In a 7-1 decision, the U.S. Supreme Court sided with the securities industry and ruled yesterday in Credit Suisse that underwriting activities, such as syndication and marketing techniques, taking place during initial public offerings are impliedly immune from antitrust scrutiny. Credit Suisse Sec. (USA) LLC v. Billing, No. 05-1157, 551 U.S. ____ (June 18, 2007). The Court found that applying antitrust laws to the underwriting activities at issue would be incompatible with the Securities and Exchange Commission's regulation of the conduct. It justified its conclusion in part on the ground that there is a fine line between securities-permitted and securities-forbidden conduct, and that the SEC is better equipped than judges and juries to determine the legality of such conduct


At issue in Credit Suisse were underwriting activities at the heart of initial public offerings. In January 2002, a group of 60 investors filed two antitrust class actions against ten leading investment banks under Sections 1 and 2 of the Sherman Act, the Robinson-Patman Act, and state antitrust laws. The complaint alleged that the defendant banks agreed to impose anticompetitive charges over and above the price of IPO shares and related underwriting commissions. Specifically, the complaint alleged that the banks were able to impose higher rates through the use of (i) laddering agreements, in which investors agreed to buy additional shares of the securities at higher prices; (ii) tying arrangements, in which investors agreed to purchase other less attractive securities; and (iii) excessive commissions, or additional commissions related to follow-up or secondary public offerings. The banks moved to dismiss the investors’ complaints on the ground that federal securities laws impliedly immunized the conduct at issue. The Southern District of New York dismissed the complaints, but the Second Circuit reversed.

The Supreme Court Decision

Writing for the Supreme Court, Justice Breyer stated that the securities laws provide an implied immunity from the antitrust laws where there is a “plain repugnancy” between the application of the two sets of laws to the conduct at issue. The Court answered in the affirmative with respect to the conduct in question in Credit Suisse. Building on prior precedent from Silver v. New York Stock Exchange, 373 U.S. 341 (1963), Gordon v. New York Stock Exchange, Inc., 422 U.S. 659 (1975), and United States v. Nat’l Ass’n of Securities Dealers, Inc., 422 U.S. 694 (1975), the Court found four factors critical in determining whether the application of antitrust laws would be incompatible with securities laws to establish implied antitrust immunity: (i) the conflict affects “practices that lie squarely within an area of financial market activity that the securities law seeks to regulate;” (ii) “the existence of regulatory authority under the securities law to supervise the activities in question;” (iii) evidence that the responsible regulator exercises that authority; and (iv) “a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct.”

As to three factors, the Court found no debate. As to the first factor, the Court found, consistent with financial experts and the SEC, that the underwriters’ efforts to promote and sell securities are “central to the proper functioning of well-regulated capital markets.” In particular, “[t]he IPO process supports new firms that seek to raise capital; it helps to spread ownership of those firms broadly among investors; it directs capital flows in ways that better correspond to the public’s demand for goods and services.” As to the second and third factors, the SEC has broad authority to supervise the conduct at issue and has used its legal authority to regulate it, including issuing guidelines to define the types of marketing activities that could be proper during the marketing phase of IPOs.

The crux of the case was on the fourth criteria – namely, whether the application of the antitrust laws would be incompatible with the SEC’s administration of the federal securities laws. The respondents argued that because the SEC had disapproved the tactics at issue, there was no inconsistency in applying the securities and antitrust laws. The Court, however, disagreed for several reasons.

First, the Court found that applying antitrust scrutiny to the conduct at issue “still threatens serious securities-related harm,” because “only a fine, complex, detailed line separates activity that the SEC permits or encourages (for which respondents must concede antitrust immunity) from activity that the SEC must (and inevitably will) forbid (and which, on respondents’ theory, should be open to antitrust attack.” Because of this fine line, “[i]t will often be difficult for someone who is not familiar with accepted syndicate practices to determine with confidence” in which category the conduct falls. Consequently, there is a high risk of inconsistency of judgments by the courts as to the legality of the conduct at issue. These considerations “suggest that antitrust courts are likely to make unusually serious mistakes in this respect. And the threat of antitrust mistakes, i.e., results that stray outside the narrow bounds that plaintiffs seek to set, means that underwriters must act in ways that will avoid not simply conduct that securities law forbids (and will likely continue to forbid), but also a wide range of joint conduct that the securities laws permits or encourages (but which they fear could lead to an antitrust lawsuit and the risk of treble damages).”

Second, the Court found that the need for antitrust enforcement is small because the SEC is required to consider competitive consequences when it creates securities-related policies, rules and regulations; securities rules and regulations forbid the conduct; and the SEC and private plaintiffs can challenge alleged illegal conduct under the securities laws. The Court criticized private plaintiffs for dressing up securities lawsuits in “antitrust clothing,” and seeking treble damages under the antitrust laws when they have recourse under the securities laws. The Court found that “an antitrust action in this context is accompanied by a substantial risk of injury to the securities markets and by a diminished need for antitrust enforcement to address anticompetitive conduct.”

The Court also declined the Solicitor General’s invitation for a middle ground by proposing that a district court could in the first instance determine whether the conduct at issue was “inextricably intertwined” with SEC-prohibited and permitted conduct. The Court found that solution would not solve the problems the Court identified earlier: the fine, complex line separating permissible and forbidden conduct and the high risk that different inferences could be drawn from the same conduct, leading to inconsistent results in the courts. In sum, the Court concluded when an area is squarely enforced by the SEC by active and ongoing regulation and a serious conflict arises between the antitrust and regulatory scheme, the securities laws are deemed “clearly incompatible” with the antitrust laws and thus create implied antitrust immunity.

Justice Stevens filed a concurring opinion on the ground that the agreements at issue did not violate the antitrust laws on the merits. "In my view, agreements among underwriters on how best to market IPOs, including agreements on price and other terms of sale to initial investors, should be treated as procompetitive joint ventures for the purposes of antitrust analysis." Justice Stevens stated that underwriting syndicate activities cannot restrain trade or cause antitrust injury and therefore do not give rise to investors' antitrust claims. "Given the magnitude of the market these practices are alleged to have influenced, I think it obvious as a matter of law that there has been no injury to any relevant competition." Justice Stevens disagreed that the burdens of antitrust litigation or the risk of mistakes by courts "should play any role in the analysis of the question of law presented in a case such as this." Justice Thomas filed a dissenting opinion, and disagreed with the majority’s basic premise that the Securities Act and the Securities and Exchange Act are silent on the preclusion of antitrust suits. Rather, Justice Thomas found that the general broad saving clauses in those Acts supplemented other remedies that may be available. Justice Thomas disagreed with the view that the saving clauses must be specific to antitrust to be operative. "Although Congress may have singled out antitrust remedies for special treatment in some statutes, it is not precluded from using more general saving provisions that encompass antitrust and other remedies." To Justice Thomas, it was irrelevant that the saving clauses played no role in the Court’s previous decisions in Silver, Gordon, and Nat’l Ass’n of Securities Dealers. "Omitted reasoning has little claim to precedential value." Justice Kennedy, whose son is a managing director of Credit Suisse, was recused.

The Effect of Credit Suisse

This decision follows an established line of Supreme Court precedent forcing antitrust enforcement to take a back seat to the SEC when there is a clear regulatory structure and active supervision of conduct at the heart of the industry. Regulatory oversight itself will not be sufficient to overcome the application of the antitrust laws; there also needs to be clear inconsistency in the application of the two regulatory schemes for the conduct to be impliedly immunized. Moreover, while the Court declined to hold that all investment bank activities are impliedly immune from the antitrust laws, this decision casts a wide net over many of them. Whether this decision should be read narrowly as applying to the securities industry or broadly as applying to other regulatory industries, such as telecommunications and transportation, remains to be seen. But the logic of the opinion suggests a broader application. It also reflects judicial concern about the increasing number and burden of antitrust treble damage actions, as recently highlighted by the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, No. 05-1126, 550 U.S. ___ (2007) (see Kilpatrick Stockton's 5/23/07 Legal Alert).