On June 13, 2012, a Seventh Circuit Court of Appeals Panel slapped down a derivative action against Sears Holding Corporation ("Sears") alleging a violation of Section 8 of the Clayton Act, which prohibits interlocking directorates. Actions under that antitrust provision are rare, and this one may have been the first of its kind. Of even or more interest, Judge Frank Easterbrook, a noted antitrust expert, pointedly commented that he believed the suit was more about transferring money from the company to the plaintiffs' lawyers than one in which shareholders were actually acting in the company's best interest.
Background – The Complaint and District Court Decision
In 2005, Sears merged with Kmart Corporation, and the new board of directors consisted of members from each legacy company. Two of the directors also sat on the boards of companies that competed with Sears.
In 2009, after the overlapping board members were re-elected by Sears' investors, the Robert F. Booth Trust and Ronald Gross, two shareholders in Sears, filed a derivative action on behalf of the company to have the overlapping board members removed. Plaintiffs did not make demands on the board to remove the directors prior to filing suit, claiming instead that the demand would have been futile. The Complaint did not allege that the overlapping board members had acted in a manner that violated the antitrust laws or put Sears at risk of either civil or criminal penalties. Sears moved to dismiss, contending that the plaintiffs lacked standing and, in any event, had failed to make a demand that the board rectify the interlock. Sears also argued that the majority of the board of directors had no stake in the Section 8 question and were themselves capable of determining the best interests of the corporation. The district court nevertheless denied the motion to dismiss.
The district court also determined that the plaintiffs had standing to allege the Section 8 challenge through a derivative litigation, although derivative actions typically contend that a board of directors has taken an action that actually hurt a company or its investors. Arguably, the antitrust purpose behind Section 8 of the Clayton Act is intended to deter potential collusive conduct between competing companies through a director interlock that would cause the company to charge higher prices and reap large rewards for the investors. The Complaint did not make such allegations.
After the district court denied the motion to dismiss, Sears and the plaintiff investors proposed a settlement whereby one of the interlocked directors would resign and the plaintiffs' attorneys would obtain up to $925,000 in fees, to which Sears could not object under a "clear-sailing" clause in the settlement agreement. Under the derivative action statute, the parties were required to give notice to investors to allow for investor comment. One of the investors, Theodore Frank, challenged the settlement because it would cost the company more than $900,000, and result in the removal of a director that the investors had elected in 2009. Further, the settlement would not prohibit future interlocks in violation of Section 8. Frank moved to intervene so that he could challenge the settlement and appeal if necessary.
The district court denied the motion to intervene, stating that the current plaintiffs properly represented Frank's interest, but denied entry of the settlement, allowing the parties to propose a new settlement. Frank appealed the denial of his motion to intervene, arguing that he had standing to oppose any settlement.
The Seventh Circuit Opinion
In the initial part of its opinion on the appeal, the Seventh Circuit Panel questioned whether the plaintiffs had standing to bring a derivative action alleging a Section 8 violation. As had been pointed out by the district court, interlocking directorate violations of Section 8 of the Clayton Act usually lead to higher prices and increased profits, which benefit investors. According to the Panel, the fact that a Section 8 violation usually benefits investors should mean that the investors do not suffer antitrust injury, and therefore lack standing. The Panel did not delve into this issue, however, although it did acknowledge that there might be private parties who could pursue Section 8 claims. 
On the other hand, the Panel determined that Frank had standing to intervene because he was an investor, and because his view of the settlement was directly opposed to the plaintiffs' views. Simply because the plaintiffs claimed to represent the investors as well as the company adequately did not establish that fact. Frank disputed that the settlement was beneficial to the company or the investors. According to the Panel, that simple fact gave Frank standing to intervene, and its decision to deny his motion to intervene constituted error.
In determining that Frank did indeed have standing to intervene, the Seventh Circuit Panel then drew an analogy between derivative actions and class actions. According to the Panel, Fed. R. Civ. P. 23, the class action rule, requires a district court judge to grant intervention to challenge settlements liberally, and this principle should be no less true under Fed. R. Civ. P. 23.1, which addresses derivative actions. Accordingly, the Panel ruled that Frank had standing and should have been allowed to intervene to challenge the settlement.
The Panel, however, did not stop at this point and merely remand the case for further consideration of the settlement. Instead, Judge Easterbrook chose to proactively address what he considered completely frivolous litigation. In fact, he went out of his way to stress: "this litigation is so feeble that it is best ended immediately, as both Sears and Frank unsuccessfully asked the district judge to do." To the Panel, the only goal of the suit appeared to be to extort money from the company for the benefit of the plaintiffs' lawyers, because it was impossible to determine how the corporation would benefit from any settlement of the action.
According to the Panel, the plaintiffs claimed that their only reason for bringing the suit was to remove the interlocking directors in order to eliminate the possibility that the government would file a Section 8 suit to remove them. The Panel seemed both dumbfounded and exasperated by the fact that the plaintiffs were willing to put the corporation through an entire lawsuit because of a minimal risk of a suit by the United States under Section 8. As Judge Easterbrook sharply noted, "[w]e don't get it." He explained that the last Section 8 lawsuit initiated by the Department of Justice was resolved in 1984. Since then, he pointed out, the antitrust enforcers have merely notified firms of actual or potential interlocking directors, then worked with the firms to restructure their boards in order to avoid litigation. Therefore, Judge Easterbrook asserted that the alleged risk of antitrust liability was a mere ruse to force the company to settle the claim as opposed to spending resources litigating an expensive antitrust case.
The Panel also addressed plaintiffs' explanation that they did not make a demand on the board before filing suit because such demand would have been futile. According to the Panel, while it is true that the board might have denied the plaintiffs' demand, had it been made, the demand would have been rejected because the claims were baseless and not because the board was acting against the best interests of the company or the investors. Specifically, according to the Panel, the independent directors on the Sears board would have upheld their fiduciary duties had they been asked, and would have honestly determined whether the two interlocked directors caused any real concern to the company.
Again stressing that "the suit serves no goal other than to move money from the corporate treasury to the attorney's coffers," the Seventh Circuit reversed the district court's decision and remanded the case with instructions to grant Frank's intervention and to enter judgment for defendants.
While the Seventh Circuit ordered dismissal of this suit, the ruling might be limited to the facts. The Panel did not reject the principle of a private right of action under Section 8 of the Clayton Act. With a more egregious fact pattern, where interlocking directors are indeed breaching their fiduciary duties to a company and its investors, a private suit under Section 8 may be taken seriously and not be recognized, as it was in this case, as being no more than a money grab by industrious lawyers.