Company shareholders do not suffer "antitrust injuries" because of an alleged violation of Section 8 of the Clayton Act, prohibiting officers and directors from serving on the boards of competing corporations, according to a new Seventh Circuit decision in Robert F. Booth Trust v. Crowley. The decision was authored by Chief Judge Frank H. Easterbrook, a widely respected antitrust jurist, and joined by Judge Richard A. Posner, another antitrust heavyweight.
Standing, or the ability to bring suit, is often an issue in private antitrust suits, particularly when the interlock prohibition is involved. Under a long line of Supreme Court precedent, a plaintiff has to suffer an "antitrust injury" to have standing to sue under the antitrust laws. Antitrust injury means "injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Stated more plainly, the plaintiff has to be hurt by the decrease in competition wrought by the antitrust violation, as opposed to an increase in competition. What constitutes such an injury was the central issue in Booth.
The dispute arose after two retail giants, Sears and K-Mart, merged in 2005. The merged entity took on directors from both companies, including William C. Crowley and Ann N. Reese. Crowley was simultaneously a director of AutoNation, Inc. and AutoZone, Inc., while Reese was simultaneously a director of Jones Apparel Group, Inc. The plaintiffs claimed that Crowley and Reese were in violation of Section 8 of the Clayton Act, which prohibits interlocking directorships, because the merged company was in direct competition with AutoNation, AutoZone, and Jones Apparel in the automotive and apparel markets, respectively. Neither the Federal Trade Commission nor the Department of Justice had raised such a claim when the Booth suit was filed, nor apparently during the investigation of the merger. Instead, two of the merged company's shareholders filed a derivative action against the corporation based on the alleged antitrust violation.
In a strongly worded opinion, the Seventh Circuit threw the shareholders out of court. Citing to Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., the Seventh Circuit found the shareholders, as investors in the merged company, could not suffer an antitrust injury because they would presumably benefit from the alleged violation. Even if the violation caused harm to competition, Judge Easterbrook reasoned, it would have helped Sears by, presumably, allowing it to charge higher prices or lower output. In so far as Sears was benefited, the plaintiffs, as shareholders of the company, would also benefit from the purported illegal conduct.
As Judge Easterbrook explained, Brunswick stands for the proposition that antitrust laws protect against a specific kind of injury. In the case of an interlock violation, the law is designed to prevent harm caused by interlocking directors presumably working to limit competition between the two companies for which they serve. For example, if Suzy Smith serves on the Board of two competing widget manufacturers, Smith would be in a position to facilitate price fixing and other anticompetitive practices by virtue of her position. Therefore, Smith cannot serve on both widget boards at the same time. To suffer an antitrust injury from an interlock violation, a plaintiff has to prove he was harmed by the decrease in competition caused by the interlock, e.g., a purchaser of the widget whose price was fixed.
In Brunswick, the plaintiff who initiated the suit was a competitor of the company that allegedly broke the antitrust laws. The plaintiff argued that because the defendant acquired several failing bowling alleys to keep them open, the plaintiff lost profits it would have gained if the alleys had been forced to close. The Court held that the defendant were entitle to judgment because the plaintiff did not suffer an antitrust injury. Specifically, the plaintiff had not suffered the type of harm the antitrust laws are designed to prevent ‑- harm from lessened competition. Instead, the plaintiff was harmed by an increase in competition, or, at least, maintenance of the status quo which was a competitive market.
Comparing Booth to Brunswick, Judge Easterbrook drew some parallels. In Brunswick, the plaintiffs complained they were not allowed to benefit from decreased competition. In Booth, the suing shareholders alleged they were, in effect, being forced to benefit from decreased competition. Like the plaintiffs in Brunswick, Judge Easterbrook held that the Booth plaintiffs had not suffered an antitrust injury because the presumed harm to competition would benefit them as shareholders, even if it ostensibly harmed competition.
The court was unequivocal in its holding, stating "the perpetrators of antitrust offenses lack standing to complain about their own misconduct." The court also appeared to admonish the attorneys involved in the suit, saying when such perpetrators "do invoke the antitrust laws, likely they have other objectives in view." In the court's view, those "other objectives" included the nearly $1 million in attorney's fees the plaintiff's lawyers stood to collect from a proposed settlement.
The Booth decision has two important lessons for corporations. First, it reaffirms that Section 8 of the Clayton Act can and will be enforced. Although the FTC had not warned the Sears/K-Mart merged entity that it could be violating Section 8, the viability of a potential government claim was never disputed by the court. In any merger, Booth serves as a reminder that the Board of the newly constituted company must be examined for potentially anti-competitive interlocks. We have extensive resources pertaining to evaluating interlock concerns available.
Second, Booth reaffirms prior precedent and helps to clarify a recurring problem in interlock litigation: who, exactly, the law is designed to help. The plaintiffs in Booth tried to argue the mere potential that the government would institute an enforcement action was a sufficient injury, but the Seventh Circuit flatly rejected that argument. Rather, the court was clear that in order to be harmed by an interlock violation, a plaintiff must prove she was harmed by the decrease in competition stemming from the interlock. Shareholders in a company alleged to be violating the interlock provision cannot, as a matter of law, suffer such an injury as investors, because their investment would presumably benefit from the violation. Therefore, shareholders would seem to almost never have standing to raise a suit based on an interlock violation, at least in a derivative action.