JAMES CLAYWORTH v. PFIZER, INC.

49 Cal. 4th 758

233 P.3d 1066

111 Cal. Rptr. 3d 666

JAMES CLAYWORTH et al., Plaintiffs and Appellants, v. PFIZER, INC., et al., Defendants and Respondents.

S166435

SUPREME COURT OF CALIFORNIA

July 12, 2010, Filed

Alioto Law Firm, Joseph M. Alioto, Joseph M. Alioto, Jr., Theresa D. Moore, Angelina Alioto-Grace, Thomas P. Pier; Law Offices of John H. Boone, John H. Boone; Foreman & Brasso, Russell F. Brasso; Law Offices of James M. Dombroski, James M. Dombroski; Law Offices of Jeffrey K. Perkins, Jeffrey K. Perkins; Gary D. McCallister & Associates, Gary D. McCallister, Thomas A. Kelliher, Eric I. Unrein and Jaime Goldstein for Plaintiffs and Appellants.

Coughlin Stoia Geller Rudman & Robbins, Pamela M. Parker; Schubert Jonckheer Kolbe & Kralowec and Kimberly A. Kralowec for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Appellants.

Zelle Hofmann Voelbel & Mason, Craig C. Corbitt and Henry A. Cirillo for Pharmacists Planning Service, Inc., as Amicus Curiae on behalf of Plaintiffs and Appellants.

Filice Brown Eassa & McLeod, Peter A. Strotz , Paul R. Johnson, William E. Steimle; Davis Polk & Wardwell, Ameila Starr, Arthur F. Golden, William J. Fenrich and Daniel J. Schwartz for Defendant and Respondent AstraZeneca LP.

Winston & Strawn, Tyler M. Paetkau, Nicole P. Dogwill, James F. Hurst, Susan A. Pipal, Matthew J. Sullivan; Eimer Stahl Klevorn & Solberg, David M. Stahl, J. Cunyon Gordon and Adam Oyenbanji for Defendant and Respondent Abbott Laboratories.

Gibson, Dunn & Crutcher, Jeffrey T. Thomas and James N. Knight for Defendant and Respondent Allergan, Inc.

Mayer, Brown, Rowe & Maw, Mayer Brown, Donald M. Falk, John Nadolenco , Mack Anderson; Sheppard Mullin Richter & Hampton, Steven O. Kramer, John P. Stigi III; Hogan & Hartson and Joseph H. Young for Defendant and Respondent Amgen, Inc.

Covington & Burling, Elizabeth Abigail Brown, Anita F. Stork, Theodore Voorhees, Jr., and Thomas J. Cosgrove for Defendant and Respondent Boehringer Ingelheim Pharmaceuticals, Inc.

Sedgwick, Detert, Moran & Arnold, Paul J. Riehle, Matthew A. Fischer; Cravath, Swaine & Moore, Evan R. Chesler, Elizabeth L. Grayer, Jessica Buturla and Jeffrey B. Korn for Defendant and Respondent Bristol-Myers Squibb Company.

Reed Smith, Michele Diane Floyd , Kirsten J. Handelman; Oppenheimer Wolff & Donnelly, Gary Hansen, David Graham and Aaron Mills Scott for Defendant and Respondent Eli Lilly & Company.

Irell & Manella, Alexander F. Wiles, John C. Keith; Cleary Gottlieb Steen & Hamilton, George S. Cary, Sara D. Schotland and David I. Gelfand for Defendant and Respondent GlaxoSmithKline PLC.

Drinker Biddle & Reath, H. Christian L'Orange, Paul H. Saint-Antoine, Mary E. Kohart, David J. Antczak and Joanne C. Lewers for Defendant and Respondent Hoffmann-La Roche Inc.

Folger Levin & Kahn, Crowell & Moring, Beatrice Bich-Dao Nguyen, Samuel Ray Miller, Tracy E. Reichmuth, Cecilia C. Ogbu , Steven E. Wilson; Patterson Belknap Webb & Tyler, William Cavanaugh, Jr., and Cecilia B. Loving for Defendants and Respondents Janssen Pharmaceutical Inc., Johnson & Johnson Health Care Systems, Inc., Ortho Biotech, Inc., and Ortho-McNeil Pharmaceutical, Inc.

Hughes Hubbard & Reed, Rita M. Haeusler , John M. Townsend, Scott H. Christensen , James A. Graffam; Orrick, Herrington & Sutcliffe, Robert P. Reznick and David Goldstein for Defendant and Respondent Merck Sharp & Dohme Corp. formerly known as Merck & Co., Inc.

Kaye Scholer, Aton Arbisser , Bryant S. Delgadillo, Saul P. Morgenstern, Karin E. Garvey; Faegre & Benson, James A. O'Neal and Kim J. Walker for Defendant and Respondent Novartis Pharmaceuticals Corporation.

Nossaman, Gunther, Knox & Elliott, Nossaman, Scott DeVries , Katrina June Lee; Dickstein Shapiro, Peter J. Kadzik , Bernard Nash , Maria Colsey Heard , Milton Marquis and Andres Colin for Defendant and Respondent Pfizer Inc.

Latham & Watkins, Charles H. Samel , Jennifer A. Carmassi, Margaret M. Zwisler , Steven H. Schulman and Belinda S. Lee for Defendant and Respondent Pharmaceutical Research and Manufacturers of America.

Arnold & Porter, Ronald C. Redcay , Douglas L. Wald , Mark R. Merley, Daniel R. Waldman , Anne P. Davis and Ryan Z. Watts for Defendant and Respondent Wyeth.

JUDGES: Opinion by Werdegar, J., with George, C. J., Baxter, Moreno, Ruvolo, Robie, and Miller, JJ., concurring.

OPINION BY: Werdegar

WERDEGAR, J.—When a group of companies conspires to fix prices at higher than a competitive level, the resulting overcharge is paid in the first instance by the direct purchaser of the cartel's goods. In markets where the direct purchaser is not also the ultimate purchaser, but an intermediary between the cartel and the consumer (the indirect purchaser), several questions arise: First, who should be permitted to sue for price fixing, the direct purchaser, the indirect purchaser, or both? Second, how should damages be allocated? Should an antitrust conspirator be permitted to raise as a defense that the direct purchaser passed on some or all of the overcharge to indirect purchasers downstream in the chain of distribution?

Under federal antitrust law, the answer to these questions is settled. In Hanover Shoe v. United Shoe Mach. (1968) 392 U.S. 481 [20 L. Ed. 2d 1231, 88 S. Ct. 2224] (Hanover Shoe), the United States Supreme Court held antitrust violators ordinarily could not assert as a defense that any illegal overcharges had been passed on by a plaintiff direct purchaser to indirect purchasers. Instead, the full measure of the overcharge is recoverable by the direct purchaser. In a related decision nine years later, the Supreme Court concluded only direct purchasers, not indirect purchasers, could sue for price fixing. (Illinois Brick Co. v. Illinois (1977) 431 U.S. 720 [52 L. Ed. 2d 707, 97 S. Ct. 2061] (Illinois Brick).)

Under state antitrust law, only the first question—who may sue—is settled. In 1978, in direct response to Illinois Brick, the Legislature amended the state's Cartwright Act (Bus. & Prof. Code, § 16700 et seq.) to provide that unlike federal law, state law permits indirect purchasers as well as direct purchasers to sue (§ 16750, subd. (a)). This left open the further question how damages should be allocated. Does the Cartwright Act permit a pass-on defense, or in this respect are state and federal law the same?

We conclude that under the Cartwright Act, as under federal law, generally no pass-on defense is permitted. While the text of the Cartwright Act does not answer the question, the Legislature's actions in response to Illinois Brick and related federal statutory amendments reveal a clear legislative preference for the Hanover Shoe rule. As well, that rule is the one most closely in accord with the Legislature's overarching goals of maximizing effective deterrence of antitrust violations, enforcing the state's antitrust laws against those violations that do occur, and ensuring disgorgement of any ill-gotten proceeds. Accordingly, we reverse the Court of Appeal, which held that a pass-on defense was available and that it entitled the alleged price-fixing defendants here to summary judgment.

FACTUAL AND PROCEDURAL BACKGROUND

On appeal from a grant of summary judgment, we review and recite the evidence in the light most favorable to the nonmoving party (here, plaintiffs). (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 [107 Cal. Rptr. 2d 841, 24 P.3d 493].)

Plaintiffs (hereafter Pharmacies) are retail pharmacies located in California. Defendants (hereafter Manufacturers) are, with two exceptions, companies that manufacture, market, and/or distribute brand-name pharmaceutical products throughout the United States. Manufacturers also manufacture, market, and/or distribute similar brand-name pharmaceutical products in Canada where, unlike in the United States, the products are subject to government pricing restrictions.

Pharmacies filed suit under section 1 of the Cartwright Act (Stats. 1907, ch. 530, § 1, pp. 984–985, as amended; §§ 16720, 16726) and the unfair competition law (UCL) (§ 17200 et seq.), alleging Manufacturers had unlawfully conspired to fix the prices of their brand-name pharmaceuticals in the United States market, including in California. The complaint alleged Manufacturers had agreed to set artificially high prices for their products, and had acted in concert to restrain reimportation of their lower priced foreign drugs into the United States and to restrict price competition from generics. As a result, the complaint alleged, Manufacturers were able to maintain prices for their drugs in California, as elsewhere in the United States, at levels 50 to 400 percent higher than for the same drugs sold outside the United States. Pharmacies alleged they consequently had been forced to pay an overcharge, the differential between the conspiracy-inflated prices set by Manufacturers and the prices Pharmacies would have paid in a competitive market. They sought treble damages, restitution, and injunctive relief.

Each Manufacturer answered, denying Pharmacies' allegations and asserting as an affirmative defense that Pharmacies' claims were barred on the ground Pharmacies passed on any alleged overcharge to third parties and therefore did not suffer a compensable injury.

Pharmacies filed a motion for summary adjudication of Manufacturers' pass-on defense, arguing that the defense was unavailable under the Cartwright Act in light of Hanover Shoe, supra, 392 U.S. 481, the subsequent legislative history of the Cartwright Act, and public policy. Manufacturers responded with a cross-motion for summary judgment, arguing that under the plain language of the Cartwright Act, a pass-on defense was available and defeated both the Cartwright Act and UCL claims.

Evidence presented in connection with the cross-motions established the following essentially undisputed facts. Manufacturers sell their drugs to wholesalers at a price referred to as the wholesale acquisition...