Antitrust - Supreme Court Finds Implied Antitrust Immunity in IPO Laddering Dispute
Credit Suisse Securities (USA) LLC v. Billing, No. 05-1157, 551 U.S. ___ (2007)
On June 18, 2007, the United States Supreme Court ruled that the federal securities laws implicitly preclude plaintiffs from bringing antitrust claims under the Sherman Act, Section 1, against a group of investment banks who, serving
as underwriters, formed syndicates that helped execute initial public offerings ("IPOs") for several hundred technology-related companies. The plaintiffs – a group of investors – alleged that the underwriters
unlawfully agreed among themselves to impose conditions on buyers of popular newly-issued securities by requiring them (1) to buy additional shares of the same security at escalating prices ("laddering"), (2) to pay high
commissions on subsequent security purchases from the underwriters, or (3) to purchase other less desirable securities from the underwriters ("tying"). According to the plaintiffs, these conditions artificially inflated
the share prices for the securities. Below, the District Court had dismissed the suit for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), but the United States Court of Appeals for the Second Circuit reversed.
The Supreme Court, in a decision written by Justice Breyer, looked to three of its precedents in analyzing the interplay between the antitrust allegations and securities law and regulation: Gordon v. New York Stock Exchange, Inc.,
422 U.S. 659 (1975); United States v. National Ass'n of Securities Dealers, Inc., 422 U.S. 694 (1975); and Silver v. New York Stock Exchange, 373 U.S. 341 (1963). Under this precedent, the Court must determine,
"given context and likely consequences," whether there is a "clear repugnancy" or incompatibility between the securities law and the antitrust complaint. According to the Court, four factors were critical to the
finding in Gordon and NASD of implied repeal of the antitrust laws: (1) the existence of regulatory authority under the securities law to supervise the challenged activities; (2) evidence that the responsible regulators
actually exercise that authority; (3) a risk of conflicting results if both the antitrust and securities laws were applied to the same activities; and (4) the conflict would affect activities that "lie squarely within an area
of financial market activity that the securities law seeks to regulate."
The Supreme Court then examined the challenged joint underwriter conduct. It noted that "the activities in question here – the underwriters' efforts joint to promote and to sell newly issued securities – [are]central
to the proper functioning of well-regulated capital markets" because they are "essential to the successful marketing of an IPO." Next, the Court found that the United States Securities and Exchange Commission ("SEC")
has the authority to supervise challenged activities and in fact has "continuously exercised" its authority, such as by bringing actions against underwriters who violate the relevant SEC regulations.
The key question, according to the Court, was whether the securities and antitrust laws conflict in a way that make them incompatible. Ultimately, the Court concluded that the "nuanced" nature of the inquiry into what is
permissible/impermissible conduct under SEC regulations was inappropriate for non-expert judges and juries. The Court ruled that, because of the "unusually serious line-drawing problem," and the fact-intensive nature of
the inquiry, there is "no practical way to confine antitrust suits so that they challenge only activity that is presently unlawful and will likely remain unlawful under the securities law." The cost of mistakes, in the
Court's view, is "unusually high" and "would threaten serious harm to the efficient functioning of the securities markets." The Court further noted that the SEC itself must take into account competitive considerations
when crafting securities policy and regulations. In all these circumstances, the Court concluded that four factors present in Gordon and NASD applied to the joint underwriter conduct and justified implied preclusion
of the antitrust laws in the IPO context.
Justice Stevens wrote a short concurring opinion. He would have found that the underwriter agreements were procompetitive joint ventures and not conspiracies in restraint of trade within the meaning of the Sherman Act, Section 1.
As such, Justice Stevens would have held that the conduct did not violate the antitrust laws as a matter of law – not that it was immune from antitrust scrutiny. He explained: "Surely I would not suggest, as the Court
did in Twombly, and as it does again today, that either the burdens of antitrust litigation or the risk 'that antitrust courts are likely to make unusually serious mistakes,' should play any role in the analysis
of the question of law presented in a case such as this." Justice Thomas wrote a short dissent, citing the savings clauses found in 15 U.S.C. § 77p(a), and the Securities Exchange Act of 1934, § 78bb(a).
Conclusion
The Credit Suisse decision is the second time this term that the Supreme Court reversed the Second Circuit after it had reinstated an antitrust complaint at the pleading stage. See also, Bell Atlantic Corp. v. Twombly,
No. 05-1126, 550 U.S. ___ (2007). As Justice Stevens pointed out in his Twombly dissent, it remains to be seen whether the Court’s scrutiny of antitrust allegations at the pleading stage will permeate other areas
of the law. Credit Suisse, read together with Twombly and other recent court decisions (such as Tellabs, Inc. v. Makor Issues Rights, Ltd., No. 06-484, 551 U.S. ___, from this term, and Dura Pharmaceuticals, Inc. v. Brondo,
544 U.S. 336 (2005), and Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), from earlier terms), suggests that the Court lately has become particularly skeptical of private lawsuits filed
in what it perceives as tightly-regulated industries. In these disputes, the Court displayed a confluence of interest between Justice Breyer (who has written extensively on what he perceives to be the positive effects that can be
obtained through Government regulation) and more conservative members of the Court, such as Justice Scalia (who might otherwise be less sympathetic to Government regulation).
An unusual aspect of Credit Suisse, is its emphasis on institutional competence as a basis for finding implied conflict. A viewpoint, espoused by former-Judge Bork and others, argues that antitrust law involves a paradox:
judges seek, in theory, to achieve the benefits of unfettered free market competition by issuing (non-free market) orders telling participants in the "free" market what they can and cannot do. Whether this view is correct
or not – and although a regulator, like the SEC, may be in a better position than a judge to determine how best to regulate securities – it is not apparent that the SEC is any more competent than federal judges are
to assess the risks of conduct such as laddering, price-fixing or tying, or that SEC regulation of the field is any more likely to avoid the paradox that Judge Bork identifies.