This blog previously reported on Judge Engelmayer’s denial of class certification and award of summary judgment against two groups of plaintiffs in the In re Aluminum Warehousing Antitrust Litigation, 13 MD 2481 (PAE), actions. The defendants have now moved for summary judgment against the remaining plaintiffs, and this post summarizes the arguments made in their motion.
The defendants’ 100-page opening brief[1] sums up the facts and then argues for dismissal based upon (1) lack of evidence of the conspiracy itself, (2) lack of evidence of causation and injury, which is primarily an attack on the plaintiffs’ expert (a Daubert motion), and (3) lack of “efficient enforcer” antitrust standing.
The defendants describe the action as involving three paired sets of investment banks and their affiliated aluminium warehouse facilities: (1) JP Morgan and Henry Bath, which had facilities in Rotterdam; (2) Goldman Sachs and Metro, which operated a massive warehouse complex in Detroit to access Canadian aluminium production; (3) Glencore and Pacorini, located in Vlissingen, Netherlands, with access to Russian aluminium. The plaintiffs allege that these entities colluded to hoard and then trap massive amounts of aluminium in the Detroit and Vlissingen facilities in order to increase prices.
All of the defendants participated in the London Metal Exchange (“LME”) and the heart of their defense is that the LME’s complicated rules and incentive structures naturally encouraged the behavior complained of, with no need for collusion or conspiracy. The LME operates an aluminium futures market with trades tied to “warrants”—specific batches of physical aluminium—located in LME warehouses including Detroit and Vlissingen. A party engaging in a futures transaction could settle either by an offsetting trade or by delivery of actual warrants, and the sellers had the right to choose which particular warrants to deliver. The recipient could “cancel” the warrants and take delivery of the aluminium, but the warehouse was only required to load out metal at the minimum rate set by the LME rules, on a first-come, first-served basis, and the warrant-holders would still have to pay rent while they were waiting to take delivery. This, according to defendants, created a strange incentive system whereby warehouses could provide large incentives to depositors in exchange for charging high rents, because the incentives would be paid to the sellers that initially deposited the aluminium, whereas the rents had to be paid by the buyers onto whom the warrants were offloaded. This in turn created a vicious cycle: Detroit could offer higher incentives because the more metal they accumulated, the longer it would take to deliver, and the more rent the warrant holders would have to pay. At its height the wait to take physical delivery in Detroit approached 600 business days, during which entire time the warrant holder was forced to pay rent to the warehouse.
The defendants first assert that no evidence of a conspiracy exists. Relying generally on Anderson News, LLC v. Am. Media, Inc., 899 F.3d 87 (2d Cir. 2018), the defendants argue that the plaintiffs must “present evidence of a combination or some form of concerted action between . . . legally distinct economic entities in the form of a conscious commitment to a common scheme designed to achieve an unlawful objective,” that this evidence must “exclude the possibility that the alleged conspirators acted independently,” and that “if there are equally likely explanations for defendants’ conduct, one legal and one illegal,” summary judgment must be granted because “a jury’s choice between those explanations would amount to mere speculation.” Furthermore, “the quality of the evidence required . . .varies with the economic plausibility of the alleged agreement.” Based upon that legal framework, the defendants first note that the plaintiffs have not discovered any communications between the defendants supporting the existence of the detailed agreements—”how much inventory each Defendant agreed to hold, how long they agreed to hold it, or when they were permitted to sell”—that would be required for the alleged conspiracy to function. The defendants also present facts to show that the parties did not act in concert with regard to their holdings, and that each party’s conduct was consistent with its particular role in the market, for instance Glencore was “the world’s largest trader of physical aluminum” whereas JP Morgan was a high-trading “market-maker in the LME futures market,” and the warehouses’ conduct could be explained by the market incentives described previously. The defendants also argue that the supposed conspiracy would have been very risky, and therefore not “economically plausible,” because they had no control over aluminium production, and even a modest increase in production would have destroyed the entire economic value of the alleged scheme.
The defendants next argue that the plaintiffs have failed to prove damages or causation. This argument primarily consists of an attack on the analysis performed by the plaintiffs’ damages expert. First, relying on U.S. Football League v. National Football League, 842 F.2d 1335 (2d Cir. 1988) and Comcast Corp. v. Behrend, 569 U.S. 27 (2013) the defendants argue that anti-trust damages can only include “damages that are . . . the result of the wrong” because “prices whose levels are above what an expert deems ‘competitive’” may have “been caused by factors unrelated to an accepted theory of antitrust harm” and thus “are not ‘anticompetitive’ in any sense relevant,” and they attack the plaintiffs’ expert for calculating aluminium prices in a “perfectly competitive” world and failing to take account of existing inefficiencies in the aluminium markets. The plaintiffs’ expert report is therefore inadequate to its purpose, based upon USFL’s holding that when “a plaintiff improperly attributes all losses to a defendant’s illegal acts, despite the presence of significant other factors, the evidence does not permit the jury to make a reasonable and principled estimate of the amount of damage.” The defendants’ other primary argument is that the plaintiffs’ damages calculation relies upon all of the defendants’ alleged wrongful conduct being part of the conspiracy; if even some of the activities alleged in the plaintiffs’ expert report were lawful, the entire calculation fails and the report must be rejected under Comcast and subsequent cases, which held that when a plaintiff claims “that all of defendant’s acts contributed to the damage figure” but the court has “found that some of those acts were proper,” the plaintiff is left with “no proper proof of damages at all.” Finally, the defendants argue that the expert’s failure to consider existing market inefficiencies “runs counter to the views of industry participants . . . and published economics literature,” and therefore has not “used the same intellectual rigor used by economists in the field,” which is another Daubert factor.
Lastly, the defendants argue that one of the plaintiffs, Southwire, is not an efficient enforcer because 81% of its damages are traced to transactions with parties other than the defendants. This argument relies upon the Second Circuit’s recent decision in Schwab Short-Term Bond Mkt. Fund v. Lloyds Banking Grp. PLC, 22 F.4th 103 (2d Cir. 2021) (“Schwab II”), which we have previously examined here and here. The defendants argue that Schwab II forecloses the plaintiffs’ argument that the defendants’ anticompetitive conduct inflated prices throughout the aluminium markets, and the fact that “non-defendants might have made their pricing decisions under the pricing ‘umbrella’ purportedly created by the alleged conspiracy” is now irrelevant as a matter of law. The next stage of briefing will be the plaintiffs’ opposition, which is due on April 18, 2022, although given current redaction practices the papers may not be publicly available on that date. Once they are made public, we will provide a follow-up post, and we also continue to track the appeal from earlier decisions.
[1]Only the “redacted” version is currently publicly available, though it is unclear if anything has actually been redacted from the brief itself as opposed to other supporting papers.