In the
United States Court of Appeals
For the Seventh Circuit

No. 01-2925

Paper Systems Incorporated, Graphic Controls
Corp., and Victor Paper Roll Products, Inc.,

Plaintiffs-Appellants,

v.

Nippon Paper Industries Co., Ltd.,

Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Wisconsin.
Nos. 96-C-959 et al.--Lynn Adelman, Judge.

Argued January 17, 2002--Decided February 6, 2002



  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 (1977), and Kansas v.
Utilicorp United Inc., 497 U.S. 199
(1990), precludes recovery. 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 (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
para.para. 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 (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-lia
bility 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
fails.
  Second, these cases prevent double
recoveries. Hanover Shoe allows the first
purchaser to recover the whole overcharge
even if some was passed on to its
customers. Had Illinois Brick allowed
indirect purchasers to recover for the
portion passed on to them, the total
recovery would have exceeded the treble
damages provided by the Sherman Act--
unless Hanover Shoe was overruled and the
take of the initial purchaser curtailed.
Here is where the third consideration
comes in. If Hanover Shoe was to be
modified to avoid duplicative recovery,
how would that be done? How much of any
overcharge is passed on depends on the
elasticities of supply and demand in the
chain of distribution, which are
exquisitely hard to pin down. The Supreme
Court concluded that the game is not
worth the candle--even, Utilicorp held,
in the simplified case of a utility
operating under rate regulation that is
designed to cause a complete pass-on.
Changes in market conditions after
regulators set rates meant that the
design might not be fulfilled. It is
better, the Court held in both Illinois
Brick and Utilicorp, to avoid these
complications and concentrate damages in
the hands of the initial purchasers so as
to maximize deterrence.

  Joint and several liability is another
vital instrument for maximizing
deterrence. See Lewis A. Kornhauser &
Richard L. Revesz, Sharing Damages Among
Multiple Tortfeasors, 98 Yale L.J. 831
(1989). Holding Nippon Paper jointly and
severally liable with the other four
manufacturers, for the conspiracy’s
entire sales, is compatible with Hanover
Shoe, Illinois Brick, and Utilicorp.
Certainly it does not undermine these
decisions, which are themselves designed
to improve deterrence. Nor does this suit
pose any risk of double recovery; sales
to Japan Pulp & Paper and Mitsui have
been carved out of the case, because
those entities own the right to recover
on account of their own purchases. The
difficulty of tracing overcharges through
the chain of distribution therefore is
unimportant; duplicative recovery has
been blocked at the outset. It remains
necessary to determine the amount of the
overcharge, and if this cannot be
established in any other way (for
example, by the conspirators’ own
agreement) then it is necessary to
determine the elasticities of supply and
demand. But this prospect is present in
every cartel case; it is not occasioned
solely by the presence of intermediaries.
The monopoly overcharge is the excess
price at the initial sale--here, from the
five manufacturers to their initial
customers. Calculations are complicated
by the fact that two of the five
(Appleton and Kanzaki) provide some
distribution services, and thus may
charge higher initial prices than do the
other three. But disaggregating these
expenses to impute a transfer price from
the manufacturing to the distribution arm
of the two vertically integrated firms
does not transgress Illinois Brick
because the process cannot lead to
multiple recovery.

  A simple example makes the point.
Suppose that five vertically integrated
manufacturers sell directly to consumers
at $12 per unit, and that this price is
an overcharge attributable to a cartel;
the competitive price would have been $10
per unit. Each manufacturer sells 100
units per year, so the total overcharge
is $1,000 ($2 on each of 500 units) and
treble damages under the Sherman Act are
$3,000. Given joint and several
liability, each of the five conspirators
is liable to pay the whole $3,000--though
no consumer can recover more than $6 per
unit purchased. Now suppose further that
one of the five manufacturers gets out of
the distribution business and sells its
output to a wholesaler for $10 per unit;
the wholesaler resells the product for
$12 per unit. It is hard to see why this
should change the total damages any
conspirator must pay under the antitrust
laws. According to Hanover Shoe and
Illinois Brick, it changes who may
collect damages (the wholesaler, as
direct purchaser, owns the right to
collect damages on 100 units each year)
but not how much each cartelist owes in
the aggregate. Yet Nippon Paper’s
position is that the use of a wholesaler
has a profound effect; it reduces that
manufacturer’s total exposure from $3,000
to $600 (treble the $2 overcharge on 100
units sold to the wholesaler)--and then
only if the wholesaler sues. This would
be economically identical to a system of
full contribution and indemnity among
antitrust offenders, with each firm
bearing liability only in proportion to
its market share. Texas Industries
rejected just such a proposal. Nothing in
Illinois Brick requires that the approach
disapproved by Texas Industries be
implemented under a different name. All
that Illinois Brick means is that, if one
direct purchaser wholesaler declines to
sue, then the total damages the five
example manufacturers owe jointly and
severally cannot exceed what is
recoverable by direct purchasers that do
litigate (in our example, for $2,400).
Every participant in the conspiracy
remains liable for damages on every sale
to every direct purchaser from any of the
manufacturers.

  If Nippon Paper participated in a cartel
of thermal fax paper (something that
remains to be determined) then it is
jointly and severally liable for the
cartel’s entire overcharge. That the
plaintiffs did not buy from Nippon Paper
directly, or at all, does not matter. As
long as Nippon Paper’s direct customers
hold the exclusive right to damages for
its own output, the holding and goals of
Illinois Brick have been satisfied. It
was improper to dismiss Nippon Paper as a
defendant while its status as a member of
the cartel remains to be determined.

Reversed and Remanded
