February 5, 2018 / 9:31 PM / 15 days ago

The case of the bad egg: 3rd Circuit revives $111 million antitrust suit

Kraft, Kellogg, General Mills and Nestle use a lot of “egg products” – egg yolks and whites removed from their shells and pasteurized industrially – in the food they manufacture. So, according to Kraft and the other food companies, when some of the companies that sell eggs supposedly hatched a scheme to drive up egg prices, the food companies were forced to pay more for the processed egg products they rely on. A lot more: In a price-fixing suit that’s part of consolidated multidistrict litigation in Philadelphia federal court over manipulation of the egg market, Kraft and its co-plaintiffs claim damages of more than $111 million.

Their theory seemed basic – if the eggs that went into processed egg products were illegally priced, then the egg products were also price-fixed – but faced two potential problems. The first was the U.S. Supreme Court’s 1977 decision in Illinois Brick v. Illinois (97 S.Ct. 2061), which holds that, in general, purchasers at the end of a tainted supply chain can’t bring antitrust claims against antitrust conspirators because it’s too hard for courts to figure out what portion of the product’s ultimate cost is attributable to illegal conduct. The food companies’ lawyers at Jenner & Block framed the case to define Kraft and the other plaintiffs not as indirect egg purchasers but as direct purchasers of egg products. They named as defendants only egg product sellers that were supposedly part of the conspiracy to boost the price of eggs by reducing the number of egg-laying hens.

The second obstacle was a problem of facts more than law. The defendants didn’t just use their own allegedly overpriced eggs when they made the egg products Kraft and the other food companies purchased. They also used eggs from egg companies that were not part of the supposed price-fixing conspiracy. In fact, according to defense lawyers from Weil Gotshal & Manges and Stinson Leonard Street, the defendant that sold the highest volume of processed egg products to Kraft and the other food companies annually used hundreds of millions of pounds of eggs purchased from non-conspirators.

The food companies believed all egg prices were driven up by the alleged price-fixing conspiracy, so the source of the eggs that went into the egg products at issue in the case was not relevant to the damages they supposedly incurred. Remember, the food companies only sued defendants that supposedly participated in the conspiracy. They weren’t attempting to hold non-conspirators responsible for their alleged overpayment. But they argued (2017 WL 1037233) that scheme affected the entire market for egg products.

The federal judge overseeing the egg antitrust litigation, U.S. District Judge Gene Pratter of Philadelphia, found a fatal flaw in that argument. In 1979’s Mid-West Paper Products v. Continental Group (596 F.2d 573), the 3rd U.S. Circuit Court of Appeals rejected the premise of “umbrella damages” for antitrust violations, dismissing a suit in which a supermarket chain sued manufacturers of consumer bags, even though the grocer had actually purchased bags from a competitor of the alleged conspirators. The grocer’s theory was that the price-fixing scheme drove up prices across the market so the conspirators were liable for its overpayments, even to a non-conspiring competitor. The appeals court said the connection between the grocer and the alleged conspiracy was too tenuous to justify the claim.

Judge Pratter saw direct parallels between the rejected umbrella damages theory from Mid-West and the food companies’ claims against egg products producers who used eggs from non-conspirators. In 2016, she granted summary judgment (2016 WL 4670983) to the egg product producers, finding the food companies caught between Mid-West and Illinois Brick. “Plaintiffs’ theory of damages with respect to egg products sounds like a combination of an ‘umbrella damages’ theory and an Illinois Brick problem,” she wrote. “Attempting to link the raw egg prices of non-conspirators to the conspiracy is, under Mid-West Paper, too attenuated, and recovering overcharges when the plaintiffs have not presented evidence that the defendants, and not the non-conspirators, pocketed those overcharges creates a situation in which plaintiffs are seeking recovery of pass-through overcharges, something prohibited by Illinois Brick.”

On Friday, the 3rd Circuit reversed Judge Pratter’s summary judgment decision, finding key differences between the facts in the Mid-West case – and for that matter, those in Illinois Brick - and the peculiar circumstances of the alleged egg products conspiracy. According to the 3rd Circuit panel (Chief Judge Brooks Smith, Judge Julio Fuentes and U.S. District Judge Leonard Stark of Wilmington, sitting by designation) neither Mid-West nor Illinois Brick compels the outcome in the egg products case, which the panel described as presenting, as a matter of first impression, the novel question of whether a plaintiff can establish antitrust standing to sue alleged conspirators over a product that contains materials from non-conspirators.

The 3rd Circuit said the food companies did have standing because, unlike the grocer in the Mid-West case, Kraft and the other plaintiffs had a direct relationship with the egg product manufacturers it named as defendants. “The purchasers’ theory of injury is different, and simpler,” wrote Judge Stark in the court’s opinion. “The purchasers are suing the conspiring parties from whom they bought the price-fixed product. (They) were directly injured by wrongful conduct undertaken by their suppliers.”

It doesn’t matter whether the food companies’ alleged overpayments went to members of the conspiracy or to non-conspirators from which the defendants purchased eggs, according to the 3rd Circuit. The allegedly rigged price of egg products was the result of an alleged scheme by defendants who had a direct relationship with the food companies.

The 3rd Circuit remanded the case to Judge Pratter for additional pre-trial proceeding, with the pointed note that it was expressing no view on the merits of the suit.

I left a phone message for Carrie Mahan of Weil, who argued for defendants at the 3rd Circuit, but she didn’t get back to me. Michael Brody of Jenner, who argued for the food companies, said he was not able to comment.

(This article has been corrected. A previous version identified the Chief Judge of the 3rd Circuit as David Smith. Judge Smith’s first name is David but he is called Brooks Smith.)

Reporting by Alison Frankel

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