A major and recurring issue in New York antitrust cases is the question of whether “umbrella purchasers,” defined as “Plaintiffs who do not have direct dealings with the defendants, but purchase products allegedly affected by defendants’ price fixing,” are entitled to antitrust standing. Umbrella standing had been an open question in the Second Circuit, with district courts coming to different conclusion, but the Court of Appeals addressed the issue in December 2021, and its decision in Schwab Short-Term Bond Mkt. Fund v. Lloyds Banking Grp. PLC, 22 F.4th 103 (2d Cir. 2021) (“Schwab II“), dealt a major blow to umbrella standing proponents.
This appeal is one of many arising from a multi-district litigation proceeding in the Southern District of New York before U.S. District Judge Naomi Reice Buchwald, In re. LIBOR-Based Fin. Instruments Antitrust Litig., 11-MD-2262, which we have reported on here, here, here, here, here, and here. In brief, the litigation arises from allegations that the sixteen banks involved in setting the London Interbank Offered Rate (“LIBOR”) and affiliated institutions conspired to manipulate the rate. As the Second Circuit explained it, the litigation includes four distinct groupings of plaintiffs:
(1) The Over-the-Counter (or “OTC”) Plaintiffs . . . who directly purchased LIBOR-based interest rate swaps directly from the Banks.
(2) The Bondholder Plaintiffs . . . who held LIBOR-based bonds issued by third parties.
(3) The Exchange-Based Plaintiffs [who purchased] LIBOR-based futures on the Chicago Mercantile Exchange.
(4) The remaining Plaintiffs [including Schwab] [filed] individual (non-class) actions based on their purchases of various financial instruments from the Banks . . . as well as from LIBOR-based bonds and fixed-rate bonds sold by third parties.
Schwab II, 2021 U.S. App. Lexis 38618 at *8.
The order on appeal decided defendants’ motion to dismiss various groups of claims, including—as relevant to this article—Schwab and the Bondholder Plaintiffs’ federal antitrust claims on “efficient enforcer” grounds. The district court dismissed the Bondholder Plaintiffs’ antitrust claims on that basis, reasoning that “the Bondholder Plaintiffs were not efficient enforcers since they purchased their bonds from third parties who independently chose to reference LIBOR, [which broke] the chain of causation between Defendants’ actions and a Plaintiff’s injury.” Id. at *12. However, the district court did not consider the “efficient enforcer” argument for the Schwab claims, and dismissed them instead for lack of personal jurisdiction. Id. at *13.
The Second Circuit affirmed dismissal of the Bondholder Plaintiffs, reversed Schwab’s personal jurisdiction dismissal, but dismissed Schwab’s claims on “efficient enforcer” grounds to the extent that the claims arose from bonds sold by third parties. Id. at *1-2.
The analysis began with the general proposition that “Congress did not intend the antitrust laws to provide a remedy in damages for all injuries that might conceivably be traced to an antitrust violation,” id. at *16, quoting Associated General Contractors of California, 459 U.S. 519, 534 (1983) (“AGC”), thereby requiring any plaintiff seeking federal antitrust damages to first establish “antitrust standing” in addition to the usual constitutional standing. And to establish antitrust standing, the plaintiff “must show (1) antitrust injury, which is injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful, and (2) that he is a proper plaintiff in light of four ‘efficient enforcer’ factors.” Id. In turn, the “efficient enforcer” factors are:
“(1) the directness or indirectness of the asserted injury;
(2) the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement;
(3) the speculativeness of the alleged injury; and
(4) the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries.
Id. at *17-18.
Although the court considered all four factors, the first AGC factor was decisive. The court held that “the district court correctly drew a line between Plaintiffs who transacted directly with Defendants and those who did not, finding that only those who transacted with the Banks suffered a direct antitrust injury,” because “for the purposes of antitrust standing, proximate cause is determined according to the so-called ‘first-step rule,” and the mere fact “that a plaintiff suffered a loss in some manner that might conceivably be traced to the conduct of the defendants,” is not enough to confer antitrust standing. Id. at *18. The court applied this general rule specifically to the injuries alleged by Schwab and the Bondholder Plaintiffs:
Schwab and the Bondholder Plaintiffs were allegedly harmed because they received lower-interest payments due to the conspirators’ suppression of LIBOR, which resulted in Plaintiffs’ counterparties receiving a corresponding benefit of lower-interest payments. But the reduced-interest payment in no way enriched the Banks, who had no financial stake in the transactions whatsoever. Rather, for every Plaintiff who was harmed by a reduced-interest payment, there was a third party who benefited from being the counterparty to the transaction. None of that benefit, however, flowed to the Banks. And while Plaintiffs insist that the Banks derived a reputational benefit from falsely touting their ability to get lower rates on borrowing than was actually the case, that benefit too is wholly unrelated to the purported harm. Though the Banks may have increased their profits by selling LIBOR-indexed instruments, those who purchased from third parties were not the target of such harm; they were simply collateral damage.
Id. at 20. The court distinguished these facts from other cases that had recognized so-called “umbrella standing,” on the grounds that those cases involved consumers “who dealt with a non-cartel member [pursuing] antitrust claims against cartel members who rigged the market as a whole,” and unlike conspiracies where a cartel controlled a market and sold at an inflated price, “the LIBOR conspiracy entailed the fixing of a number that was available for unlimited third parties to reference and incorporate into their own products and transactions without any input from, or involvement by, the Banks,” and Schwab and the Bondholder Plaintiffs transacted with third parties who had “independently decided to peg their bonds’ terms to LIBOR.” Id. at *21-22. The court also noted that the Second Circuit had “never adopted this theory of antitrust standing, and the unique nature of the LIBOR conspiracy makes umbrella standing particularly inappropriate here.” Id. at *21.
The court specifically distinguished Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), because there, although the consumer did not contract directly with her employer-provided insurance plan, the decision “merely carved out an exception to the market participant requirement in cases where a plaintiff was manipulated or utilized by a defendant as a fulcrum, conduit or market force to injure” other market participants. Id. at *22-23. The court also distinguished a line of cases from the Seventh Circuit on the grounds that the defendants’ manipulation of commodity cash markets had had a “lockstep effect” on the futures markets where the plaintiffs were trading, and also that in one case, the defendant had specifically intended to affect prices in both the cash and the futures markets. Id. at *24.
Finally—but only after noting that the indirectness of the injury was an “ample justification” for its decision–the court briefly considered the other three AGC factors: factor two favored defendants because plaintiffs who did allege direct damages had also sued, whereas factors three and four were closer calls, factor three in the defendants’ favor and factor four in the plaintiffs’, but none of the three really affected the outcome. Id. at *26-28. Under factor three, the court did note that for at least some bonds “Plaintiffs’ theory would require the court to speculate about how the third-party sellers would have factored a non-suppressed LIBOR into the transaction. For example, a bondholder may have received lowered coupon payments from a suppressed rate, but the price of the bond itself may have been correspondingly lowered to account for a suppressed LIBOR.
The potential significance of Schwab II will be examined in future posts—indeed, it has already been raised in both the SIBOR and the Silver antitrust litigations—but it is safe to say that, by partially but not completely eliminating umbrella standing, the Second Circuit’s decision will cast a long and heavily-litigated shadow.