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July 2010

The California Supreme Court Disallows the Anti-Trust Pass-On Defense and Permits an Injunction Under the UCL Despite the Lack of Monetary Damages

Clayworth v. Pfizer (10 C.D.O.S. 8795)

The California Supreme Court's July 12, 2010 decision in Clayworth v. Pfizer (10 C.D.O.S. 8795) serves the dual purpose of clarifying the state Unfair Competition Law's standing requirements and available remedies, and effectively barring the anti-trust law "pass-on" defense to Cartwright Act claims in California.

No Pass-On Defense Under California's Anti-Trust Law

The defenses under California's anti-trust law (Cartwright Act, Bus. & Prof. Code §§16700 et. seq.) were significantly restricted when the Court unanimously rejected the "pass-on" defense, a defense by which companies claim a direct purchaser cannot sue if it had passed on any overcharge to others, e.g., ultimate consumers. The plaintiffs in Clayworth, retail pharmacies, bought prescription drugs from the defendant pharmaceutical manufacturers. The defendants allegedly conspired unlawfully to keep the prices artificially high. Plaintiffs, however, allegedly passed along all of the increased prices to their customers.

Under the asserted "pass on" defense, the defendants argued that the plaintiffs had no claim because they had "passed on" the alleged increased costs to their own customers, and hence sustained no damages. Although this defense under federal law was rejected by the U.S. Supreme Court in Hanover Shoe v. United Shoe Mach. (1968) 392 U.S. 481, in Clayworth, the California Court of Appeal allowed it under state law. On review, the California Supreme Court disagreed and reversed the appellate court's ruling, rejecting the Clayworth defendants' defense, and thus bringing California in line with the federal law on the issue.

Plaintiffs Can Seek an Injunction Under the UCL Even if They May Not be Entitled to Restitution

In addition to their Cartwright Act claims, the plaintiffs in Clayworth sought injunctive relief and restitution under California's Unfair Competition Law ("UCL"; Bus. & Prof. Code § 17200 et seq.) Under Proposition 64, the voters' 2004 initiative tightening the UCL's standing requirement, a UCL plaintiff lacks standing unless he can show that he "suffered injury in fact and has lost money or property" as a result of unfair competition. (Bus. & Prof. Code § 17204.) As discussed above, the defendants argued that since the price increases were "passed on" to the ultimate consumers, the plaintiffs suffered no injury in fact and lost no money or property, and thus lacked standing. The Clayworth Court disagreed and held that the "pass on" of price increases to the plaintiffs' customers was an issue of mitigation and does not preclude them from having standing in the first place.

The Supreme Court analyzed plaintiffs' standing and expressly adopted the rule established in Shersher v. Superior Court (2007)154 Cal.App.4th 1491, i.e., that indirect purchases may support UCL standing. That is, plaintiffs who did not purchase a product "directly" from the defendant(s) may nonetheless bring a UCL claim and recover restitution if the loss can be traced to the defendant's pockets. Application of this rule to the facts in Clayworth ultimately led to the conclusion that the retail pharmacies established standing, in part, because they acted as retailers for the manufacturers' drugs and thus had indirect business dealings with manufacturers. This holding overrules a number of decisions, such as Buckland v. Threshold Enterprises, Ltd. (2007) 155 Cal.App.4th 798 and Citizens of Humanity v. Costco Wholesale Corp. (2009) 171 Cal.App.4th 1, in which it was held the only type of monetary loss that can confer standing is a purely restitutionary loss.

With respect to UCL remedies, the Court clarified that, even where plaintiffs had engaged in the "pass on" of price increases, such does not necessarily preclude them from seeking injunctive relief. The Court rejected the defendants' argument that in order to seek injunctive relief, plaintiffs must have suffered a monetary loss and be entitled to restitution: "injunctive relief under [Bus. & Prof. Code] section 17203 is not dependent on entitlement to restitutionary relief; the two are wholly independent remedies."

Legal commentators and practitioners opine that the ruling will facilitate the pursuit of class action lawsuits brought under the UCL by easing the standing requirement. An enhancement of anti-trust enforcement in California is also predicted on the heels of this ruling, which may allow intermediaries, such retailers who buy from manufacturers and resell to the public, to pursue their own claims.

Antitrust

Amy Maclear



Antitrust
Commercial Litigation
Unfair Competition

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