On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a lower court decision dismissing complaints against 16 major banks for price-fixing of benchmark borrowing rates for failure to plead antitrust injury.[1] While the decision obviously amounts to a reprieve for plaintiffs, the Court imposed on the plaintiffs a very heavy burden on remand to establish that they are “efficient enforcers of the antitrust laws.” In doing so, the Court attempted to bring clarity to an aspect of antitrust standing doctrine which, it said, has engendered substantial confusion.[2]
Plaintiffs were purchasers of financial instruments that carried a rate of return indexed to the London Interbank Offer Rate (LIBOR), which approximates the average rate at which major banks borrow money. The defendants were on a panel of banks that determined LIBOR each day based on the banks’ individual (and supposedly non-collusive) individual submissions. Plaintiffs alleged that the banks exceeded the authorized level of collaboration and engaged in a horizontal price-fixing conspiracy to artificially depress LIBOR in order to lower their own borrowing costs, which had the effect of reducing the returns plaintiffs earned on their LIBOR-indexed instruments.[3]
Plaintiffs relied heavily on evidence of the banks’ collusive activities collected in government proceedings, including U.S. Department of Justice criminal investigations that resulted in settlements by three major banks. Plaintiffs also cited statistical evidence that LIBOR was not behaving as it would have had the banks acted independently.[4]
The Court of Appeals stated that antitrust plaintiffs must show both constitutional and antitrust standing. The former requires a showing of harm from the defendants’ conduct, while the latter requires harm of the type the antitrust laws were designed to prevent. There was no dispute in this case as to the former, as plaintiffs alleged they were receiving lower returns on LIBOR-denominated instruments due to defendants’ manipulation. However, the banks argued that plaintiffs’ allegations fell short as to the latter, and the lower court agreed in dismissing the complaints.[5]
The Court of Appeals noted that there is often confusion as to the difference between antitrust violations and antitrust standing. To avoid that confusion, the Second Circuit assumes the existence of a violation in addressing the issue of standing, a procedure the lower court failed to observe.[6]
On the issue of what constitutes a violation, the Court stated that plaintiffs had plausibly alleged a horizontal price-fixing conspiracy by the banks in their concerted action to depress LIBOR. It rejected the banks’ argument that LIBOR is not a price, as it is not bought or sold by anyone. “The point is immaterial,” the Court said, as “LIBOR forms a component of the return from various LIBOR-denominated financial instruments, and the fixing of a component price violates the antitrust laws.” As horizontal price-fixing, the conduct is per se unlawful under the antitrust laws, “that is, without further inquiry.”[7]
The Court then turned to antitrust standing, which embraces two issues: have appellants suffered antitrust injury, and are they efficient enforcers of the antitrust laws. As noted above, antitrust injury is “’injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.’”[8] Plaintiffs satisfied that requirement in alleging a horizontal price-fixing which resulted in their earning returns that did not reflect the free play of competitive market forces.[9] The fact that plaintiffs could have negotiated the interest rates attached to particular financial instruments was of no legal consequence, since antitrust law “is concerned with influences that corrupt market conditions, not bargaining power.” Nor did it matter that the banks were in no position to control the market; their conduct was unlawful because it interfered with the free operation of the market. [10]
Contrary to the lower court’s ruling, the Court of Appeals also held that plaintiffs should not have been faulted for failing to plead harm to competition. Inasmuch as horizontal price fixing is per se illegal, “proof of harm to competition is not a prerequisite for recovery[. I]t follows that allegations pleading harm to competition are not required to withstand a motion to dismiss…”[11] In other words, plaintiffs met their burden of showing that their injury was of the kind the antitrust laws are designed to prevent without having to allege that the defendants’ conduct resulted in harm to competition.[12]
The Court stated that the second component of antitrust standing, whether the plaintiffs are “efficient enforcers of the antitrust laws,” requires consideration of four factors: (1) the directness or indirectness of the asserted injury, which requires evaluation of the chain of causation linking the asserted injury to the alleged price fixing; (2) the existence of more direct victims of the alleged conspiracy; (3) the extent to which the damages claim is highly speculative; and (4) the importance of avoiding either the risk of duplicative recoveries or the danger of complex apportionment of damages.[13]
While the Court left it for the lower court to consider evidence on each of these factors on remand, its amplification telegraphed skepticism of plaintiffs’ ability to satisfy this component of standing. Even before addressing the individual factors, the Court conveyed that skepticism in stating that
These factors require close attention here given that there are features of this case that make it like no other….
There are many other enforcement mechanisms at work here. In addition to the plaintiffs in the numerous lawsuits consolidated here, the Banks’ conduct is under scrutiny by government organs, bank regulators and financial regulators in a considerable number of countries. This background context bears upon the need for appellants as instruments for vindicating the Sherman Act.[14]
As to the issue of causation, the Court observed that plaintiffs included parties who did not deal directly with the defendant banks, but rather claimed injury from diminished returns on instruments tied to LIBOR that were purchased from third parties. This created a possibility that the defendant banks could be liable for damages in an amount disproportionate to their wrongdoing. As the Court put it, “Requiring the Banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent LIBOR-denominated derivative swap would…not only bankrupt 16 of the world’s most important financial institutions, but also vastly extend the scope of potential antitrust liability in myriad markets where derivative instruments have proliferated.”[15]
On the second factor, the existence of more direct victims, the Court stated that “not every victim of an antitrust violation needs to be compensated …for the antitrust laws to be efficiently enforced….Crediting the allegation of the complaints, an artificial depression in LIBOR would injure anyone who bought bank debt pegged to LIBOR from any bank anywhere. So in this case directness may have diminished weight.”[16]
As to the third factor, speculativeness of damages, the Court said that it was “difficult to see how [plaintiffs] would arrive at [a reasonable] estimate, even with the aid of expert testimony.”[17] That estimate would have to take into account the fact that the disputed transactions were done at negotiated rates, notwithstanding that the negotiated component was the increment above LIBOR, and that the market for money “is worldwide, with competitors offering various increments above LIBOR, or rates pegged to other benchmarks, or rates set without reference to any benchmark at all.”[18]
Finally, on the importance of avoiding duplicative recovery and complex damages apportionment, the Court found that, in view of the ongoing investigations in several countries, some of which could seek damages for victims while others might impose fines, disgorgement and other remedies, it was “unclear how issues of duplicate recovery and damage apportionment can be assessed.”[19]
The Court’s concluding remarks were no less dubious of the plaintiffs’ prospects on remand. The Court stated that the influence of the corrupted LIBOR figure on competition might turn out to be “weak and potentially insignificant, given that the financial issues are complex, LIBOR was not binding, and the worldwide market for financial instruments—nothing less than the market for money—is vast, and influenced by multiple benchmarks.”[20] Moreover, the Court pointed out, it was a matter of common sense that banks operated as both borrowers and lenders of LIBOR-referenced transactions, so the net effect of their alleged conspiracy might prove to be a wash.[21]
The Court of Appeals’ decision means that plaintiffs will have the opportunity to move forward with their cases on remand. Given the Court of Appeals’ commentary on the challenges plaintiffs will face in establishing that they are “efficient enforcers” of the antitrust laws, however, plaintiffs may take little comfort from their appellate victory. For members of the antitrust bar, the case is a noteworthy reminder that success can be elusive to antitrust plaintiffs
even where defendants’ conduct is so egregious as to be per se unlawful and plaintiffs have experienced economic harm as a result.
[1] Gelboim v. Bank of America Corp., Nos. 13-3565-cv (L) et al. (2nd Cir. May 23, 2016)(Slip op.).
[2] Slip op. 17-18. The view that antitrust standing doctrine is in need of clarification is widely shared. See generally Swift, E., “Antitrust Standing in Art Authentication Cases,” 37 Columbia Journal of Law & The Arts 247, 255-65 (2013).
[3] Slip op. 3-8.
[4] Slip op. 8-10.
[5] Slip op. 16-17.
[6] Slip op. 17-19.
[7] Slip op. 19-21.
[8] Slip op. 23, quoting from Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977).
[9] Slip op. 24-30 (italics in original).
[10] Slip op. 25.
[11] Slip op. 32 (citation omitted).
[12] Slip op. 35.
[13] Slip op. 37-38, citing Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 540-45 (1983).
[14] Slip op. 38.
[15] Slip op. 40.
[16] Slip op. 41.
[17] Slip op. 42 (citation omitted).
[18] Slip op. 43.
[19] Slip op. 43-44.
After addressing standing, the Court took up an argument by the banks that the decision below should be affirmed on the alternative ground that plaintiffs failed to allege a conspiracy, an issue that the lower court also did not address since it found that plaintiffs lacked standing. While the Court stated that there were many close cases on the issue of what distinguishes lawful parallel conduct from an unlawful conspiracy, this case was not one of them, as the complaints contained numerous allegations of conspiratorial conduct. Slip op. 44-50.
[20] Slip op. 50.
[21] Slip op. 50-51.