Thursday, May 16, 2019
The markets for the major ag products in the U.S. are highly concentrated. This is the case in the markets for hogs and poultry as well as food processing and the market for genetic characteristics of corn, soybeans and cottonseed. The retail sector involving many ag products is also highly concentrated. This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers. In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food? If so, what can a farmer or rancher do about it? Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party? The U.S. Supreme Court recently decided a case involving the Apple Co. and IPhone users that involves some of these concepts. Does it have implications for farmers and ranchers?
That’s the topic of today’s post – the ag implications of the recent Supreme Court decision involving Apple Inc. and IPhone users. I have asked Peter Carstensen, Professor of Law Emeritus at the University of Wisconsin School of Law to collaborate with me on today’s post. Peter is a Senior Fellow of the American Antitrust Institute, and formerly worked in the antitrust division of the U.S. Department of Justice. You will find rather interesting his thoughts on the implications of this week’s Supreme Court decision for agriculture.
Antitrust and Indirect Purchasers
The 1977 U.S. Supreme Court decision. The questions posed above are interesting. From a legal standpoint, what can a farmer or rancher do if they believe that they have been improperly harmed by anticompetitive conduct? In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured. In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between. For example, assume manufacturers or food retailers operate in a concentrated market and agree to fix the prices of their products and then sell those products to wholesalers or retailers (their direct customers). The wholesalers and retailers then resell the goods either to other entities down the supply chain or to end consumers (i.e., indirect purchasers). It’s those indirect purchasers that the 1977 Supreme Court decision bars from seeking damages because the court feared that defendants would be exposed to multiple claims for recovery and there would be complications in apportioning damages among the plaintiffs in the supply chain. The same reasoning has been applied to farmer claims where the alleged source of harm is a downstream conspiracy by retailers. Indirectly injured parties can still seek injunctive relief, but private lawyers are unlikely to take such cases despite the statutory right to a reasonable attorney’s fee if they succeed. Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)). In these states, indirect purchasers can seek recovery under state antitrust laws.
Recent Supreme Court opinion. In Apple Inc. v. Pepper, et al., No. 17-204, 2019 U.S. LEXIS 3397 (U.S. Sup. Ct. May 13, 2019), IPhone users sued Apple Inc. over its operations of the App Store. The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick. The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018). On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote. Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices. Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer. Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.
The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply. In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly. The opinion acknowledged that there could be some difficult issues as to damages because if Apple took a lower commission (mark-up) on the apps, the app seller might have raised its prices. Hence, the actual damages to the buyers might be difficult to calculate. Moreover, the opinion pointed out that the developers could have a claim for damages as a result of lost sales resulting from the excessive commission charge if they would have kept a lower retail price.
The dissent argued that the better interpretation of Illinois Brick was to focus on the party setting the price, here the developers. Hence, they alone should have standing to claim that any Apple monopoly had harmed them as the first victim. The dissent stressed the problems of determining damages for both upstream and downstream victims given that the majority had held that both could sue.
Thus, the court was unanimous that the Illinois Brick rule should remain. It rejected the argument of a group of 30 states set forth in an Amicus Brief urging the Court to reverse Illinois Brick and allow indirect purchasers with damage claims to have access to the federal courts. However, the majority decision appears to reject the use of formal contracts to determine who is the first buyer. This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct. However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods. In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments. The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.
Implications for Agriculture
The following are Prof. Carstensen’s thoughts on the ag implications of the Pepper decision:
Because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law. Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm. This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages. This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation. In addition, the decisions have required that there be an adverse effect on consumers and not just producers. The Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries. In future PSA cases proof of harm to producers should establish “harm to competition.” Of course, a better understanding of the PSA, consistent with its application in various contexts such as buyer defaults and false weighing, is that its purpose is to protect individual farmers from unfair and discriminatory conduct. But that issue must await a court willing to interpret the PSA’s provisions correctly.
Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers). The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer. Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way. In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer. This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.
In Pepper, the Supreme Court reaffirmed the Illinois Brick rule. However, it employs a functional analysis to identify the first buyer (seller). This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings. But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers. Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages. But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.
The Pepper decision is not much of a crack in the (Illinois) brick house. A small dent perhaps, but not a foundational crack. “Ow…a brick house.”…