Court Limits Scope of Antitrust Liability

June 21, 2007 | Roger McEowen

The Iowa Supreme Court has issued an important ruling concerning the scope of the Iowa competition (antitrust) law. The ruling narrows the pool of eligible parties that may sue for an antitrust violation, and has important implications for many Iowa consumers - including farmers.  

The court’s 2002 opinion.  In 2002, the court stated that the Iowa competition law “created a cause of action for all consumers, regardless of whether the consumer was a direct or indirect purchaser.”  Under that rationale, all Iowa consumers that are injured by antitrust conduct have standing to sue to enforce the law. The case involved retail buyers of computers that had the Windows 98 operating system pre-installed. In order to use the system, the buyers became end-use licensees of Microsoft. The retail buyers sued under the Iowa competition law on the claim that Microsoft charged inflated prices for its products above what would have resulted in a competitive market. The Court ruled that the computer buyers had standing to sue as indirect purchasers of the computers - they didn’t buy them directly from Microsoft, but obtained them “through the stream of commerce.” The court’s ruling rejected the application of a 1977 U.S. Supreme Court ruling that limited antitrust standing to direct purchasers (Illinois Brick).

The court’s 2007 opinion.  The present case involved two national credit card companies as the defendants. Businesses who accepted their credit cards also had to accept the companies’ debit cards - the two services were tied together. A business could not choose to use only one of the services (e.g., accept credit cards but not debit cards). The claim was that the tying arrangement resulted in the businesses paying inflated fees for processing debit transactions and violated the Iowa competition statute. Those higher costs were passed along to all consumers in the form of higher prices for goods that the businesses sold. The plaintiffs were a class made up of purchasers of goods for cash or via debit card from merchants who utilize the defendants’ services (i.e., accept credit cards and are forced via the illegal tying arrangement to accept debit cards). They sued to enforce the Iowa competition law, and the trial court granted summary judgment for the defendants on the basis that the plaintiffs’ injuries were “too remote.”

On appeal, the Iowa Supreme Court affirmed on the basis that the court’s 2002 opinion only allowed claims to be brought under the Iowa competition statute by direct or indirect purchasers of the product that is the subject of the antitrust activity.That rationale, as applied in this case, had the effect of limiting standing to direct or indirect purchasers of the debit processing services.  The plaintiffs (buyers of products with inflated prices due to the illegal antitrust tying activity of the defendants) had no standing to sue under the Iowa competition law.

Once the court had limited its own precedent so that it did not apply to the present case, the court utilized a 1983 U.S. Supreme Court opinion to discern the legislature’s intent on the standing issue when it passed the competition law in 1976. Under the 1983 case, standing to sue is not measured in terms of actual antitrust injury, but rather whether the plaintiff’s injury is too remote. Application of that case to the present case resulted in the plaintiff class not having standing to sue. So, the outcome was all in how the court framed the issue. The issue was framed narrow enough to eliminate the antitrust claim.

Impact of the court’s ruling.  The court was clearly trying to minimize the scope of liability for antitrust conduct. In that regard, the court’s opinion is consistent with numerous other courts that have limited the ability to bring antitrust actions. But, the court’s ruling largely misses the point of antitrust law and the Iowa competition law. The fact remains that the plaintiffs were persons who bought products that had inflated prices as the result of price-fixing activity. They were the ones that suffered actual economic damages, but the court ruled that they had no redress under the Iowa competition law.

In a broader sense, most Iowa consumers are now disenfranchised from bringing suit under Iowa law for antitrust injury. While the court did not technically eliminate the possibility that indirect purchasers could maintain an antitrust claim, the court appears very willing to grope for reasons to limit the scope of the Iowa competition law. The court’s opinion certainly illustrates that point. The court’s adoption of a remoteness standard rather than focusing on actual economic injury from antitrust conduct will achieve that result. In most instances, consumers do not purchase directly from the parties leveling the anticompetitive overcharge, but rather purchase goods indirectly through distributors, wholesalers, retailers and others in the distribution chain. These direct purchasers usually pass-on at least 100% of the anticompetitive overcharge to consumers or end-users, since it is embedded in their cost of goods. Sometimes these parties are actually beneficiariesof the antitrust conduct in situations where demand for the product is relatively inelastic (a price increase doesn’t lead to much, if any decline in demand). So, the direct purchaser has little to no incentive to sue and indirect purchasers could be held to suffer injury that is “too remote” to bestow standing. 
  
The 1976 Iowa competition law was modeled after language in the Sherman Act as amended by the Clayton Act which provides that "any person injured in his business or property" may sue. Before the Supreme Court’s 1977 Illinois Brickdecision, this included consumers who bore the brunt of unlawful overcharges. The Iowa Supreme Court’s 2002 decision in the Microsoft case refused to limit antitrust recovery only to direct purchasers. To claim (as the court did in its present opinion) that purchasers of products with inflated prices due to antitrust activity are not even indirect “purchasers” entitled to bring an antitrust claim is disingenuous. In addition, there is a great deal of academic literature and economic studies that demonstrate that when tied goods are unbundled, the price of the goods falls to a competitive level. To bar suit by purchasers of goods whose price has been artificially inflated by a tying arrangement does not comport with the Iowa statute which states that it applies to “all” consumers.

Application to agriculture.  The court’s decision also deals a blow to competitive agricultural markets. Given the increased concentration amongst agricultural firms that sell inputs to farmers and buy their outputs, agricultural markets have become prone to market manipulation. For example, the entire food industry consists of a chain of handlers. One segment, the grain industry, consists largely of farmers that sell grain to a grain buyer or wet miller who then sells to the lysine industry.  If the lysine industry is characterized by a few powerful buyers who can force prices below a competitive level, the grain buyer may be indifferent. The grain buyer simply wants equal price treatment with regard to other grain buyers. However, the grain market is driven down because of the market power and the grain buyer passes the damage to the grain farmer in the form of lower grain prices. Thus, the grain farmer is ultimately the damaged party but would not be afforded the protection of Iowa law because the injury is “too remote.”  A similar analysis would apply to the meat industry and other sectors of the agricultural economy.

The bottom line is that the court’s ruling will end up allowing some antitrust activity to go unchecked. That’s a bad result for all Iowans. Southard, et al. v. Visa U.S.A., Inc., et al., 734 N.W.2d 192(Iowa Sup. Ct. 2007).