Paper Systems Inc. v. Nippon Paper Industries Co.

• Decision Date: 06 February 2002
• Docket Number: No. 01-2925.,01-2925.
• Citation: 281 F.3d 629
• Parties: PAPER SYSTEMS INCORPORATED, Graphic Controls Corp., and Victor Paper Roll Products, Inc., Plaintiffs-Appellants, v. NIPPON PAPER INDUSTRIES CO., LTD., Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

281 F.3d 629

PAPER SYSTEMS INCORPORATED, Graphic Controls Corp., and Victor Paper Roll Products, Inc., Plaintiffs-Appellants, v. NIPPON PAPER INDUSTRIES CO., LTD., Defendant-Appellee.

No. 01-2925.

United States Court of Appeals, Seventh Circuit.

Argued January 17, 2002.

Decided February 6, 2002.

COPYRIGHT MATERIAL OMITTED

Daniel A. Small (argued), Cohen, Milstein, Hausfeld & Toll, Washington, DC, for Plaintiffs-Appellants.

Goodwin Liu, Ian T. Simmons (argued), O'Melveny & Myers, Washington, DC, for Defendant-Appellee.

Before FLAUM, Chief Judge, and BAUER and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Five manufacturers of thermal facsimile paper — a product now obsolete — are accused in this class action of conspiring to reduce output and raise price in this business from 1990 to 1992. The paper business has a long history of cartelization; criminal prosecutions and civil antitrust actions are depressingly common. In 1995 the Department of Justice brought a criminal prosecution against the major producers of thermal fax paper. Nippon Paper Industries (known until recently as Jujo Paper) was among the defendants. See United States v. Nippon Paper Industries Co., 109 F.3d 1 (1st Cir.1997). Although it was acquitted, see 62 F.Supp.2d 173 (D.Mass.1999), this does not foreclose civil litigation, which employs a lower burden of persuasion. Nippon Paper prevailed in this action, too, and without a trial, because the district judge concluded that the direct-purchaser rule of Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), and Kansas v. UtiliCorp United Inc., 497 U.S. 199, 110 S.Ct. 2807, 111 L.Ed.2d 169 (1990), precludes recovery. 2000 WL 362020, 2000 U.S. Dist. Lexis 4535 (E.D.Wis. Mar. 30, 2000). After the remaining defendants settled, the plaintiffs appealed the dismissal of their claim against Nippon Paper.

The five manufacturers use different distribution systems. Kanzaki Specialty Papers, Inc., and Appleton Papers, Inc., sell directly to firms such as plaintiffs. (Our plaintiffs resold fax paper to their own customers, but under Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), they are entitled to collect damages without reduction to account for the possibility that they passed the overcharge on to their own customers. The first buyer from a conspirator is the right party to sue. In other words, Hanover Shoe holds that there is no passing-on defense, while Illinois Brick and UtiliCorp establish that indirect purchasers cannot use a passing-on theory offensively.) Two other manufacturers, Oji Paper Co. and Mitsubishi Paper Mills Ltd., sell exclusively to trading houses, which resell to firms such as plaintiffs. Oji sold only to Elof Hansson Paper & Board, Inc., while Mitsubishi Paper sold exclusively to Mitsubishi Corp. in Japan, which resold exclusively to Mitsubishi International Corp. in the United States. The complaint alleges that Elof and the two Mitsubishi trading firms are members of the conspiracy, which makes plaintiffs the first purchasers from outside the conspiracy. The right to sue middlemen that joined the conspiracy is sometimes referred to as a co-conspirator "exception" to Illinois Brick, but it would be better to recognize that Hanover Shoe and Illinois Brick allocate to the first non-conspirator in the distribution chain the right to collect 100% of the damages. Perhaps if a conspirator defects and sues its former comrade, that snitch would come to own the right to damages, but Elof and the Mitsubishi trading houses did not change sides and align themselves as plaintiffs. Thus our plaintiffs are entitled to collect damages from both the manufacturers and their intermediaries if conspiracy and overcharges can be established. See Fontana Aviation, Inc. v. Cessna Aircraft Co., 617 F.2d 478, 481 (7th Cir.1980); In re Brand Name Prescription Drugs Antitrust Litigation, 123 F.3d 599, 604 (7th Cir.1997); Phillip E. Areeda & Herbert Hovenkamp, II Antitrust Law ¶¶ 346f, 346h (rev. ed.2000).

Nippon Paper, the fifth manufacturer, sold its output in Japan to Japan Pulp & Paper Co. and Mitsui & Co., which resold through subsidiaries around the world. Neither Japan Pulp & Paper nor Mitsui is alleged to have participated in the conspiracy. As a result, Hanover Shoe and Illinois Brick allocate to them any right to collect overcharges attributable to Nippon Paper's sales. Neither of these firms joined the suit or expressed any interest in suing, so no damages may be awarded to the three plaintiffs (or any class member) on account of Nippon Paper's sales. The district court understood this to mean that Nippon Paper cannot be liable. Yet all that Hanover Shoe and Illinois Brick establish is that the direct purchasers (here, Japan Pulp & Paper and Mitsui) own the right to damages on account of particular sales. Nothing in Illinois Brick displaces the rule of joint and several liability, under which each member of a conspiracy is liable for all damages caused by the conspiracy's entire output. See Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 101 S.Ct. 2061, 68 L.Ed.2d 500 (1981). Our three plaintiffs, and members of their class, hold rights to recover on account of purchases directly from Kanzaki and Appleton, and (through other conspirators) from Oji and Mitsubishi. If they can prove that there was indeed a conspiracy, they may collect damages not just firm-by-firm according to the quantity each sold, but from all conspirators for all sales. If Nippon Paper was among those conspirators, then it is responsible for the entire overcharge of all five manufacturers — and any direct purchaser from any conspirator can collect its own portion of damages (that is, the damages attributable to its direct purchases) from any conspirator. This makes it impossible to dismiss Nippon Paper outright.

Recognizing the normal effects of joint and several liability, Nippon Paper contends that Illinois Brick creates an exception. If it is liable at all, it insists, judges or juries will have to trace the original overcharge through several levels of distribution to determine what damages it caused. The difficulty of figuring out how much was passed on, and how much swallowed by a distributor, is one major reason that Illinois Brick came out as it did. That's true enough, but it does not justify abandonment of the joint-and-several-liability norm. Every firm sells indirectly in some respect. All products of this industry went through multiple hands; the plaintiffs are themselves distributors. If the presence of any wholesaler or retailer in the chain of distribution creates complications too great to allow joint liability, then the norm that every conspirator is responsible for the acts of every other would be overthrown.

Illinois Brick and Hanover Shoe together do three things. First, they concentrate damages in the hands of the initial purchasers, and thus improve deterrence. Firms that deal directly with the manufacturers are apt to know the most about the industry's behavior and thus are in the best position to detect cartels; allowing them to collect the full overcharge, trebled, creates powerful incentives to investigate and file suit. See William M. Landes & Richard A. Posner, Should Indirect Purchasers Have Standing To Sue Under the Antitrust Laws? An Economic Analysis of the Rule of Illinois Brick, 46 U. Chi. L.Rev. 602 (1979). The prospect of recovery also acts like a cents-off coupon to the initial buyer, which given competition at the distribution stage is forced to pass on this anticipated discount, and so protects remote customers from the effects of the cartel if deterrence...