings on the grounds that the intervenors’ “classic antitrust claims” of price-fixing and monopolization are not cognizable under the DTPA.

The trial court sustained the manufacturers’ special exceptions and allowed the inter-venors thirty days to replead. The interve-nors made only slight changes, retaining their core allegations that the manufacturers violated the DTPA by attempting to monopolize the infant formula market and creating barriers to entry by these methods: 1) creating the illusion that infant formula products are somehow unique and nutritionally different, when all brands are nutritionally identical; 2) creating and maintaining dedicated franchise relationships with physicians and hospitals that endorse the purchasing of a *505particular brand name while Texas consumers are kept ignorant of the monies and lavish promotional resources which these physicians and hospitals receive for these endorsements; 3) giving free samples through franchise physicians and hospitals during the first months of infants’ lives, thereby creating an endorsement of the manufacturers’ products and later grossly overcharging Texas consumers in the retail market for baby formula products; 4) using market dominance to prevent other companies from selling baby formula products to consumers through direct consumer advertising that could inform Texas consumers about the generic nature of these products and permit informed buying decisions based upon price and nutritional information; and 5) implementing nearly identical price increases. These allegations are also nearly identical to the allegations made by the antitrust plaintiffs, all of whom are direct purchasers and retailers of formula, in a multi-district consolidation currently pending in the Northern District of Florida. See In re Infant Formula Antitrust Litigation, MDL Docket No. 878, 1992 WL 503465 (N.D.Fla).

The manufacturers moved for summary judgment, arguing that (1) the intervenors’ claims are cognizable only under the Antitrust Act, under which the intervenors, as indirect purchasers, lack standing, and (2) alternatively, even if the intervenors’ claims are DTPA claims, the intervenors have no standing because the DTPA and the Anti- ■ trust Act must be harmonized and the Antitrust Act bars suits by indirect purchasers. By response, the intervenors conceded that their claim would be barred under the Antitrust Act, but maintained that their pleadings were sufficient to state a cause of action under the DTPA for “unconscionable action or course of action.” TexBus. & Com.Code Ann. § 17.45(5).

The trial court granted summary judgment for the manufacturers against the interve-nors, severing that part of the case from the State’s enforcement action. The court of appeals reversed and remanded for trial on the merits. We granted the manufacturers’ writ of error.

The manufacturers moved for summary judgment on two closely related grounds, neither of which specifically addressed un-conscionability, but both of which assert that the bar to indirect purchaser recovery in antitrust controls the outcome of this action.2 In reviewing the judgment of the court of appeals, we therefore do not consider whether the manufacturers established by their summary judgment proof that the alleged conduct was not unconscionable as a matter of law under the DTPA.

We begin with the Legislature’s mandate that Texas antitrust law be harmonized with federal antitrust law. Tex.Bus. & Com.Code Ann. § 15.04;3 see Caller-Times Pub. Co. v. Triad Communications Inc., 826 S.W.2d 576, 580 (Tex.1992). Allowing the intervenors to sue under the DTPA on allegations that are virtually identical to the antitrust allegations made by both the Texas *506Attorney General and the multi-district litigation plaintiffs in Florida would essentially permit an end run around the policies allowing only direct purchasers to recover under the Antitrust Act.

The legal reasoning behind the prohibition on indirect purchaser recovery in antitrust has three principal bases, each of which the Supreme Court discussed at some length in Illinois Brick. First, the prohibition on indirect purchaser recovery had its genesis in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968). That case involved an antitrust treble-damages action brought under section 4 of the Clayton Act against a manufacturer of shoe machinery by one of its customers, a manufacturer and wholesaler of shoes (a direct purchaser). In defense of allegations of monopolistic pricing, the shoe machinery manufacturer sought to show that the plaintiff-wholesaler had not been injured in its business as required by section 4 because it had passed on the claimed illegal overcharge to those who bought shoes from it, namely retailers and ultimately consumers. In Hanover Shoe, the Court rejected as a matter of law the defense that indirect, rather than direct purchasers, were the parties injured by the antitrust violation. See Hanover Shoe, 392 U.S. at 487-94, 88 S.Ct. at 2228-32; see also Illinois Brick, 431 U.S. at 728-36, 97 S.Ct. at 2065-70.

Then, in 1977, in Illinois Brick, the Court held that if an antitrust violator may not use a pass-on theory defensively to avoid liability against a direct purchaser as it had held in Hanover Shoe, an indirect purchaser also may not use a pass-on theory offensively to win damages against an antitrust violator. The Court stated: “We are left, then, with two alternatives: either we must overrule Hanover Shoe (or at least narrowly confine it to its facts), or we must preclude [indirect purchasers] from seeking to recover on their pass-on theory. We choose the latter course.” Id. at 736, 97 S.Ct. at 2070.

The second reason for allowing only direct purchasers to recover in antitrust is that “the uncertainties and difficulties in analyzing price and output decisions in the real economic world rather than in an economist’s hypothetical model” is too complex for efficient judicial resolution. Illinois Brick, 431 U.S. at 732, 97 S.Ct. at 2067-68. Antitrust suits would become even more complex and burdensome as the courts attempted to determine the proper apportionment of pass-on antitrust charges to each level of indirect purchasers.4 We are persuaded by the reasoning of Illinois Brick:

Permitting the use of pass-on theories under § 4 [of the Clayton Act] essentially would transform treble-damages actions into massive efforts to apportion the recovery among all potential plaintiffs that eould have absorbed part of the overcharge from direct purchasers to middlemen to ultimate consumers. However appealing this attempt to allocate the overcharge might seem in theory, it would add whole new dimensions of complexity to treble-damages suits and seriously undermine their effectiveness.

Id. at 737, 97 S.Ct. at 2070. In both Hanover Shoe and Illinois Brick, the Court expressed “concern for the reduction in the effectiveness of [antitrust] suits if brought by indirect purchasers with a smaller stake in the outcome than that of direct purchasers suing for the full amount of the overcharge.” Illinois Brick, 431 U.S. at 745, 97 S.Ct. at 2074. The third reason for precluding indirect purchasers from recovering on a pass-on theory is that it opens the door to multiple recoveries. See Illinois Brick, 431 U.S. at *507730, 97 S.Ct. at 2066-67. Allowing both direct purchasers and consumers to recover overcharge damages would expose antitrust defendants to duplicate damages for the same injury. 2 Areeda & Hovenkamp, AntiTRUST Law, ¶ 371c, at 257-58 (rev. ed. 1995). The Supreme Court has reiterated the importance of policies preventing duplicative recoveries, avoiding claims of speculative damages, and keeping antitrust trials within judicially manageable limits. See Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 545, 103 S.Ct. 897, 912, 74 L.Ed.2d 723 (1983).

This same reasoning applies to plaintiffs suing under the DTPA on allegations that are in essence antitrust claims. Assuming, arguendo, that price fixing or other anticom-petitive conduct is recoverable under the DTPA, indirect purchasers would face the same proof problems as they would have faced had an antitrust cause of action been recognized. We will not interpret the DTPA in a manner that rewards creative pleading at the expense of consistent application of legal principles.

Our holding is not based on any determination of standing under the DTPA As Areeda and Hovenkamp have noted, the Court in Illinois Brick saw “which persons have been injured by an illegal overcharge” as “analytically distinct” from “which persons have sustained injuries too remote to give them standing ...” Illinois Brick, 431 U.S. at 728 n. 7, 97 S.Ct. at 2065 n. 7; Areeda & Hovenkamp, supra, ¶ 371c, at 259. Our holding today only forecloses the recovery of damages for seeking a prohibited antitrust recovery under the masquerade of our consumer protection statute.

For these reasons, we hold that the conduct alleged by the intervenors is not actionable under the DTPA We therefore reverse the judgment of the court of appeals and render judgment that plaintiffs take nothing as a matter of law.

. The plaintiff-intervenor class will be referred to collectively as “intervenors,” and the defendant infant formula manufacturers will be referred to as “manufacturers.’'

. The specific grounds found in Ae defendants' motion for summary judgment are as follows:

A. The claims asserted by plaintiff-interve-nors, although couched in Ae language of Ae Texas Deceptive Trade Practices Act (“DTPA”), are cognizable only under the Texas Free Enterprise and Antitrust Act (Ae "TFEAA”); plaintiff-intervenors, as indirect purchasers of infant formula, have no standing under Ae TFEAA to bring such claims.
B. In Ae alternative, even if plaintiff-interve-nors' claims are cognizable as DTPA claims, plaintiff-intervenors still have no standing because Ae later-enacted TFEAA, which specifically adAesses Ae claims asserted by plaintiff-

’ intervenors, bars suits by indirect purchasers. The concurrence focuses on only the first half of Ae first ground and determines Aat Ae mterve-nors’ claims have no merit as DTPA claims. This is an issue we need not decide because even if Ae motion for summary judgment could be read as raising an issue on unconscionability, we choose to dispose of this case on the primary grounds argued by Ae parties in boA Ae trial court and on appeal.

. Section 15.04 provides:

The purpose of Ais Act is to maintam and promote economic competition in trade and commerce occurring wholly or partly within the State of Texas and to provide Ae benefits of that competition to consumers in the state. The provisions of this Act shall be construed to accomplish this purpose and shall be construed, in harmony with federal judicial interpretations of comparable federal antitrust statutes to Ae extent consistent wiA Ais purpose, (emphasis added).

. It is possible, with sufficient simplifying assumptions, to determine a formula for calculating how the overcharge is to be distributed between the direct purchaser and the indirect purchasers. The formula would assume that the market for the direct purchaser's product is perfectly competitive, the overcharge is imposed equally on all indirect purchasers, and that the direct purchaser maximizes its profits. If this is the case, the ratio of the shares of the overcharge borne by the direct purchaser and the indirect purchaser will equal the ratio of the elasticities of supply and demand in the market for the direct purchaser’s product. Illinois Brick, 431 U.S. at 741, 97 S.Ct. at 2072; see also Schaefer, Passing-On Theory in Antitrust Treble Damage Actions: An Economic and Legal Analysis, 16 Wm. & Mary L.Rev. 883 (1975). This analysis further relies on the assumption that the proper elasticities can be determined by an already overburdened judicial system.