Abbott Laboratories, Inc. (Ross Laboratories Div.) v. Segura, 94-0514

Citation907 S.W.2d 503
Decision Date27 October 1995
Docket NumberNo. 94-0514,94-0514
Parties1995-2 Trade Cases P 71,251, 38 Tex. Sup. Ct. J. 961 ABBOTT LABORATORIES, INC. (ROSS LABORATORIES DIVISION); Bristol-Myers Squibb Company; Mead Johnson & Company; and American Home Products Corporation (Wyeth-Ayerst Laboratories Division), Petitioners, v. Crystal SEGURA; Teri Norton; Sherri Chretien; Janice Kimler; Tessia Innocenti; Angela Christine Maroney; Melissa Whittaker Duran; and Tracey Freezia Leudeman, Respondents.
CourtSupreme Court of Texas

Michael N. Sohn, Washington, DC, Philip K. Maxwell, Austin, Thomas H. Brill, Mission Hills, KS, Carl A. Parker, Rife S. Kimler, Port Arthur, R. Lawrence Ward, William E. Quirk, Ellen Martin, Kenton C. Granger, Raymond L. Dahlberg, Kansas City, MO, Vernon N. Reaser, Jr., Victoria, William Douglas Hammond, Carron L. Haight, Houston, Marc M. Seltzer, Los Angeles, CA, Tim Labadie, Austin, Angela K. Green, Kansas City, MO, for respondents.

Brian S. Greig, Austin, Layne E. Kruse, Houston, Shannon H. Ratliff, D.L. (Lin) Hughes, Austin, J. Andrew Langan, Chicago, IL, John R. Hulme, Louis P. Bickel, Dallas, Douglas D. Broadwater, Max R. Shulman, Beth L. Trent, New York City, Patton G. Lochridge, Austin, Mark J. Spooner, Mark R. Merley, Washington, DC, for petitioners.

PHILLIPS, Chief Justice, delivered the opinion of the Court, in which HIGHTOWER, HECHT, ENOCH and OWEN, Justices, join.

In this case, we decide whether the long-standing bar to indirect purchaser recovery in antitrust suits also bars indirect purchasers who primarily allege antitrust conduct, but who sue under the Texas Deceptive Trade Practices-Consumer Protection Act ("DTPA"). TEX.BUS. & COM.CODE ANN. §§ 17.41-17.63 (Vernon 1987). The court of appeals held that retail buyers of infant formula "stat[ed] causes of action for unconscionable price disparity and taking advantage of plaintiffs' lack of capacity, knowledge, and experience to a grossly unfair degree." 873 S.W.2d 399, 408. We hold that indirect purchasers cannot recover under the DTPA upon allegations on which recovery would have been barred if brought under the Texas Free Enterprise and Antitrust Act ("the Antitrust Act"). TEX.BUS. & COM.CODE ANN. §§ 15.20, 15.21 (Vernon 1987). Accordingly, we reverse the judgment of the court of appeals and render judgment that the plaintiff-intervenors take nothing as a matter of law. 1

This case began in September 1991 when the Attorney General of the State of Texas sued Bristol-Myers Squibb Company, its wholly-owned subsidiary Mead Johnson & Company, Abbott Laboratories, Inc., a division of Ross Laboratories Division, and the American Academy of Pediatrics ("AAP"), seeking injunctive relief and damages under sections 15.20 and 15.21 of the Antitrust Act. The State alleged that the manufacturers conspired with each other to fix the wholesale price of infant formula and with the AAP to monopolize markets for infant formula and infant formula advertising. Specifically, the State maintained that the manufacturers' marketing plan created the appearance that pediatricians endorsed particular brands of infant formula, thus creating an illusion of uniqueness which was wholly unwarranted because federal regulations govern quality control and nutritional standards resulting in nearly identical products.

The State sought damages as parens patriae on behalf of consumers who purchased the infant formula and on behalf of the Women, Infants, and Children Program, a federally funded food distribution program administered by the Texas Department of Health. 42 U.S.C.A. § 1786 (1994); TEX.AGRIC.CODE ANN. § 15.001-7 (Vernon Supp.1995). The manufacturers and the AAP specially excepted to the Attorney General's pleadings on the grounds that since neither the consumers nor the WIC program were direct purchasers, they lacked standing under the Antitrust Act. See Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977) (forbidding indirect purchasers to recover under federal antitrust laws). Moreover, since the State sues as parens patriae on behalf of its consumers to recover damages caused by an antitrust violation, it has no greater right to recovery than the consumers it represents. Kansas & Mo. v. Utilicorp United, 497 U.S. 199, 219, 110 S.Ct. 2807, 2818, 111 L.Ed.2d 169 (1990). Therefore, the manufacturers argued, the State's derivative claim on the indirect purchasers behalf was also barred for the same reason. The trial court sustained the special exceptions and dismissed the damages claim, but left the State's injunction claim pending.

Crystal Segura and other infant formula consumers intervened in the State's ongoing enforcement action, adding American Home Products Corporation as an additional manufacturer-defendant but omitting the AAP. The intervenors brought claims for damages against the manufacturers for the same conduct alleged by the State under the Antitrust Act. The intervenors, however, alleged that the conduct violates the Texas DTPA's prohibition against unconscionable conduct. TEX.BUS. & COM.CODE ANN. § 17.50(a)(3) (Vernon 1987). The manufacturers filed a plea to the jurisdiction and specially excepted to the intervenors' pleadings on the grounds that the intervenors' "classic antitrust claims" of price-fixing and monopolization are not cognizable under the DTPA.

The trial court sustained the manufacturers' special exceptions and allowed the intervenors thirty days to replead. The intervenors made only slight changes, retaining their core allegations that the manufacturers violated the DTPA by attempting to monopolize the infant formula market and creating barriers to entry by these methods: 1) creating the illusion that infant formula products are somehow unique and nutritionally different, when all brands are nutritionally identical; 2) creating and maintaining dedicated franchise relationships with physicians and hospitals that endorse the purchasing of a particular brand name while Texas consumers are kept ignorant of the monies and lavish promotional resources which these physicians and hospitals receive for these endorsements; 3) giving free samples through franchise physicians and hospitals during the first months of infants' lives, thereby creating an endorsement of the manufacturers' products and later grossly overcharging Texas consumers in the retail market for baby formula products; 4) using market dominance to prevent other companies from selling baby formula products to consumers through direct consumer advertising that could inform Texas consumers about the generic nature of these products and permit informed buying decisions based upon price and nutritional information; and 5) implementing nearly identical price increases. These allegations are also nearly identical to the allegations made by the antitrust plaintiffs, all of whom are direct purchasers and retailers of formula, in a multi-district consolidation currently pending in the Northern District of Florida. See In re Infant Formula Antitrust Litigation, MDL Docket No. 878, 1992 WL 503465 (N.D.Fla).

The manufacturers moved for summary judgment, arguing that (1) the intervenors' claims are cognizable only under the Antitrust Act, under which the intervenors, as indirect purchasers, lack standing, and (2) alternatively, even if the intervenors' claims are DTPA claims, the intervenors have no standing because the DTPA and the Antitrust Act must be harmonized and the Antitrust Act bars suits by indirect purchasers. By response, the intervenors conceded that their claim would be barred under the Antitrust Act, but maintained that their pleadings were sufficient to state a cause of action under the DTPA for "unconscionable action or course of action." TEX.BUS. & COM.CODE ANN. § 17.45(5).

The trial court granted summary judgment for the manufacturers against the intervenors, severing that part of the case from the State's enforcement action. The court of appeals reversed and remanded for trial on the merits. We granted the manufacturers' writ of error.

The manufacturers moved for summary judgment on two closely related grounds, neither of which specifically addressed unconscionability, but both of which assert that the bar to indirect purchaser recovery in antitrust controls the outcome of this action. 2 In reviewing the judgment of the court of appeals, we therefore do not consider whether the manufacturers established by their summary judgment proof that the alleged conduct was not unconscionable as a matter of law under the DTPA.

We begin with the Legislature's mandate that Texas antitrust law be harmonized with federal antitrust law. TEX.BUS. & COM.CODE ANN. § 15.04; 3 see Caller-Times Pub. Co. v. Triad Communications Inc., 826 S.W.2d 576, 580 (Tex.1992). Allowing the intervenors to sue under the DTPA on allegations that are virtually identical to the antitrust allegations made by both the Texas Attorney General and the multi-district litigation plaintiffs in Florida would essentially permit an end run around the policies allowing only direct purchasers to recover under the Antitrust Act.

The legal reasoning behind the prohibition on indirect purchaser recovery in antitrust has three principal bases, each of which the Supreme Court discussed at some length in Illinois Brick. First, the prohibition on indirect purchaser recovery had its genesis in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968). That case involved an antitrust treble-damages action brought under section 4 of the Clayton Act against a manufacturer of shoe machinery by one of its customers, a manufacturer and wholesaler of shoes (a direct purchaser). In defense of allegations of monopolistic pricing, the shoe machinery manufacturer sought to show that the plaintiff-wholesaler had not been injured in its business as required by section 4 because it had passed on the...

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