Clayworth v. Pfizer, Inc.

• Decision Date: 25 July 2008
• Docket Number: No. A116798.,A116798.
• Citation: 165 Cal.App.4th 209,83 Cal. Rptr. 3d 45
• Court: California Court of Appeals Court of Appeals
• Parties: JAMES CLAYWORTH et al., Plaintiffs and Appellants, v. PFIZER, INC., et al., Defendants and Respondents.

165 Cal.App.4th 209

83 Cal. Rptr. 3d 45

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

No. A116798.

Court of Appeals of California, First District, Division Two.

July 25, 2008.

Alioto Law Firm, Joseph M. Alioto, Theresa D. Moore, Angelina Alioto-Grace, Joseph M. Alioto, Jr., Thomas P. Pier; Law Offices of James M. Dombroski, James M. Dombroski; Law Offices of Jeffery K. Perkins, Jeffery K. Perkins; Law Offices of John H. Boone, John H. Boone; Foreman &

Brasso, Russell F. Brasso; Gary D. McCallister & Associates, Thomas A. Kelliher, Eric I. Unrein and Jaime Goldstein for Plaintiffs and Appellants.

Winston & Strawn, Tyler M. Paetkau, Nicole P. Dogwill, Susan A. Pipal; Eimer Stahl Klevorn & Solberg, David M. Stahl, J. Cunyon Gordon, A. Oyenbanji; Davis Polk & Wardwell, Amelia Starr, Arthur F. Golden, William J. Fenrich, Daniel J. Schwartz; Filice Brown Eassa & McLeod, Peter A. Strotz, William El Steimle, Paul R. Johnson; Kaye Scholer, Aton Arbisser, Bryant S. Delgadillo, Saul P. Morgenstern; Covington & Burling, Theodore Voorhees, Jr., Thomas J. Cosgrove; Elizabeth Abigail Brown, Anita Fern Stork; Gibson, Dunn & Crutcher, Jeffrey T. Thomas, James N. Knight; Oppenheimer Wolff & Donnelly, Gary Hansen, David P. Graham, Aaron Mills Scott; Reed Smith, Michele Diane Floyd; Folger Levin & Kahn, Beatrice Bich-Dao Nguyen, Samuel Ray Miller; Patterson Belknap Webb & Tyler, William Cavanaugh, Jr.; Cleary Gottlieb Steen & Hamilton, George Cary, Sara D. Schotland; Irell & Manella, Alexander F. Wiles, John C. Keith; Dickstein, Shapiro, Peter J. Kadzik, Bernard Nash, Maria Colsey Heard, Milton Marquis, Andres Colin; Nossaman, Gunther, Knox & Elliott, Scott DeVries, Katrina June Lee; Drinker, Biddle & Reath, H. Christian L'Orange, Paul H. Saint-Antoine, David J. Antczak; Hughes Hubbard & Reed, John M. Townsend, Robert P. Reznick, Rita M. Haeusler; Cravath, Swaine & Moore, Elizabeth L. Grayer, Evan R. Chesler, Jessica Buturla, Jeffrey B. Korn; Sedgwick, Detert, Moran & Arnold, Paul J. Riehle, Matthew A. Fischer; Latham & Watkins, Margaret M. Zwisler, Steven H. Schulman; Latham & Watkins, Charles H. Samel, Belinda S. Lee, Jennifer A. Carmassi; Arnold & Porter, Douglas L. Wald, Mark R. Merley, Anne P. Davis, Ronald C. Redcay, Daniel R. Waldman, Ryan Z. Watts; Hogan & Hartson, Joseph H. Young; Faegre & Benson, James A. O'Neal, Kim J. Walker; Mayer, Brown, Rowe & Maw, Steven Oliver Kramer and Donald M. Falk for Defendants and Respondents.

OPINION

RICHMAN, J.

This case presents an issue of first impression in California antitrust law: whether the pass-on defense is available to defendants accused of price fixing. We hold that it is.

Retail pharmacies (plaintiffs) sued pharmaceutical companies (defendants) alleging price fixing, asserting claims for violation of the Cartwright Act (Bus. & Prof. Code, § 16700 et seq.),¹ and for restitution and injunctive relief under the California Unfair Competition Law (UCL) (§ 17200 et seq.). Defendants asserted as an affirmative defense that plaintiffs "passed on" all of the claimed overcharges to their customers. Discovery demonstrated that they did pass on the charges, and plaintiffs further admitted that they sought no other damages, such as lost or delayed sales, aside from the claimed overcharges.

Plaintiffs moved for summary adjudication on the pass-on defense, contending that it is not recognized in California, relying primarily on Hanover Shoe v. United Shoe Mach. (1968) 392 U.S. 481 [20 L.Ed.2d 1231, 88 S.Ct. 2224] (Hanover Shoe), which rejected the pass-on defense, and the legislative history of the Cartwright Act. Defendants filed their own motion, contending that California never adopted the Hanover Shoe holding and that the language of the Cartwright Act makes clear that plaintiffs in an antitrust action cannot recover for an overcharge passed on to a subsequent purchaser.

The trial court decided the cross-motions in favor of defendants, concluding that the pass-on defense is available in California, and that plaintiffs did not suffer any compensable injury within the meaning of section 16750 and thus could not recover on the Cartwright Act claim. The court also concluded that plaintiffs lacked standing to bring a UCL claim because they had not lost money or property and, alternatively, were not eligible for restitution. The trial court thus granted summary judgment. We affirm.

BACKGROUND

1. The Parties and the Pleadings

Plaintiffs are retail pharmacies located in California.² Defendants are, with two exceptions, companies that manufacture, market, and/or distribute brandname pharmaceutical products throughout the United States.³ Defendants 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-imposed pricing limitations.

Plaintiffs' action sought treble damages, restitution, and injunctive relief, alleging that defendants fixed the prices of their brand-name pharmaceuticals in violation of the Cartwright Act and the UCL. The case came at issue on the third amended complaint, which alleged that plaintiffs were injured by defendants' purported price fixing "because they have paid more than they otherwise would have or should have paid in the absence of the [d]efendants' violations ...."; specifically, plaintiffs alleged that defendants conspired "to eliminate price competition and fix prices" in the United States market by, among other things, using Canadian prices as a "floor" or minimum price for defendants' United States products.

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

The case was designated as complex and assigned to the Honorable Ronald M. Sabraw.

2. The Facts

Over plaintiffs' objection, and without deciding whether the pass-on defense was available in California, Judge Sabraw permitted defendants to conduct discovery "that is relevant to the `pass on' defense." The resulting discovery included requests for production of documents, requests for admissions, form interrogatories, special interrogatories, and depositions. Multiple discovery disputes ensued, resulting in detailed discovery orders providing the parties with guidance as to the discovery to be produced and setting schedules for the production of written discovery and the taking of depositions. In one such order, entered on May 22, 2006, Judge Sabraw concluded that defendants' request that plaintiffs compile information and produce reports regarding their purchases and sale of certain specified drugs was neither overly burdensome nor oppressive, explaining: "No [p]laintiff has submitted a declaration describing how the information is maintained, how it must be retrieved, and the burden of retrieval and organization. The deposition testimony of the witnesses for [five plaintiffs] suggests that the information sought is kept by each of the [p]laintiffs in readily retrievable electronic form and that it can be accessed and organized by [p]laintiffs without undue burden." Judge Sabraw then ordered plaintiffs to produce, among other things, "all responsive purchasing, pricing and sales-related documents and information," including in electronic form where appropriate, within 10 days, with any disputes over the production of the data to be resolved with the assistance of information technology consultants retained by both sides. Judge Sabraw also ordered each plaintiff to "provide a narrative ... describing that [p]laintiff's pricing and price-setting practices."

The resulting narratives, as well as deposition testimony of the persons most knowledgeable and plaintiffs' responses to written discovery, revealed the following salient facts, which are essentially undisputed.

Defendants sell their drugs to wholesalers at a price referred to as the wholesale acquisition cost (WAC). The wholesalers resell the drugs to plaintiffs at prices using a formula mathematically tied to the WAC, called the average wholesale price (AWP), which apparently represents a benchmark price published in lists by companies unrelated to defendants. As a result, when defendants' prices increase, the cost of drugs to plaintiffs increases by the same percentage amount. So, plaintiffs pay the full amount of the alleged overcharge, defined in plaintiffs' brief as "the difference between what [plaintiffs] actually paid and what they would have paid in the absence of the conspiracy."

Plaintiffs sell the drugs to two groups of customers, also on the basis of the AWP: (1) those with "third party" insurance or a drug benefit plan offered by either a private entity or the government, which in turn pay customers' claims on their behalf; and (2) uninsured (or "cash-paying") customers. The vast majority of customers are covered by third party payers, which reimburse plaintiffs at a contractually or statutorily fixed amount, predetermined as a percentage of the AWP plus a dispensing fee, which provides plaintiffs a percentage profit above their acquisition cost. As to the sales to cash-paying customers, plaintiffs charge a set percentage of the AWP, and sometimes a dispensing fee, which could result in plaintiffs' receiving a price above their acquisition cost. The result of this is that each time defendants increase their prices for a product, plaintiffs increase the price they charge their customers by at least the same amount. And the higher defendants' prices, the higher plaintiffs' revenues—and the higher their gross profits.

In sum, discovery demonstrated two undisputed facts: (1) plaintiffs passed on to their customers all claimed overcharges, and (2) plaintiffs waived any claims for damages not based on the alleged overcharge,...