Standing Analysis Reveals Skepticism of Competitor Collaborations
On May 23, 2016, the United States Court of Appeals for the Second Circuit issued an important decision on antitrust standing in the context of the alleged manipulation of financial benchmarks. In In re LIBOR-Based Financial Instruments Antitrust Litigation, No. 13-3565L, the Second Circuit reversed the lower court and held that plaintiffs adequately alleged antitrust injury based on the alleged manipulation of U.S. dollar LIBOR, on the grounds that the alleged horizontal price-fixing constituted a per se federal antitrust violation.
Plaintiffs alleged that defendants--U.S. Dollar London Interbank Offered Rate (LIBOR) panel banks and the British Bankers' Association--violated the Sherman Antitrust Act by agreeing to submit artificially low estimates of their borrowing costs used in calculating LIBOR. Plaintiffs claimed that these submissions thereby lowered the rate of return on their investments pegged to LIBOR. The Judicial Panel on Multidistrict Litigation transferred related actions from across the country to the Southern District of New York before Judge Naomi Reice Buchwald, who in March 2013 granted defendants' motion to dismiss for failure to state a claim. See In re LIBOR-Based Financial Instruments Antitrust Litigation, 935 F. Supp. 2d 666 (2013).
In granting the motion to dismiss, the district court concluded that plaintiffs lacked antitrust standing because they did not plausibly allege that they suffered antitrust injury. See id. at 685-86. The district court reasoned that antitrust injury means an injury attributable to an anticompetitive practice. Id. at 686 (which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful). Plaintiffs' loss must stem from a competition-reducing aspect or effect of defendants' behavior. Id. Under that framework, the lower court went on to hold that defendants' alleged conduct was not anticompetitive because the collaborative LIBOR-setting process was never intended to be competitive. Id. at 688. If the defendants conspired to submit artificially low rates as alleged, "Plaintiffs' injury would have resulted from defendants' misrepresentation, not from harm to competition." Id. Following this decision, numerous plaintiffs joined a consolidated appeal in the Second Circuit heard by Judges Dennis Jacobs, Reena Raggi and Gerard Lynch. While the appeal was pending, district court Judges Lorna G. Schofield and Jesse M. Furman decided motions to dismiss similar antitrust claims in cases involving other benchmarks and concluded that plaintiffs in those cases adequately alleged antitrust injury. See In re Foreign Exch. Benchmark Rates Antitrust Litig., 74 F. Supp. 3d 581 (S.D.N.Y. 2015) and Alaska Elec. Pension Fund v. Bank of America Corp, No. 14-CV-7126(JMF), 2016 WL 1241533 (S.D.N.Y. 2016).
On appeal, plaintiffs argued that the alleged collusive submission of artificially low rates violated the per se rule against horizontal price fixing. They argued that per se price fixing includes agreements to fix a "price element,"
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such as a rate benchmark, and that the lower court improperly concluded that the alleged manipulation of LIBOR did not harm competition at all. Defendants countered that an alleged agreement to suppress LIBOR did not displace competition in any market. Defendants explained that the free play of market forces continued unabated in the competition over negotiating the terms of financial instruments pegged to LIBOR, regardless of the level of LIBOR, and further that plaintiffs failed to demonstrate anticompetitive effects.
The Second Circuit vacated the district court's decision and, in so doing, clarified the pleading standard in competition cases involving financial benchmarks. The appellate court held that plaintiffs had adequately alleged antitrust injury on the grounds that: (1) horizontal price-fixing constitutes a per se antitrust violation; (2) a plaintiff alleging a per se antitrust violation need not separately plead harm to competition; and (3) a consumer who pays a higher price on account of horizontal price-fixing suffers antitrust injury. Slip op. at 4. Since the district court did not reach the second component of antitrust standing, whether plaintiffs are efficient enforcers of the antitrust laws, the court remanded for further proceedings on that question. Id. at 4, 22-23, 37-44. Defendants had urged affirmance on the alternative ground that no cognizable conspiracy had been adequately alleged, which the court also rejected. Id. at 4, 44-51.
The court recognized that the interplay between analyzing an antitrust violation and antitrust standing has engendered substantial confusion, though courts typically assume the existence of a violation when addressing standing. Id. at 17-19. For judicial economy, the court reviewed both issues separately and found that plaintiffs had alleged a horizontal price-fixing conspiracy violation because LIBOR, as a financial benchmark, must be characterized as a price component. Id. at 19-20. The alleged price fixing was unlawful per se despite the unfamiliar context of plaintiffs' claims because one price-fixing rule applies to all industries. Id. 20-21.
In holding that plaintiffs adequately pled antitrust injury, the Second Circuit found that plaintiffs had sufficiently alleged that they paid artificially fixed higher prices. The court explained that, "[g]enerally, when consumers, because of a conspiracy, must pay prices that no longer reflect ordinary market conditions, they suffer injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Id. at 24. The court emphasized that anticompetitive consequences are apparent when "price is higher and output lower than they would otherwise be and both are unresponsive to consumer preference, which is significant since Congress designed the Sherman Act as a consumer welfare prescription." Id. Even though plaintiffs remained free to negotiate the interest rates on financial instruments, the court pronounced that "antitrust law is concerned with influences that corrupt market conditions, not bargaining power." Id. at 25. And although LIBOR was merely a reference rate, "the fact that the dealers used the fixed uniform list price in most instances only as a starting point is of no consequence." Id. Thus, "even if none of the [plaintiffs'] financial instruments paid interest at LIBOR, [precedent] allows an antitrust claim based on the influence that a conspiracy exerts on the starting point for prices." Id. at 33.
Regarding whether the LIBOR-setting process was cooperative or competitive, the Second Circuit held that the "machinery employed by a combination for price-fixing is immaterial." Id. at 30. With respect to harm to competition, the court reasoned that pleading such harm is unnecessary when proof of harm to competition is not even a prerequisite to recover from a per se antitrust violation. Similarly, the fact that plaintiffs could have suffered the same harm under normal circumstances of free competition was immaterial, because antitrust law assumes the likelihood of harm when evaluating alleged per se violations. Id. at 34.
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Antitrust standing in this case remains unresolved. The Second Circuit remanded the case for the lower court to decide whether plaintiffs would be efficient enforcers of the antitrust laws, which concerns whether "plaintiff is a proper party to perform the office of private attorney general and thereby vindicate the public interest in antitrust enforcement." Id. at 44. The appellate court reserved decision on this issue but stated that the "factors require close attention here given that there are features of this case that make it like no other[.]" Id. at 37-38. The court highlighted that "[t]here are many other enforcement mechanisms at work here," such as scrutiny by government regulators. Id. Under the causation factor, the court noted that "[r]equiring the Banks to pay treble damages to every plaintiff who ended up on the wrong side of an independent LIBOR-denominated derivative swap would, if [plaintiffs'] allegations were proved at trial, not only bankrupt 16 of the world's most important financial institutions, but also vastly extend the potential scope of antitrust liability in myriad markets where derivative instruments have proliferated." Id. at 40. Regarding damages, the court opined that "it is difficult to see how [plaintiffs] would arrive at [a reasonable] estimate." Id. at 42. The lower court will analyze these factors and decide the issue on remand.
Defendants' argument in the alternative that plaintiffs failed to plausibly allege an inter-bank conspiracy faltered under the appellate court's Twombly analysis. The court recognized that the line separating conspiracy from parallel conduct is "indistinct," but explained that it "may be crossed with allegations of interdependent conduct, accompanied by circumstantial evidence and plus factors." Id. at 47. The court found "numerous allegations that clear the bar of plausibility," including a common motive to conspire (increased profits and the projection of financial soundness), as well as a high number of inter-firm communications. Id. 48-49.
This appellate decision sets precedent in the Second Circuit that financial benchmarks, even if cooperatively set, constitute a price element under federal antitrust law. Accordingly, the alleged manipulation of a financial benchmark constitutes per se price fixing, an antitrust violation that, if proven, imposes treble damages on those liable. Further, as a per se violation, plaintiffs may establish antitrust injury merely by pleading that they paid an artificially higher price. Moreover, this decision conveys the courts' ongoing suspicion of cooperative activities by trade associations and admonishes that even non-competitive activity, such as providing rate estimates, may violate the antitrust laws if the process allegedly is tainted and affects a price component.
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