Introduction
On June 18, 2007, the United States Supreme Court ruled in a 7-1 decision that investment banks are immune from antitrust scrutiny in connection with syndication and marketing techniques employed in underwriting initial public offerings, Credit Suisse Securities (USA) LLC v. Billing (No. 05-1157) 127 S.Ct. 2383, 2007 U.S. LEXIS 7724. Finding that "permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing" would pose a "serious conflict between, on the one hand, application of the antitrust laws and, on the other, proper enforcement of the securities law," the Court held that federal securities laws and regulation impliedly preclude the application of antitrust laws to the underwriting activities at issue. Id. at *35. Writing for the majority, Justice Breyer emphasized that there is a fine, complex line separating activities permitted and forbidden under the securities laws, and that the Securities and Exchange Commission is far better qualified to determine the legality of such conduct than judge and juries in antitrust cases. Id. at *27-34.
Background
Plaintiffs in Credit Suisse alleged what the Second Circuit described as an "epic Wall Street conspiracy." Sixty plaintiff investors claimed that between March 1997 and December 2000, ten of the nation’s leading underwriting firms entered into illegal contracts regarding the marketing and distribution of securities sold through IPOs, thereby grossly inflating the post-IPO prices of the securities and violating Sherman Act Section 1. Specifically, plaintiffs claimed that the investment banks unlawfully agreed with one another that they would not sell shares of popular IPO securities to a buyer unless that buyer committed (1) to buy additional shares of that security later at escalating prices ("laddering"); (2) to pay unusually high commissions on subsequent security purchases from the underwriters; or (3) to purchase from the underwriters other less desirable securities ("tying"). See id. at *6-7.
The district court granted a motion to dismiss by defendants, holding that the securities laws impliedly repealed federal and state antitrust laws with respect to the alleged underwriting conduct. In re Initial Pub. Offering Antitrust Litig., 287 F. Supp.2d 497 (S.D.N.Y. 2003). Judge Pauley found that implied immunity was appropriate because the SEC, both directly and through its pervasive oversight of the National Association of Securities Dealers and other self-regulatory organizations, either expressly permits the conduct alleged or has the power to regulate the conduct such that a failure to find implied immunity would "conflict with an overall regulatory scheme that empowers the [SEC] to allow conduct that the antitrust laws would prohibit." Id. at 523. See also id. at 499 ("Any other result would force the defendants to navigate the Scylla of securities regulation and Charybdis of antitrust law.").
The Second Circuit reversed, and reinstated plaintiffs’ claims, finding no specific Congressional intent to immunize the challenged conduct, either express or implied. Billing v. Credit Suisse First Boston Ltd., 426 F.3d 130, 172 (2005). The Second Circuit rejected defendants’ argument that implied antitrust immunity arises from a potential specific conflict between the antitrust laws and the securities laws, and further held that the securities laws were not sufficiently "pervasive" to immunize defendants’ alleged conduct. Id. at 166-172 ("Congress knows how to immunize regulated conduct from the antitrust laws. To date, it has not done so here . . .").
The Supreme Court’s 7-1 Decision
The Supreme Court reversed the Second Circuit, holding that the securities laws implicitly preclude the application of the antitrust laws to the conduct alleged by plaintiffs. Relying on a trilogy of high court cases on the law of antitrust immunity in the securities context, Justice Breyer explained in the majority opinion that an implied repeal of the antitrust laws is found where there is a "plain repugnancy" between the antitrust and securities laws. Credit Suisse, 2007 U.S. LEXIS 7724 at *13-15. Stated otherwise, the Court held, the test is whether the securities law and an antirust complaint are "clearly incompatible." Id. at *21. Under this test, antitrust claims are precluded implicitly when the challenged conduct is: (1) squarely within the "heartland of securities regulations"; (2) within the authority of the SEC to regulate; (3) the subject of "active and ongoing agency regulation"; and (4) likely to create "a serious conflict between the antitrust and regulatory regimes." Id. at *37.
Justice Breyer, joined by Chief Justice Roberts and Justices Scalia, Souter, Ginsburg and Alito, explained that the first three of these factors were easily met in Credit Suisse, as the defendants’ joint efforts to promote and to sell newly issued securities are central to the proper functioning of well-regulated capital markets; the law grants the SEC authority to supervise these activities; and the SEC has continuously exercised its legal authority to regulate the conduct of the general kind at issue. Id. at *22-24.
In considering the fourth factor, regarding the existence of a serious conflict between the antitrust and securities regimes, the Court assumed the truth of plaintiffs’ contention that the SEC has disapproved, and will continue to disapprove, the specific conduct challenged by plaintiffs under the antitrust laws. Id. at *26-27. Nonetheless, the Court found a serious conflict because "an antitrust action in this context is accompanied [1] by a substantial risk of injury to the securities markets and [2] by a diminished need for antitrust enforcement to address anticompetitive conduct." Id. at *35.
As to the first concern, the Court held that antitrust actions such as Credit Suisse threaten 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)." Id. at *27. In light of this fine line, "[i]t will often be difficult for someone who is not familiar with accepted syndicate practices to determine with confidence" how to categorize challenged practices. Id. at *27. The Court noted that evidence tending to show unlawful antitrust activity and evidence tending to show lawful securities marketing activity may overlap or prove identical, and that there would be a high risk of inconsistent results from different non-expert judges and different non-expert juries. Id. at *30-31. Collectively, observed the Court, "these factors suggest that antitrust courts are likely to make unusually serious mistakes" in applying antitrust law to securities-regulated conduct. Id. at *31-32. According to the Court, this "threat of antitrust mistakes" (and the resultant treble damages) would discourage underwriters from a wide range of joint conduct that the securities laws permits or encourages – "[a]nd therein lies the problem." Id. at *32.
The Court also concluded that "any enforcement-related need for an antitrust lawsuit is unusually small" in the securities context. The Court justified this conclusion with observations that (a) the SEC actively enforces the rules and regulations that forbid the conduct in question; and (b) investors harmed by underwriters’ unlawful practices may bring lawsuits and obtain damages under the securities laws. Id. at *34. In addition, the Court expressed reluctance to potentially undermine the newly tightened procedural requirements for plaintiffs filing securities actions by allowing such suits to proceed "in antitrust clothing." Id. at *35.
Notably, the Supreme Court rejected the compromise resolution suggested by the Solicitor General, SEC and DOJ in a unified amicus submission (the SEC and DOJ submitted opposing amicus positions during the Second Circuit appeal). The Court declined to follow the Government’s suggestion to remand the case to the District Court to determine whether plaintiffs’ allegations of prohibited conduct could be separated from conduct allowed by securities regulations or whether the SEC-permitted and SEC-prohibited conduct are "inextricably intertwined." Id. at *35-37 (noting Solicitor General’s fear that overly broad finding of implied immunity could preclude application of antitrust law to underwriting syndicate behavior such as overt market division). Justice Breyer explained that this proposed disposition did not convincingly address the Court’s concerns, i.e.:
[1] the difficulty of drawing a complex, sinuous line separating securities-permitted from securities-forbidden conduct, [2] the need for securities-related expertise to draw that line, [3] the likelihood that litigating parties will depend upon the same evidence yet expect courts to draw different inferences from it, and [4] the serious risk that antitrust courts will produce inconsistent results that, in turn, will overly deter syndicate practices important in the marketing of new issues.
Id. at *36-37.
Justice Stevens filed a concurring opinion in which he concluded that the challenged underwriting agreements did not violate the antitrust laws on the merits, and "should be treated as procompetitive joint ventures for purposes of antitrust analysis," with no need for an analysis of implied immunity. Id. at *38-40 (Stevens, J., conc.). Justice Thomas lodged a dissenting opinion disagreeing with the majority’s conclusion that the Securities Act and Securities Exchange Act are silent on the preclusion of antitrust claims, instead finding that both "contain broad saving clauses that preserve rights and remedies existing outside of the securities laws." Id. at *41 (Thomas, J., diss.). Justice Kennedy, whose son is a managing director of Credit Suisse in New York, recused himself from the case.
Looking Forward
Credit Suisse is an important win for the securities industry. Although securities industry players must conform to a substantial and developing body of SEC rules, they now can be less concerned with potentially devastating treble damages attacks on their market activities under the antitrust laws.
Participants defending antitrust claims in other highly regulated industries no doubt will push for the same significant regulatory deference shown the SEC in Credit Suisse, and indeed, the logic of Credit Suisse may reach beyond the securities industry. Complicated line-drawing abounds in many regulated industries, and judges and juries may be poorly equipped to decide a wide variety of matters on which they pass judgment. Moreover, to the chagrin of Justice Stevens, in Bell Atlantic Corp. v. Twombly (No. 05-1126, May 21, 2007) 127 S.Ct. 1955, 2007 U.S. LEXIS 5901 and Credit Suisse, the Roberts Supreme Court has shown a willingness to confine the reach of antitrust claims based on the perceived burdens of antitrust litigation and the risk "that antitrust courts are likely to make unusually serious mistakes." See Credit Suisse, 2007 U.S. LEXIS 7724 at *40-41 (Stevens, J., conc.).
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