On January 12, 2016, Judge Engelmayer of the Southern District of New York dismissed a lawsuit against JP Morgan which alleged the bank (and some of its subsidiaries) monopolized silver futures spread trading in late 2010 and early 2011.  The court’s decision in Shak v. JPMorgan Chase & Co., S.D.N.Y., No. 1:15-cv-00992-PAE, affirmed that plaintiffs can properly plead a Section 2 monopolization claim under the Sherman Act without precisely defining the relevant market if there is sufficient direct evidence that the defendant controlled price or excluded competition in a relevant market.  The court explicitly held that evidence of market manipulation by a dominant player in a commodities market could be enough to prove market power.  However, the Court found that plaintiffs failed to adequately plead the second element of a monopolization claim, exclusionary conduct, because they were unable to show that JP Morgan’s conduct was anything other than “gloves-off, hard-nosed market competition.”

The plaintiffs in the lawsuit, independent silvers futures traders, allege that JP Morgan placed “uneconomic orders” before the close of trading to influence settlement prices and benefit their positions.  These allegedly uneconomic orders benefited JP Morgan’s position by causing “backwardation”—a rare market condition where futures contracts with nearer delivery dates of a commodity cost more than contracts with further off delivery dates.  The plaintiffs claimed they were harmed by this artificial market movement because it pressured them to liquidate their silver spread positions in transactions where JP Morgan was allegedly the counterparty.

The defendants first attempted to rebut the monopolization claim by arguing that the complaint did not establish that JP Morgan had monopoly power in a relevant market.  The Court agreed that the plaintiffs’ definition of the relevant market as “silver futures spread market and in particular the ‘long-dated’ silver futures spread market” was “implausible” because there was no explanation why “physical silver or other silver derivatives products are not interchangeable.”  However, while plaintiffs did not properly plead market power by the “conventional means,” the Court held that when market power is pled through direct evidence, the plaintiff is not required to “define the market with the same precision and punctiliousness (e.g. to exclude potential interchangeable products) that a plaintiff who alleges monopoly power solely by means of alleging the defendant’s market share must.”

Relying on two recent cases alleging monopolization in a commodities market (In re Crude Oil Commodity Futures Litig. 913 F. Supp. 2d 41 (S.D.N.Y. 2012) and In re Term Commodities Cotton Futures Litig., No. 12 Civ. 5126 (ALC), 2013 WL 9815198 (S.D.N.Y. Dec. 20, 2013)), the Court held that plaintiffs properly pled direct evidence of monopoly power because “concrete allegations of a dominant position in either a physical commodity or a related futures market, combined with significant pricing anomalies that are closely correlated with defendants’ alleged conduct, may be sufficient to plead monopoly power.”

The court still ultimately dismissed the plaintiffs’ monopolization claims, though, because the plaintiffs failed to plead the second element of a monopolization claim: anticompetitive purpose.  The complaint only offered “unacceptably vague” allegations of conduct and did not show that that conduct was intended to exclude competitors.  Judge Engelmayer noted that the complaints in In re Crude Oil and In re Cotton Futures contained detailed allegations about “intentionally manipulative trading strategies,” and the uneconomic nature of those strategies was “far more patent” because the defendants were suffering short-term losses to reap larger long-term gains.  Conversely, these plaintiffs did not point to any specific actions by JP Morgan that were uneconomic and did not distinguish “JP Morgan’s conduct from that of a rational, hard-nosed market actor.”

The court granted the plaintiffs two weeks leave to file amended complaints to rehabilitate their Sherman Act § 2 claims by pleading additional facts.  If no such complaints are filed, the dismissal will be with prejudice.