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Clayworth v. Pfizer, Inc.: The Other [Hanover] Shoe Drops

By Bruce Nye

    It?s been a long time since CBL has posted about California?s Unfair Competition Law, and even longer since we blogged about anti-trust law.  Here?s a two-fer.

    As CBL noted in this post, California has had its own anti-trust law, the Cartwright Act (Bus. & Prof. Code §§16700 and following), since 1907, and the California anti-trust jurisprudence is similar, but by no means identical to, that deriving from the Federal Sherman Anti-Trust Act (15 U.S.C. § 1, and following).  In July, 2008, the California Court of Appeal for the First District carved out one difference with respect to the ?pass-on defense.?

    In Clayworth v. Pfizer, Inc., (A116798), plaintiffs, retail pharmacies, bought prescription drugs from  pharmaceutical manufacturer defendants.  The defendants allegedly conspired unlawfully to keep the prices artificially high.  Plaintiffs allegedly passed along every last nickel of the supra-market price to their customers.  Under the asserted ?pass on? defense, the defendants alleged that the plaintiffs had no claim because they had ?passed on? the alleged increased costs to their own customers, and hence had sustained no damages.  Although this defense had been rejected by the U.S. Supremes in Hanover Shoe v. United Shoe Mach. (1968)  392 U.S. 481, the Court of Appeal held that California law was different, and allowed for the pass-on defense.

    But the Cal Supremes have  reversed, and the law in this regard is now the same under both the Cartwright and Sherman Acts:  in most instances, there is no pass-on defense.  Clayworth v. Pfizer, Inc. (July 12, 2010) ___Cal.4th___ (S166435).  State and Federal law still differ, however, with respect to the ?indirect purchaser? rule.  Under Federal anti-trust law, the customers of the plaintiffs ? the ones who actually paid the net increased prices caused by the defendants? price-fixing ? are barred from suing the manufacturers.  Illinois Brick Co. v. Illinois (1977) 431 U.S. 720.  Under California?s ?Illinois Brick repealer act (Bus. & Prof. Code § 16700), the opposite is true.  The ultimate purchasers can sue.

    In addition to their Cartwright Act causes of action, the plaintiffs here sued for injunctive relief and restitution under the Unfair Competition Law (Bus. & Prof. Code § 17200 et seq.)  And the wrinkle in this decision has to do with the  UCL.

    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.)   So, said the defendants, since all the price increases were ?passed on? to the ultimate consumers, the plaintiffs suffered no injury in fact and lost no money or property, so they lacked standing, right?

    Wrong.  That the price increases were passed on to the plaintiffs? customers was a matter of mitigation.  ?The [p]harmacies indisputably lost money when they paid an allegedly illegal overcharge.?  (Slip. Op. p. 40.)  The fact that they ultimately may have recouped some or all of this lost money from someone else doesn?t prevent them from having standing in the first place. 

    CBL thinks this holding is the real sleeper, and will likely ease the UCL?s standing requirement in a number of as yet unforeseen settings.

    More commentary on Clayworth:  UCL Practitioner here and here (UCLP's Kimberly Kralowec wrote one of the amicus briefs on the case);  California Appellate Report here.

Full post as published by CalBizLit on July 13, 2010 (boomark / email).