Competitors Engaged In Cooperative Processes Find They Face Competing Approaches By Southern District Of New York Judges Weighing Antitrust Liability
By Robert M. Cross
The scope of antitrust liability for competitors engaged in cooperative processes—such as setting benchmark interest rates—became murkier this week with a decision by the U.S. District Court for the Southern District of New York holding that manipulation of such a cooperative process could give rise to a viable price-fixing claim.
On Monday, Judge Jesse M. Furman held in Alaska Electrical Pension Fund v. Bank of America Corporation, 14-cv-07126(JMF) (S.D.N.Y. 2016), that a group of “otherwise-competing” entities who are engaged in a cooperative process in which they do not compete may still be subject to antitrust liability if they conspire “to manipulate prices (or components thereof).” Id. at 16.
Significantly, Judge Furman disagreed with the Southern District of New York’s previous holding in In re LIBOR-Based Financial Instruments Antitrust Litigation, 935 F. Supp. 2d 666 (S.D.N.Y. 2013) (“LIBOR I”), that engaging in a “cooperative endeavor” to manipulate prices insulates “otherwise-competing” entities from antirust liability. Id. at 16. These dueling decisions underscore the disagreements among jurists within the Southern District and contributes to the lack of clarity surrounding the scope of antitrust liability for actors who are normally competitors, but engage in cooperative, non-competitive, endeavors in which they allegedly manipulate prices. Id. at 2. The LIBOR I case is currently on appeal to the Second Circuit. The Second Circuit’s ruling on that appeal may ultimately provide parties with more guidance on this complex issue.
Plaintiffs, a group of institutional investors, brought this action against (1) a group of banks that are the primary actors in the market for interest rate derivatives and act collectively to set ISDAfix (an interest rate benchmark that is the most common tool used to determine the value of certain interest rate derivative instruments) and (2) ICAP Capital Markets LLC (ICAP), a broker that posted ISDAfix rates. Although Plaintiffs alleged various state law claims, their primary claims asserted that Defendants’ alleged conspiracy to manipulate ISDAfix constituted price fixing in violation of the Sherman Act, 15 U.S.C. § 1.
An understanding of Plaintiffs’ allegations of misconduct requires a brief summary of the interest rate derivatives market. One type of interest rate derivative instrument is called a “swaption,” and consists of a contract under which the buyer pays a premium to a seller for the option to engage in an interest rate swap at a defined rate on some predetermined date in the future. Id. at 3. Swaptions come in two forms—“physically settled” swaptions, which require the contracting parties to actually perform the swap if the option is exercised, and “cash settled” swaptions, which require the seller to pay the buyer whatever value the swap holds on the exercise date. Id. ISDAfix is the measure that is most frequently used to gauge the settlement value of a cash-settled swaption on the exercise date. Id. Either the buyer or the seller profits, depending on which of the ISDAfix rate and the fixed rate outlined in the swaption contract is more favorable. Id.
During the relevant period, ICAP compiled the ISDAfix benchmark rates. Id. at 4. Every morning at 11:02 a.m., ICAP would send all of the bank defendants (these banks are also referred to as “dealers”) various reference points generated from (1) the rates that had been offered in executed inter-dealer trades and executable inter-dealer bids at 11:00 a.m. and (2) information “reflecting executed trades and executable bids and offers at 11 a.m. for U.S. Treasury securities” as reflected on ICAP’s inter-dealer trading platform. Id. at 4-5. ICAP would then request each defendant bank to submit, for all maturities, the midpoint of where “that dealer would itself offer and bid a swap” in the specified maturity for a defined notional amount to “[a] dealer of good credit in the swap market.” Id. at 5. Banks had the option of accepting the ICAP reference rates issued at 11:02 a.m., sending in a different rate, or doing nothing. Thompson Reuters would then aggregate the day’s ISDAfix rates by eliminating some number of the highest and lowest rates the banks submitted through ICAP and then averaging the remaining rates. Id. The key point is that in this rate submission process, the various banks cooperated under the umbrella of ICAP rather than acted as competitors (despite the fact that they compete in other contexts).
Plaintiffs alleged that the defendant banks manipulated the ISDAfix rates by (1) rubberstamping the ICAP reference rates, and (2) sharing information with one another so that the banks could flood the inter-dealer swap market just prior to 11 a.m. with transactions that could help push the ICAP reference rates to the value the various banks desired. Id. They further suggested that ICAP sometimes simply set rates at a level prearranged by the banks without reference to market conditions. Id. at 6. According to Plaintiffs, this manipulation of ISDAfix rates occurred on almost every single trading day during the damages period—which disadvantaged Plaintiffs because they all engaged in some interest rate derivative transaction, the profitability of which was linked to the ISDAfix rates with one or more of the defendant banks on days when the ISDAfix rates were manipulated. Id. In other words, by manipulating the ISDAfix rates, the banks were able to insure that various derivative transactions they engaged in with Plaintiffs were more profitable for the banks and less profitable for Plaintiffs. Id.
Procedural Context and Ruling
The Defendants sought to dismiss Plaintiffs’ claims pursuant to both Fed. R. Civ. P. 12(b)(1) (lack of subject matter jurisdiction) and Fed. R. Civ. P. 12(b)(6) (failure to state a plausible claim for relief). The Court held that (1) it did have subject matter jurisdiction, and (2) Plaintiffs did state a plausible claim for relief on their antitrust claim and a subset of their state law claims.
Key Legal Analysis
The Court’s decision largely focused on Defendants’ argument that Plaintiffs’ Sherman Act price fixing claim must be dismissed because Plaintiffs lacked “antitrust standing.” Id. at 13. Antitrust standing is contingent on the plaintiff demonstrating that (1) it suffered a particular type of antitrust injury designed to be redressed by antitrust law, and (2) it is positioned to be an “efficient enforcer” of the antitrust laws. Id. at 13-14. Relying on LIBOR I, Defendants claimed that the Plaintiffs failed the first component because they could not demonstrate antitrust industry due to the fact that the setting of the ISDAfix rates “is based on a cooperative process” as opposed to “the product of competition to win Plaintiffs’ business.” Id. at 14. Although recognizing some factual similarity to LIBOR I—which held that Defendants who had colluded to set LIBOR interest rates in a manipulative manner were not subject to antitrust liability—the Court refused to accept Defendants’ argument.
Instead, the Court (1) found LIBOR I factually distinguishable in one crucial respect, and (2) concluded that LIBOR I had reached an incorrect legal conclusion. Id. at 15-16. First, the Court observed that, unlike in LIBOR I, in order to conspire to flood the derivatives market to push the ISDAfix rates to the desired level leading up to 11 a.m., the banks were coordinating behavior within a market where they were, in fact, horizontal competitors in order to manipulate the cooperatively set ISDAfix rates. Id. Thus, while the actual rate fixing may have occurred through a cooperative process, it was driven by “coordinated action in a supposedly competitive market”—exactly the type of misconduct prohibited by antitrust laws. Id. at 16. Second, and more significantly, the Court disagreed “with the LIBOR I Court’s legal conclusion that engaging in a ‘cooperative endeavor’ to manipulate prices (or components thereof) insulates ‘otherwise-competing’ entities from antirust liability to parties harmed by that manipulation.” Id. Based on this reasoning and its conclusion that plaintiffs were efficient enforcers of the antitrust laws, the Court found that Plaintiffs did have antitrust standing. Id. at 16, 22.
Given the split between different Southern District jurists regarding whether otherwise-competing entities are shielded from antitrust laws when they collude within a space where they are not competitors, it is critical for plaintiffs with claims against defendants who are likely to raise this issue to scrutinize the Second Circuit’s approach to the LIBOR I appeal. In some instances it may even be worthwhile for potential plaintiffs to consider delaying litigation until the Second Circuit (hopefully) provides clarity on the issue to avoid wasting valuable time and resources.
– Edited by Gary J. Malone
 Note: All internal citations have been omitted from this blog post