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United States District Court, Northern District of Illinois, E.D

December 17, 1963


The opinion of the court was delivered by: Robson, District Judge.

These treble damage antitrust actions are a part of the suits which have been brought throughout the nation as a result of the criminal antitrust prosecutions in Philadelphia of certain electrical equipment manufacturers. They include all the claims currently pending in this district for purchases by investor-owned utilities of steam turbine-generators and power transformers, two of the nineteen product lines involved in these suits. Defendants served plaintiffs with twenty-four interrogatories which probe in detail the economics of plaintiffs' businesses. Defendants contend that these interrogatories are "designed to elicit facts establishing the extent to which plaintiffs have `passed on' to others the purported excess charges paid for electrical equipment. * * *"*fn1

Plaintiffs have objected to the interrogatories in toto. The parties filed briefs and oral argument was heard by the Court. For purposes of the argument, the Court assumes that part of any increased costs were "passed on" to consumers of electricity. Plaintiffs assert that any evidence of such "passing on" which defendants might adduce would be irrelevant and inapplicable as a matter of law to the suits in these product lines. The Court concludes that in view of the peculiar facts of these cases, plaintiffs' objections are well taken and should be sustained.

Here, as in the usual case, the legal concept of proximity is applicable to ascertain and measure damages. Thus, the necessary and appropriate limits of judicial inquiry are served by disregarding consequential and remote effects. As analyzed by Mr. Justice Holmes, the general rule of the law is to take only the first step and discover direct effects on the parties.*fn2 This principle was recently re-enunciated and applied to these cases by the Court of Appeals for this Circuit.*fn3

The "passing on" doctrine is a narrow exception to this general trend of the law. It has received judicial acceptance primarily in the so-called Oil Jobber cases*fn4 which involved middlemen and in which the legal "pass on" was readily apparent from an immediate change in the resale price.*fn5 Similar facts are not present here. Plaintiffs in these cases are investor-owned utility companies who purchase capital equipment, fuel, supplies and manpower which they use to produce and/or distribute electricity. The purchase of electrical equipment for immediate resale is no part of their business.*fn6 Any "pass on" of alleged overcharges for capital equipment is buried in the myriad details of plaintiffs' rate bases and would be extremely difficult to compute.

Plaintiffs in the Oil Jobber cases were jobber-distributors who resold gasoline to stations at margins which were fixed and often guaranteed by defendants. Defendants were members of a group of oil companies who had been convicted of fixing the spot price of gasoline in the so-called "Madison Oil" case.*fn7 The ad damnum sought was treble the amount of the illegal overcharge. Plaintiffs were uniformly denied relief on the grounds that the damages had been "passed on" to their customers. The Oil Jobber cases thus required plaintiffs as part of their showing of damages to demonstrate that they had ultimately borne any increased costs.*fn8

The Court of Appeals for the Seventh Circuit has indicated an entirely different test by which plaintiffs must demonstrate their damages in the instant cases. "The damages, if any, to which they [the utilities] are entitled are measured by the hurt they may have suffered by reason of the alleged conspiracies claimed to be violative of the antitrust laws. That hurt is measured by the excessive prices they claim were paid for equipment purchased from defendants. * * *"*fn9 This measurement of plaintiffs' damages appears to make evidence of "pass on" entirely irrelevant to these cases.

The Oil Jobber cases are distinguishable in at least five other important respects. (1) Plaintiffs in those cases were true middlemen; here they are consumers. The "pass on" defense was limited to suits on behalf of middlemen in the recent case of Hanover Shoe, Inc. v. United Shoe Machinery Corporation,*fn10 (treble damage action by manufacturer of shoes against lessor of shoe manufacturing equipment). (2) The parties in those cases were more closely related than the usual buyer and seller. Often the defendants guaranteed plaintiffs' profit margins.*fn11 In these cases ordinary buyer-seller relationships exist. (3) Whereas the jobbers resold the gasoline intact, the utilities use the equipment to produce and/or distribute electricity.*fn12 (4) The risks cast on the jobbers by higher gasoline prices were de minimus and short term. In contrast the risks which would be created for the utilities by higher equipment prices could be significant and would extend over the lives of the capital equipment involved. (5) Finally, gasoline consumers were thought to have independent rights under the antitrust laws to bring suits against the oil companies which could negate the existence of such rights in the middlemen.*fn13 On the other hand, the consumers of electricity apparently have no such rights.*fn14 This last distinction leads to two undesirable results if "passing on" is sustained. First, defendants would be left with the profits of their alleged wrongdoing. This is directly contrary to the general equitable principle that no man should be allowed to profit by his wrongdoing. Second, the purpose of Section 4 of the Clayton Act*fn15 would be frustrated because there would be no available private remedy even though a private injury had in fact occurred.*fn16

Defendants in their brief*fn17 place strong emphasis on the following language in Keogh v. Chicago & Northwestern Railway Company, et al.,*fn18 as additional support for the "passing on" defense:

    "Finally, * * * recovery cannot be had unless it is
  shown, that, as a result of defendants' acts, damages
  in some amount susceptible of expression in figures
  resulted. * * * [N]o court or jury could say that, if
  the rate had been lower, Keogh would have enjoyed the
  difference between the rates or that any other
  advantage would have accrued to him. The benefit
  might have gone to his customers, or conceivably, to
  the ultimate consumer."

The sole question for decision in Keogh was "[W]hether there is a cause of action under § 7 of the Anti-Trust Act,"*fn19 or whether plaintiffs' sole remedy lies under the Interstate Commerce Act. The Court's discussion of damages and "passing on" was thus not required by the holding in the case and does not act to bind this Court. In any event the above quoted language on damages is directly contrary to the philosophy of plaintiffs' burden as expressed in more recent Supreme Court Cases. Eastman Kodak Co. of New York v. Southern Photo Materials Company;*fn20 Story Parchment Company v. Paterson Parchment Paper Company, et al.;*fn21 Bigelow, et al. v. R.K.O. Radio Pictures, Inc., et al.*fn22

The Court's decision on this matter is based primarily on the binding precedent of the well known Chattanooga case.*fn23 The City of Atlanta which operated a waterworks brought a treble damage action against a group of pipe companies. Recovery was sought for an amount based on the difference between a fair market price and the allegedly higher fixed price which the City asserted it had been forced to pay for pipe because of defendants' conspiracy. The factual similarities of Chattanooga to the instant cases are strikingly apparent. In Chattanooga, the City, acting as a utility, purchased capital equipment; here the electric companies similarly purchased capital equipment for use in their utility business. In both cases purchases at prices allegedly higher than fair market prices were the bases for the suits. The measure of plaintiff's damages outlined by Mr. Justice Holmes in the Chattanooga opinion is identical to the standard applied to these cases by the Court of Appeals in Commonwealth Edison Co., et al. v. Allis-Chalmers Manufacturing Company, supra. It is the difference between the fair market value and the alleged conspiratorially fixed price:

    "It 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. * * *
  But when a man is made poorer by an extravagant bill
  we do not regard his wealth as a unity, or the tort,
  if there is one, as directed against that unity as an
  object. We do not go behind the person of the
  sufferer. We say that he has been defrauded or
  subjected to duress, or whatever it may be, and stop
  there. * * *"*fn24

The damage rule of Chattanooga was applied in private antitrust cases involving the so-called "tobacco trust" which were decided several years later. See e.g., Monarch Tobacco Works v. American Tobacco Co., et al.,*fn25 and United States Tobacco v. American Tobacco Co., et al.*fn26 Both of these cases were treble damage suits by a manufacturer of tobacco products against his suppliers. Both times the court overruled defendants' demurrers and applied the Chattanooga standard of damages. The discussion in United States Tobacco is particularly appropriate:

    "As to damages, it seems to me very clear that the
  allegations are ample. Assuming that the combination
  was illegal and in violation of the act referred to,
  the complaint says the defendants fixed arbitrary and
  excessive and unreasonable prices, and that they
  raised the price from 7 to 10½ cents per pound, and
  that by reason of such combination, etc., the
  plaintiff was compelled to pay, and did pay, the
  excessive and unreasonable price for licorice paste.
  If the defendants by an illegal agreement and
  combination, in violation of the act, arbitrarily
  increased the price of this commodity to the
  consumers, the plaintiff amongst others, and made the
  price excessive and unreasonable and much greater
  than it would have been but for such combination, and
  the plaintiff was compelled to pay that unreasonable
  and excessive price and more than its actual value
  because of the illegal agreement or combination, and
  did pay it, he was clearly injured in his property
  thereby. * * *"*fn27

In the subsequent case of Thomsen v. Cayser,*fn28 the Supreme Court allowed a treble damage recovery to shippers from carriers based on increased shipping costs. Defendants' contention that plaintiffs had failed to show injury was rejected as untenable without explicit consideration of "passing on".

Straus, et al. v. Victor Talking Machine Co., et al.,*fn29 a treble damage action by retailers against supplier for unreasonable refusal to sell at "dealers' price," provides additional support for the conclusions reached in this memorandum. The following language in Straus states concisely the showing plaintiff must make to demonstrate his damages in the usual price fixing case:

    "Whether, then, plaintiffs sold to their customers
  at a profit or a 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, and the jury could find that such
  deprivation defined in money was the difference
  between the established reasonable price and the
  amounts plaintiffs

  were compelled to pay, provided as the trial judge
  charged `they acted reasonably in making these
  payments.' * * * It is thus unnecessary to `go
  beyond' this `first step.'"*fn30

The "pass on" defense was recently rejected in this District in a treble damage suit based on Section 2(d) of the Robinson-Patman Act.*fn31 Chief Judge Campbell, in State Wholesale Grocers, et al. v. Great Atlantic and Pacific Tea Company, et al.,*fn32 expressed his agreement with Hanover Shoe, supra, in this way:

    "The Third Circuit, as recently as 1960, affirmed a
  district court's ruling that the `pass on' defense
  was not meritorious. Hanover Shoe, Inc. v. United
  Shoe Machinery Corp. * * * I agree with the Third
  Circuit's description of the district court's opinion
  in that case as being thoroughly convincing, and I am
  in full accord with the reasoning employed by Judge
  Goodrich in his opinion and the authorities therein

The factual similarities of the instant cases to the binding precedent of Chattanooga, supra, the measure of damages applied to these cases by the Court of Appeals in Commonwealth Edison Co. v. Allis-Chalmers Manufacturing Co., et al., supra, and the numerous significant distinctions as set forth herein from the Oil Jobber cases, supra, have persuaded the Court to sustain plaintiffs' objections to defendants' "pass on" interrogatories.

The Court certifies that it is of the opinion that this memorandum is a ruling upon a controlling and important question of law in these proceedings, namely, whether plaintiffs should be required to answer detailed interrogatories which have been designed to elicit facts on the extent to which plaintiffs have "passed on" the alleged excess charges paid by them for electrical equipment, an issue which goes to the heart of these controversies. The Court is further of the opinion that an immediate appeal from this order will materially advance the ultimate termination of these proceedings and that this situation is particularly appropriate for the type of interlocutory appeal provided by Section 1292(b).*fn34 Plaintiffs are directed to submit to the Court within seven days from the date hereof a draft order in conformance with this memorandum.

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