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Mid-West Paper Products Co. v. Continental Group Inc.

decided as amended april 5 1979.: March 26, 1979.

MID-WEST PAPER PRODUCTS COMPANY, APPELLANT
v.
CONTINENTAL GROUP, INC., AMERICAN BAG AND PAPER CORPORATION, CHASE BAG COMPANY, HARLEY CORPORATION, ST. REGIS PAPER COMPANY; SHOPPING CART, INC., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, APPELLANT V. CONTINENTAL GROUP, INC., AMERICAN BAG AND PAPER CORPORATION, CHASE BAG COMPANY, HARLEY CORPORATION, ST. REGIS PAPER COMPANY; 86TH STREET FOOD SPECIALTY, INC. C. G. DIARIES, INC. AND 3 J'S FARMS, INC., APPELLANTS V. CONTINENTAL GROUP, INC., AMERICAN BAG AND PAPER CORPORATION, CHASE BAG COMPANY, HARLEY CORPORATION, ST. REGIS PAPER COMPANY; MURRAY'S OF BAEDERWOOD, INC., ON BEHALF OF ITSELF AND ALL OTHERS SIMILAR SITUATED, APPELLANT V. CONTINENTAL GROUP, INC., AMERICAN BAG AND PAPER CORPORATION, CHASE BAG COMPANY, HARLEY CORPORATION, ST. REGIS PAPER COMPANY.



ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA D.C. Nos. 76-3935, 76-3524, 76-3956, and 77-1516

Before Aldisert, Adams and Higginbotham, Circuit Judges.

Author: Adams

Opinion OF THE COURT

In this appeal we are called upon to apply the teaching of Illinois Brick Co. v. State of Illinois, 431 U.S. 720, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977), to a number of settings, all in the context of a series of antitrust actions brought against manufacturers of consumer bags, alleging illegal price fixing under the Sherman Act and seeking both treble damages and injunctive relief. Because none of the plaintiffs purchased bags directly from the defendants, the district court relied on the holding in Illinois Brick that indirect purchasers from antitrust violators may not as a general matter sue for treble damages, granted defendants' motions for summary judgment, and dismissed the suits in their entirety.

With respect to all the plaintiffs, excepting only Mid-West Paper Products Company, we agree with the district court that Illinois Brick bars their claims for treble damages. But in our view such plaintiffs may still seek injunctive relief. We also believe that summary judgment on Mid-West's suit is inappropriate at least at this time.

I. FACTUAL AND PROCEDURAL HISTORY

These private antitrust actions were instituted in the wake of a grand jury indictment charging five corporations and seven individuals engaged in the manufacture of consumer bags with fixing prices in violation of section 1 of the Sherman Act.*fn1

The criminal indictment, the language of which was closely tracked in the complaints filed in the private civil actions, described consumer bags as single or multilayered paper bags that may also contain linings or coatings made from other materials and that are employed to prepackage products then marketed in them. Consumer bags are designed for capacities of less than twenty-five pounds. They often have printed exterior designs describing their contents and are used for packaging a variety of products, including pet foods, cookies, tea, coffee, and chemicals.

Plaintiffs in the civil actions fall into three categories: The first group, which includes Shopping Cart, Inc., 86th Street Food Specialty, Inc., C. G. Dairies, Inc. and 3 J's Farms, Inc., consists of supermarkets and retail grocery stores that do not purchase consumer bags directly from the defendants or from anyone else, but purchase products that are packaged in consumer bags for resale to their customers.

In the second category is Murray's of Baederwood, Inc. (Murray), a grocery store and delicatessen that sells products packaged in consumer bags, and also purchases empty consumer bags in which it packages its own brand of ice cream. The bags admittedly are not purchased directly from any of the defendants, but are for the most part bought from middlemen and wholesalers. However, one of Murray's officers suggested in a deposition that one of the firms from which Murray purchases bags "is a paper supplier and it's possible they manufacture. I don't know."*fn2 Together, the first two classifications will be referred to as the "supermarket plaintiffs."

Finally, there is Mid-West Paper Products Company (Mid-West), a middleman that purchases bags for resale to automobile manufacturers, which in turn put machine parts in the bags. Mid-West buys bags directly from various manufacturers, including Great Plains Bag Company (Great Plains), a subsidiary of defendant Continental Group, Inc. The parties are in dispute whether these bags are properly denominated consumer bags, rather than kraft bags.

Named as defendants in these actions are the five corporations listed in the criminal indictment: Continental Group, Inc., American Bag and Paper Corp., Chase Bag Co., Harley Corp., and St. Regis Paper Co. The cases involved in this appeal as well as other suits were consolidated for trial in the Eastern District of Pennsylvania, where plaintiffs sought certification to represent a class, and asked for treble damages and injunctive relief.

The district judge at first limited discovery to matters relevant to the class certification question. After the Supreme Court's decision in Illinois Brick, however, the judge requested the parties to show cause why the cases should not be dismissed because of that precedent. On April 5, 1978, summary judgment was granted in favor of the defendants on the authority of Illinois Brick. The order was not accompanied by an opinion. Plaintiffs filed a timely appeal.

II. Illinois Brick

According to Justice White, the author of the Illinois Brick opinion, the result there was logically compelled by the Court's earlier decision in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S. Ct. 2224, 20 L. Ed. 2d 1231 (1968). In Hanover Shoe, a company that had illegally overcharged its customers was sued by one of them for treble damages under § 4 of the Clayton Act.*fn3 It was determined there that as a matter of law an antitrust violator may not, as a general matter, interpose as a defense that the direct purchaser has not been injured because it had passed on the illegal overcharge to its own customers. As described in Illinois Brick, the Court in Hanover Shoe

held that except in certain limited circumstances, a direct purchaser suing for treble damages under § 4 of the Clayton Act is injured within the meaning of § 4 by the full amount of the overcharge paid by it and that the antitrust defendant is not permitted to introduce evidence that indirect purchasers were in fact injured by the illegal overcharge. 392 U.S., at 494, 88 S. Ct. at 2232. The first reason for the Court's rejection of this offer of proof was an unwillingness to complicate treble-damages actions with attempts to trace the effects of the overcharge on the purchaser's prices, sales, costs, and profits, and of showing that these variables would have behaved differently without the overcharge. Id., at 492-493, 88 S. Ct. at 2231. A second reason for barring the pass-on defense was the Court's concern that unless direct purchasers were allowed to sue for the portion of the overcharge arguably passed on to indirect purchasers, antitrust violators "would retain the fruits of their illegality" because indirect purchasers "would have only a tiny stake in the lawsuit" and hence little incentive to sue. Id., at 494, 88 S. Ct. at 2232.*fn4

With Hanover Shoe already foreclosing the defensive use of "pass-on" except in limited circumstances, the Court in Illinois Brick adopted a rule of symmetry with respect to the offensive use of "pass-on", thereby barring indirect purchasers from suing for treble damages whenever the antitrust defendant would be precluded from asserting the pass-on defense against a direct purchaser.

The Court reasoned that symmetry was required to protect defendants from the serious risk of multiple liability.*fn5 Also, it considered the "principal basis for the decision in Hanover Shoe " the perception that it would greatly complicate and reduce the effectiveness of treble damages proceedings if they were to include an analysis of the price and output decisions of a direct purchaser to determine how much of the illegal overcharge was absorbed by it and how much was passed on to be equally applicable to the assertion of pass-on theories by plaintiffs.*fn6 In sum, Illinois Brick concluded: "Permitting the use of pass-on theories under § 4 essentially would transform treble-damages actions into massive efforts to apportion the recovery among all potential plaintiffs that could have absorbed part of the overcharge from direct purchasers to middlemen to ultimate consumers."*fn7

Under Hanover Shoe and Illinois Brick, however, the pass-on theory may still be used, offensively or defensively, in the limited circumstances when tracing the interaction of market forces is unnecessary. Of relevance here, and the only situation clearly delimited by the Supreme Court,*fn8 is an exception carved out for the situation where there is a pre-existing, fixed-quantity, cost-plus contract between the direct purchaser and its customer, as well as between all other parties in the distribution chain from the direct purchaser to the plaintiff, so that the plaintiff has absorbed the illegal overcharge in its entirety.

In such a situation, the purchaser is insulated from any decrease in its sales as a result of attempting to pass on the overcharge, because its customer is committed to buying a fixed quantity regardless of price. The effect of the overcharge is essentially determined in advance, without reference to the interaction of supply and demand that complicates the determination in the general case.*fn9

Like many Supreme Court decisions that are the product of a system in which the cases to be reviewed are carefully selected, Illinois Brick not only addresses the immediate problem presented, it also serves as a guidepost for future litigation. Accordingly, we frame our response to the issues raised in this appeal with an eye toward blending with and complementing the themes that have been accentuated by the High Court. Thus, we must determine first, whether any of the supermarket plaintiffs qualify under the cost-plus contract exception so as to be in a position to sue defendants for treble damages. Second, although the Ratio decidendi in Illinois Brick focused upon the narrow issue of the necessity for symmetrical application of defensive and offensive use of the pass-on theory, defendants contend that that decision has broad implications regarding the general question of standing to sue. Therefore, we are required to assess whether Illinois Brick bars suits by purchasers from competitors of the antitrust defendants who allege that defendants' anticompetitive activity made it possible for their competitors to charge higher prices, thereby injuring plaintiffs. Third, it is necessary that we ascertain whether indirect purchasers, who may not sue for treble damages under § 4, may nonetheless seek injunctive relief under § 16.

III. TREBLE DAMAGE CLAIMS

A. Indirect Purchasers

It is evident that none of the plaintiffs grouped in the first category supermarkets that purchased consumer bags only indirectly from the defendant manufacturers may maintain actions for treble damages unless they can prove that there were pre-existing, fixed-quantity, cost-plus contracts at each level of distribution between the direct purchasers from the defendants and the plaintiffs, and that therefore they have absorbed the illegal overcharge in its entirety. Similarly, to prevail on one of its theories, Murray must establish the existence of cost-plus contracts at each level of distribution. The district court apparently concluded on the basis of the documents before it that the plaintiffs could not prove that such contracts existed and that since there was no genuine issue as to any material fact, the defendants were entitled to judgment as a matter of law. On appeal, the supermarkets argue that summary judgment was inappropriate inasmuch as discovery with respect to the merits of the controversy had not yet proceeded, and since it was still possible for them to prove that they qualify under the cost-plus exception.

Any review of the propriety of a grant of summary judgment at the early stages of discovery is instructed by an appreciation of the nature of the trial process in federal courts. The Federal Rules of Civil Procedure are designed "to put an end to the "sporting theory of justice,' by which the result depends on the fortuitous availability of evidence or the skill and strategy of counsel."*fn10 One cornerstone of this scheme is the discovery apparatus, through which the issues in dispute may be isolated, defined, and clarified before trial and through which a party may ascertain what evidence, if any, his opponent intends to introduce on each issue.*fn11 It has been recognized, however, that the liberal discovery devices still leave ample room for strategic maneuvering by counsel. Protracted discovery could be used by a wealthy party to coerce an adversary with limited resources into submission.*fn12 Also, as the Supreme Court has warned,

to the extent that (discovery) permits a plaintiff with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an In terrorem increment of the settlement value, rather than a reasonably founded hope that the process will ...


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