Legal Definitions - pass-on defense

The pass-on defense is a legal argument made by a defendant in certain types of lawsuits, particularly those involving antitrust violations or consumer protection. It asserts that even if the defendant's actions caused an initial increase in cost or harm to the plaintiff (the party bringing the lawsuit), the plaintiff did not ultimately suffer that financial loss because they were able to "pass on" or shift that increased cost to their own customers or other parties down the supply chain.

In essence, the defendant argues that the plaintiff was merely a conduit for the increased cost, and therefore, the plaintiff should not be awarded damages for a loss they did not ultimately bear.

Here are some examples to illustrate the pass-on defense:

• Scenario 1: Price-Fixing in Manufacturing
  Imagine a large electronics manufacturer (Defendant) illegally colludes with competitors to fix the price of a specific computer chip. A smaller computer assembly company (Plaintiff) buys these chips at the inflated price and uses them to build its desktop computers. The assembly company then sells these finished computers to consumers. If the assembly company sues the chip manufacturer for the overcharge, the chip manufacturer might employ a pass-on defense. They would argue that the assembly company simply increased the retail price of its desktop computers to cover the higher chip cost, thereby passing the financial burden of the price-fixing onto the end consumers, rather than bearing the loss itself.

• Scenario 2: Increased Costs Due to Environmental Pollution
  Consider a chemical plant (Defendant) that illegally discharges pollutants into a local river, forcing a municipal water utility (Plaintiff) to implement more expensive water treatment processes to ensure safe drinking water. The water utility then raises its monthly rates for residents and businesses to cover these increased operational costs. If the water utility sues the chemical plant for the additional treatment expenses, the chemical plant could use a pass-on defense. They would contend that the utility did not ultimately suffer the financial loss because it recovered the extra costs by charging its customers higher rates, effectively passing on the pollution-related expenses.

• Scenario 3: Breach of Contract in Supply Chain
  A major supermarket chain (Plaintiff) has a contract with a produce distributor (Defendant) for a steady supply of organic vegetables at a fixed price. Due to an internal error, the distributor charges the supermarket chain a higher price than agreed upon for several months. The supermarket chain pays the higher price but then adjusts the retail prices of the organic vegetables in its stores, passing the increased cost onto its shoppers. If the supermarket chain sues the distributor for the overcharged amount, the distributor might raise a pass-on defense. They would argue that the supermarket chain did not incur a net loss because it simply recouped the extra cost by charging its customers more for the produce.