STATE OF WEST VIRGINIA v. CHAS. PFIZER & CO.

J. JOSEPH SMITH, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York, Inzer B. Wyatt, Judge, dated September 18, 1970 entering final judgment in favor of defendants-appellees and dismissing the actions as to them. The opinion is reported at 314 F.Supp. 710.

This case involves some 66 civil actions, 26 of which were commenced in the Southern District of New York and 40 of which were transferred to that district by the Judicial Panel on Multi-district Litigation "for coordinated or consolidated pre-trial proceedings." The claim in each of these actions is that the defendants, who manufacture certain broad spectrum antibiotic drugs, are guilty of violations of the antitrust laws in the sale of these antibiotics, specifically sections 1 and 2 of the Sherman Act (15 U.S.C. §§ 1, 2). Treble damages were sought, as authorized in 15 U.S.C. § 15.

Before these actions proceeded to trial the defendants, on February 6, 1969 (as modified on May 9, 1969), proposed an offer of settlement in the amount of $100,000,000 as to the claims of the following groups:

The terms of this settlement offer were as follows:

On May 26, 1969, after the settlement had been accepted in principle by nearly all the plaintiffs, the district court issued an order containing the following provisions:

Having determined that certain actions were to be maintained as class actions, the district court pursuant to Rule 23(c) (3) in an order dated June 16, 1969 directed that notice be given to the various classes in the following manner.

Notices of exclusion were timely filed by 61 members of the classes consisting of government entities and institutions, 42 members of the classes consisting of individual purchasers, and by about 1500 members of the class consisting of wholesalers-retailers. Claims amounting to $16,500,000 were filed by 38,000 members of the class consisting of individual purchasers, and 4100 wholesalers and retailers filed claims. The face amount of the purchases made by these claimants was in excess of $345,000,000.

Thereafter, in accordance with the terms of the settlement, several plaintiffs submitted separate plans for the allocation of the $100 million settlement fund. The most detailed and comprehensive of these, the so-called "Alabama Plan," was, with some modifications, the one accepted by the defendants and approved by the court. The theory behind this plan was that the claims of the government entities were entitled to first priority, since the dollar amount of their purchases and payments could be calculated with reasonable accuracy and the damages were direct and provable. The dollar amount of these sales and payments was determined to have been $121,620,000, and it was also calculated that the prices actually charged contained an overcharge of 66 2/3%. Allowing for uncertainties in law and in fact, it was concluded that for settlement purposes an overcharge figure of 40-41% could properly be used. Applying 41% to the sales figure yielded a figure of $49,864,200 or, rounded off, $50,000,000. On the same basis it was calculated that the appropriate settlement figure for re-imbursement payments to welfare recipients by the government entities was $10,000,000. This left $40 million to be divided between claims of wholesalers and retailers on the one hand and individual consumers on the other.

As to the claims of the wholesalers and retailers, many of the plaintiffs were of the view that these purchasers were not entitled to any reimbursement because the members of this class sold nearly all their antibiotics to consumers on the basis of cost plus a fixed percentage profit, which resulted in their actually making higher profits as a result of the antitrust violations. However, in order to secure the agreement of the wholesaler-retailer class to the settlement, a "nuisance value" allocation of $3 million was made to the members of this class. This is one of the disputes raised in this appeal and is dealt with below.

Finally, as to the remaining $37 million allocated for individual consumers, individual claims of $16.5 million had been filed by some 38,000 persons. After these were settled, the remaining amount would be retained by the states as indicated in the public notice to be disbursed in accordance with the direction of the district court. This is the other major issue raised in this appeal and is also discussed below.

The plan then undertook to allocate the $50 million given to governmental institutions on the basis of the number of hospital beds in the institutions of, or represented by each plaintiff as a percentage of the total number of hospital beds in the country. As to the $10 million vendor reimbursement funds, allocation was made on the basis of each state's welfare payment program. The $37 million which had been allocated to the claims of individual purchasers was divided into the amount applicable to each class of consumers represented by each government entity plaintiff on the basis of the percentage of the total population represented by the population of each government entity plaintiff.

Finally, the total amount was adjusted downward to $82,615,030 to allow for those plaintiffs who had elected to exclude themselves, except that no adjustment was made for wholesaler-retailers or for the consumer class members who had elected to be excluded.

The only serious objections to this plan were raised by some members of the wholesaler-retailer class who contended that they were entitled to the entire $37 million going to consumers. After extensive negotiations, it was agreed that defendants would deposit the settlement immediately in an escrow account, and the interest on this account, amounting to more than $8 million, would accrue to the wholesaler-retailer class. Nearly all of the committee of counsel for the wholesaler-retailers accepted this arrangement. On October 20, 1969 a plan was filed in accordance with these terms for the approval of the court and the funds were deposited in the escrow account. The escrow agreement provided (in part):

In orders dated February 4 and 6, 1970 the Clerk of the Court was directed to give notice directly and by publication to all the parties in the same manner as was prescribed in the order of June 16, 1969, supra, as to a hearing on the proposed settlement to be held on March 24, 1970. In the meantime other minor adjustments not relevant to the issues raised on this appeal were made to the total amounts going to the various classes [see, 314 F.Supp. 732-739].

At this hearing again the only serious objections raised to the settlement plan came from some of the members of the wholesaler-retailer class to the effect that they were entitled to the entire $37 million. It should be emphasized that only a minority of this class continued to raise these objections. On June 24, 1970 Judge Wyatt filed a lengthy opinion and order approving the settlement and dismissing the actions against defendants. This appeal followed by the minority members of the wholesaler-retailer class.

The first question to be considered is what is the proper scope of review for this court to apply. Judge Wyatt viewed his responsibilities in evaluating the settlement as follows:

It appears to be well settled that in reviewing the appropriateness of the settlement approval, the appellate court should only intervene upon a clear showing that the trial court was guilty of an abuse of discretion.1 As Judge Brown in the Fifth Circuit recently noted in Florida Trailer and Equipment Co. v. Deal. 284 F.2d 567, 571 (1960):

It is important to take particular note of the fact that in reviewing the compromise, this court need not and should not reach any dispositive conclusions on the admittedly unsettled legal issues which the case raises, yet at the same time we are apparently required to attempt to arrive at some evaluation of the points of law on which the settlement is based. A number of years ago this court set forth the applicable standard in In Re Prudence (supra n. 1):

The most interesting and difficult issue which this appeal presents is the use of the "passing-on" doctrine as regards the claims of the wholesalers and retailers, not as a defense to escape liability, as is normally the case, but rather as a basis for determining the distribution of the damages recovered among various plaintiffs. Judge Wyatt had the following comments on this question:

Although appellants dispute the factual accuracy of the court's finding that they suffered no economic loss, they also contend that even accepting this premise, they are still entitled to recovery under Hanover Shoe v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L. Ed.2d 1231 (1968). In that case United had charged Hanover more for shoe machinery equipment than would have been charged but for the violation of the antitrust laws. The cost of the machinery was one of several factors which went into the price at which Hanover sold its products to the consumer. In these circumstances, the Court relying on its prior decisions in Chattanooga Foundry and Pipe Works v. City of Atlanta, 203 U.S. 390, 27 S.Ct. 65, 51 L.Ed. 241 (1906); Thomsen v. Cayser, 243 U.S. 66, 37 S.Ct. 353, 61 L.Ed. 597 (1917); Southern Pacific Co. v. Darnell-Taenzer Lumber Co., 245 U.S. 531, 38 S.Ct. 186, 62 L.Ed. 451 (1918); and Adams v. Mills, 286 U.S. 397, 52 S.Ct. 589, 76 L. Ed. 1184 (1932) held that the passing-on defense was not available to United. Mr. Justice White noted:

In considering the question of whether the obvious reluctance of the Court to allow the passing-on doctrine to be used as a defense to treble-damage liability should dictate the result in the context of the present case, the most important thing to keep in mind is the result orientation with which the Court has approached the whole area of private treble-damage litigation. A good example of this is contained in Minnesota Mining and Mfg. Co. v. New Jersey Wood Finishing Co., 381 U.S. 311, 85 S.Ct. 1473, 14 L.Ed.2d 405 (1965). There the question was whether the statute of limitations was tolled under section 5(b) of the Clayton Act by an FTC proceeding, as distinguished from an antitrust proceeding instituted by the Department of Justice. In spite of Mr. Justice Black's persuasive dissent on the legislative history of the statutes, the Court held the statute was tolled, while obliquely admitting that the result was difficult and perhaps impossible to justify in terms of conventional analysis of the text and legislative history, precisely because a "contrary conclusion" would "deprive large numbers of private litigants" of assistance in their treble damage litigation [381 U.S. at 322, 85 S. Ct. at 1479]. In Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968), the Court noted that it has granted certiorari "because these rulings by the Court of Appeals seemed to threaten the effectiveness of the private action as a vital means for enforcing the antitrust policy of the United States" [392 U.S. at 136, 88 S.Ct. at 1983]. The Court in Perma Life then went on to substantially narrow the pari delicto doctrine as a defense noting:

In Hanover Shoe itself Justice White placed strong emphasis on the Court's desire to encourage private treble damage actions.

Keeping these comments in mind, there are then several obvious distinctions between the principles laid down in Hanover Shoe and the present case. First, the passing-on doctrine is not here being used as a defense to permit the defendants to escape liability, but rather as an attempt to award damages, insofar as is possible, to those who ultimately paid higher prices as a result of the collusive pricing, and to avoid giving a windfall gain to those who rather clearly were not injured. Secondly, to permit the use of the doctrine in the present circumstances will not act to limit or frustrate private treble-damage claims, but will, if anything, do the opposite. As Judge Feinberg noted in discussing this problem in Atlantic City Electric Co. v. General Electric Co., 226 F.Supp. 59, 70 (S.D.N.Y. 1964):

Finally, the Hanover Shoe Court itself indicated, as quoted above, that it might well be willing to recognize, in the limited situation where the initial purchaser of the collusively priced goods resold them on a "cost-plus" basis "thus making it easy to prove that he has not been damaged * * * [that] the considerations requiring that the passing-on defense not be permitted in this case would not be present" [392 U.S. at 494, 88 S.Ct. at 2232]. The record below makes it clear that the arrangements under which the wholesalers and retailers resold these products were, in virtually all cases, cost plus a set percentage mark-up (for wholesalers 16 2/3% for retailers 66 2/3%). Judge Wyatt therefore concluded:

In regard to this point, therefore, we conclude that the district court was well within its discretion.2

The second major contention of the appellants concerns the propriety of permitting the states to recover through their attorneys general damages on behalf of individual consumers who have not themselves filed any claims. Initially the recovery by the state on behalf of consumers was based on two alternative theories, that of the state acting as parens patriae, and secondly, that of a standard Rule 23 class action. Parens patriae, literally "parent of the country," refers traditionally to the role of the state as sovereign and guardian of persons under a legal disability to act for themselves such as juveniles, the insane, or the unknown. Recently the doctrine has been used to allow the state to recover damages to quasi-sovereign interests wholly apart from recoverable injuries to individuals residing within the state. These quasi-sovereign interests have included the "health, comfort, and welfare" of the people, interstate water rights, pollution-free interstate waters, protection of the air from interstate pollutants, and the general economy of the state. [See Simburg, "State Protection of Economy and Environment," 6 Colum.J. of Law and Soc.Prob. 411 (1970).]

The use of the parens patriae theory has not, however, met with much success in the few attempts to apply it to the recovery of treble-damage antitrust claims, most notably in the recent ruling of the Ninth Circuit in State of Hawaii v. Standard Oil Co., 431 F.2d 1282 (1970), reversing the District Court for Hawaii which had allowed a private antitrust action to be brought by the state under this theory, although the Supreme Court has recently granted certiorari in this case, 401 U.S. 931, 91 S.Ct. 931, 28 L.Ed. 2d 215 (1971).3 While in our view the court below might well have considered making use of a parens patriae theory in the present case (see, "State Protection of Its Economy and Environment" (supra)), Judge Wyatt made it quite clear, in spite of the assertions of appellants here, that he was proceeding solely on the basis of a Rule 23 class action, and therefore evaluation of the parens patriae doctrine by this court is unnecessary.

We then turn to the question of the propriety of permitting the maintenance of a class action under Rule 23. To be maintainable as a class action, a suit must meet all the requirements set forth in Rule 23(a) and also fall within one of the subsections of 23(b), in this case 23(b) (3).4

In Eisen v. Carlisle and Jacquelin, 391 F.2d 555 (2d Cir. 1968) this court had before it the question of whether a class action was proper by a single "odd-lot" purchaser of securities on behalf of himself and an estimated 3,750,000 other odd-lot traders in an action alleging violations of the Sherman Act. Judge Medina in a lengthy opinion held that a class action under these circumstances was maintainable under the provisions of revised Rule 23(b) (3), and the holding in Eisen would appear largely controlling in the present case. Rather clearly the requirements of Rule 23(a) have been met in that joinder of all the members would be impossible, questions of law and fact as well as claims and defenses are typical of all the members, and the representation by the state adequately protects the class members' interests.

Obviously the only practical way that individual consumers could recover in the circumstances of this case is through the device of class representation, and, as Judge Medina noted, "the class suit [is designed to] provides small claimants with a method of obtaining redress for claims which would otherwise be too small to warrant individual litigation." [391 F.2d at 560.] In addition, as Judge Medina pointed out, under both the old and new versions of Rule 23, antitrust violations involving large numbers of individuals have been held to merit treatment as class actions.5

The appellants also attack the adequacy of the notice given to consumers pursuant to Rule 23(c) (2). This section calls for "the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." As noted above, notice to consumers was published in quarter-page, prominently headlined ads in every daily newspaper in the participating states. There are no precise rules as to what constitutes adequate notice, and the due process standards have been held to vary depending on the circumstances of each case. In the present action notice by publication was obviously the only practical alternative. The Supreme Court in Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 317, 70 S.Ct. 652, 658, 94 L.Ed. 865 (1949) noted: "This Court has not hesitated to approve of resort to publication as a customary substitute in another class of cases where it is not reasonably possible or practicable to give more adequate warning." Judge Weinstein in Dolgow v. Anderson, 43 F.R.D. 472, 497, 498 (E.D.N.Y.1968) commented on the particular notice problem involved here.

It should also be noted that the Judicial Panel on Multi-District Litigation has used Judge Wyatt's notice in the present case as the model for federal trial courts. Manual for Complex and Multidistrict Litigation, 1 Pt., 2 Moore, App. 1.65 (1970). If this type of litigation is to be entertained at all, therefore, the methods of notice used by the district court here would appear adequate to meet the due process problem.

There is one aspect of the manner in which the consumer class recovery was handled that does present some difficulty, although not mentioned by appellants, and that is allowing the states to recover on behalf of this class without requiring any affirmative indication from individual members that they wished to assign their claims in this manner. There are some cases where the courts have required class members to give notice that they wish to participate.6

We conclude, however, that the use of what might be termed the "Book-of-the-Month-Club" procedure in these circumstances should be permitted. The notice stated that those not filing individual claims by a certain date would be assumed to be authorizing the state through its Attorney General to recover on their behalf. Presumably there were among this group some who read the notice and made an affirmative decision to assign their claims. Undoubtedly there were also those who did not receive notice, and it is with this group we should be concerned. Since under the revised rule those in a (b) (3) class who do not elect to opt out will be bound by the judgment, it is difficult to see how those who do not receive notice but on whose behalf damages are awarded to the state are in any way harmed by permitting the use of this procedure. To require those who wish to authorize the state to recover for them to affirmatively notify the court to this effect would obviously, as a practical matter, be likely to reduce the amount of these recoveries to a minimum.

The other points raised by appellants appear to be clearly without merit and can be dealt with summarily. Appellants make several rather vague charges of conflict-of-interest as to various counsel for both the wholesaler-retailer class and the government plaintiffs. The district court specifically found that "from the affidavits submitted and [from] the Court's knowledge of the progress of these actions, it is clear that the proposed compromise was the result of good faith bargaining at arms' length." The appellants have suggested nothing of substance which would cast doubt on this conclusion.

Appellants also attack the wholesaler-retailer notice of February 16, 1970 concerning the settlement conference and hearings for failure to mention the plan of allocation submitted by the Committee of Counsel for the wholesaler-retailer class. This is erroneous since the notice clearly referred to the plan and invited any interested party to inspect it at the clerk's office.

Appellants also complain that the wholesaler-retailer notices (of June, 1969 and February, 1970) were mailed only to wholesalers and retailers in business as of June, 1969, and therefore failed to notify druggists who went out of business prior to that time. This contention is without merit since the second notice went beyond the Clark-O'Neill trade list to include anyone whose name was available. In addition, it appears that at a later stage in these proceedings when the district court administers the intra-class distributions, individual claims will again be considered.

Some of the appellees have suggested that the taking of this appeal was solely to obtain for the appellants the extra month's interest (some $640,000) as provided in the escrow agreement. There is a letter dated December 18, 1969 from counsel for the minority group of wholesaler-retailers, Edward A. Berman, which suggests that this may be the case. In that letter Mr. Berman states: "Also, our group is convinced that the defendant's modified plan as accepted by most of the committee members invites and demands an appeal from the allocation order because, in our opinion, an appeal is the only way that the final order can be delayed beyond the thirteenth month." Under the escrow agreement, this extra month's interest, which, of course, is not an insubstantial amount in this case, would otherwise have accrued to the government entity plaintiffs and the classes they represent. Sections 1912 and 1927 Title 28 of the United States Code and Rule 38 of the Federal Rules of Appellate Procedure provide that the court may award damages and double costs to the appellee in cases of frivolous and vexatious appeals. The imposition of such sanctions, however, is highly unusual and requires a clear showing of bad faith on the part of appellants. We are unable to find sufficient evidence in the record to warrant such action.

Finally we wish to commend Judge Wyatt for the skill and diligence which he has demonstrated in conducting this difficult and complex litigation.

Affirmed.