e&i update - winter 2010

8/8/2019 E&I Update - Winter 2010

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Winter 2010

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While most of the attention over the last several

months regarding the health care reform debatehas centered on the public option, changes to

Medicare and Medicaid, and federal funding for

abortion, the possibility that the insurance in-

dustrys antitrust exemption might be repealed

at least for health and medical malpractice

insurershas clearly taken a back seat. However,

when Congress returns from its recess in Janu-

ary, the McCarran-Ferguson Act will unques-

tionably face the strongest challenge to its

continued existence ever, and significant change

in the manner in which the federal antitrust laws

are applied to the insurance industry is a signifi-cant possibility.

The Current Status

While stand-alone bills to repeal McCarran were

introduced earlier this yearas they have been

many times in the pastMcCarrans continued

existence took a dramatically more dangerous

turn when it became ensnared in the current

health care reform debate. After several Con-

gressional hearings this Fall, which included tes-

timony in support of repeal by AssistantAttorney General Christine Varney and Senator

Harry Reid, among others, McCarran repeal was

made a part of the Houses omnibus health care

reform legislation (HR 3962). With the passage of

the bill by the House on November 7, McCarran

repeal had cleared its first hurdle. However, to

the surprise of many, the legislation that was

passed by the House turned out to be even

broader in scope than had been anticipated.

Specifically, as expected, Section 262 of the house

bill would repeal McCarran for health and med-ical malpractice insurers with respect to all con-

duct except (a) collecting, compiling, classifying

or disseminating historical loss data; (b) deter-

mining a loss development factor applicable to

historical loss data; and (c) performing actuarial

services if doing so does not involve a restraintof trade. However, the bill contains two other

related provisions that were added late in the

process that have the potential to be equally sig-

nificant. First, subdivision (b) of Section 262 ex-

pands the Federal Trade Commissions authority

to bring actions under Section 5 of the FTC Act

(for anticompetitive conduct) against non-profit

health and medical malpractice insurers. Cur-

rently, the FTC has no such authority. Even more

significantly, Section 260 of the bill permits the

Federal Trade Commission to conduct studies

and prepare reports concerning the entire insur-ance industrynot just as to health and medical

malpractice insurers. Such studies and reports

are also currently outside the scope of the FTCs

authority.

At the same time, McCarran repeal efforts ad-

vanced in the Senate, with Senator Leahy of Ver-

mont, who has been one of the most outspoken

advocates for McCarran repeal for many years,

leading the charge. In September, Senator Leahy

introduced a stand-alone McCarran repeal bill (S.

1681). That bill, unlike the House McCarran pro-

vision that was passed, does not contain any of

the safe harbors described above. In early De-

cember, Senator Leahy offered his McCarran bill

as an amendment to the Senates omnibus health

care reform legislation. However, with the Sen-

ate Democrats needing all 58 Senate Democrats,

plus Senators Sanders and Lieberman, to defeat a

Republican filibuster and push the bill forward

to passageincluding Senator Ben Nelson of Ne-

braska, a former insurance industry executive and

a former state insurance commissionerthat wasnot to be.

As is now well known, Senator Nelson voiced his

strong condemnation for many aspects of the

M C C A R R A N R E P E A L P R O P O S E DA S P A R T O F H E A L T H C A R E R E F O R M

C O P Y R I G H T N O T I C ECopyright 2010 American Bar Association. The contents of this publication may not be reproduced,

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to: Director, Copyrights and Contracts, American Bar Association, 321 North Clark, Chicago, IL 60654;

FAX: 312-988-6030; e-mail: [email protected].


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Winter 2010

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Fal

P

Senate bill, and indicated that, unless some

changes were made, he would not provide the

critical 60th vote necessary for the Senate De-

mocrats to push the Senate bill forward. One of

the provisions in the bill Senator Nelson refused

to support was Senator Leahys McCarran repealamendment, and for that reason the Senate health

care bill that was approved by the Senate on De-

cember 24 does not include any McCarran repeal

provisions.

What Happens Now?

While, for a moment, it appeared that the Sen-

ates failure to include McCarran repeal in the bill

meant that McCarran had, once again, survived,

any clear indication that this was in fact the case

was quite short-lived. In late December, Senator

Leahy issued a statement indicating his profound

disappointment that McCarran repeal had not

survived. He stated that McCarran repeal is an

integral part of injecting competition into the

health insurance market and that McCarran re-

peal would ensure that basic rules of fair com-

petition will apply to insurers. Moreover, Sena-

tor Leahy stated that he looked forward to

working to include [McCarran repeal] when the

Senate and House conference to reconcile their

versions of the legislation. Accordingly, we maynot yet have heard the last from Senator Leahy

on this issue.

Congress is in recess until January 19. At that

time, because the bills passed in the House and

Senate differ, a Conference Committee will likely

be created that will try to harmonize the two bills

for another vote in the House and Senate. While

many Senators have publicly stated that any

changes made to the Senate bill by the Confer-

ence Committee will make it unlikely the legisla-

tion will continue to garner the 60 votesnecessary to defeat a Republican filibuster, only

time will tell whether McCarran has, once again,

remarkably avoided repeal.

C H E C K I T O U T : T H E P O L I T I C S

O F A N T I T R U S T E X E M P T I O N S P R O G R A MSpring Meeting, Thursday, April 22, 2010

At the 2010 ABA Antitrust Sections Spring Meet-

ing, the Exemptions & Immunities Committee

will present a program on the politics and leg-

islative process of antitrust exemptions and im-

munities. Scheduled for the morning of

Thursday, April 22, 2010, the program will take a

close look at the politicking and process involved

in Congresss recent and ongoing attempts to

enact or repeal certain exemptions and immuni-ties to the antitrust laws.The distinguished pan-

elists on this program will consider whether

more vigorous competition enforcementin-

cluding repeal of certain insurance exemptions

would assist current efforts at reforming the U.S.

health care system. The program also will review

legislative priorities and developments involving

exemptions and immunities in the railroad, credit

card, and other industries.

Program participants will include Makan Del-

rahim, a Partner at Brownstein Hyatt Farber

Schreck LLP, as moderator, and the following

panelists: W. Stephen Cannon, Chairman of Con-

stantine Cannon LLP; Toby G. Singer, a Partner at

Jones Day; Anant Raut, Counsel on the U.S.House Judiciary Committee; and Stephanie Kan-

wit, a health care consultant and Special Counsel

for Americas Health Insurance Plans.

The program is co-sponsored by the Health Care

& Pharmaceuticals, Legislation, and Insurance &

Financial Services Committees.


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C H E C K I T O U T : P E T I T I O N I N GA N D T H E A N T I T R U S T L A W S :

T H E F O U N D A T I O N S O F P E T I T I O N I N G I M M U N I T Y

A N D T H E NO E R R - P E N N I N G T O N D O C T R I N ECLE Program, Friday, February 19, 2010

Winter 2010

Page 4

An upcoming program promises fresh insight on

the foundations of one of the most debated an-

titrust exemptions: Petitioning Immunity or the

Noerr-Pennington doctrine.

The Noerr-Pennington doctrine is a judicially-cre-

ated policy that shields an antitrust defendant

from liability for competitive injuries resulting

from concerted or individual petitioning conduct

that is reasonably calculated or genuinely in-

tended to petition government decision-makers

for redress.

At the core of the doctrine is the conflict between

two fundamental values of our democracy. On

the one hand is the right of the people to petition

their government for grievances, set in the foun-

dation of our representative democracy since its

inception. On the other hand is the fundamental

goal of supporting our nations established eco-nomic system in which free and unfettered com-

petition is the rule.

Balancing these two core principles has been a

challenge for the courts for the nearly 50 years

since the Supreme Court issued its opinion in

Eastern Railroad Presidents Conference v. Noerr

Motor Freight, 365 U.S. 127 (1961). Courts have

struggled to define the boundaries of the doctrine

and to establish clear rules. This judicially created

doctrine has matured over time, but continues to

develop. For lower courts, balancing the core val-ues is an arduous interpretative task. For coun-

selors and practitioners, predicting the results is

an even greater challenge.

Our expert faculty will explore the foundations

of petitioning immunity and provide an

overview of the most important principles em-

bodied in Noerr. The faculty includes:

Susan Creighton, Partner, Wilson Sonsini

Goodrich & Rosati, Washington, DC. Ms.

Creighton is formerly the Director of the Bu-

reau of Competition at the Federal Trade

Commission.

Charles Fried, Beneficial Professor of Law, Har-

vard Law School, Cambridge, MA. Professor

Fried is formerly the Solicitor General of the

United States, an Associate Justice of the

Supreme Judicial Court of Massachusetts

and a leading First Amendment Scholar.

David Meyer, Partner,Morrison & Foerster LLP,

Washington, DC. Mr. Meyer is formerly theDeputy Assistant Attorney General for An-

titrust at the United States Department of

Justice.

Chris Sagers, Associate Professor of Law, Cleve-

land Marshall College of Law, Cleveland, OH.

Professor Sagers is a leading antitrust scholar

who teaches classes in Administrative Law,

Antitrust and Law & Economics.

John Roberti, Partner, Mayer Brown LLP. Mr.Roberti is Chair of the ABA Exemptions and

Immunities Committee.


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Winter 2010

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Want to make the most of your Exemptions &

Immunities Committee experience? Want to havea hand in important E&I analysis and publica-

tions? Want to forge relationships with other an-

titrust lawyers throughout the country? Looking

for opportunities for recognition and a pathway

to a leadership role in the ABA? Then become ac-

tively involved in the work of your E&I Com-

mittee.

The Committee is currently seeking volunteers to

help with several interesting projectsprojects

that can provide you with the opportunities you

seek, while making it possible for the Section andthe Committee to carry out their mission to edu-

cate and support the antitrust bar. Opportunities,

to name a few, include helping with a publica-

tion, writing or editing a chapter of a book to be

published by the ABA; preparing articles for the

Committee newsletter, the E&I Update; helping to

craft comments on pending legislation in the an-

titrust field; participating in brown bags, tele-

seminars, and other presentations; and

generating summaries of new cases involving ex-

emptions or immunities, summaries dissemi-

nated to the entire Committee listserv and

displayed on the Committee website with the au-

thors byline.

Just this past year, for example, the ABA pub-

lished THE NOERR-PENNINGTONDOCTRINE, already

listed among ABA Best Sellers, written entirely

by members of the Committee. In addition, mem-

bers of the Committee have been revising the

ABAs STATE ACTION PRACTICE MANUAL, the first

edition of which appeared in 2000; we expect that

to be published soon this year. Upcoming bookand publication efforts promise to be equally ac-

tive, with the Committee continuing to provide

annual updates to the yearly Antitrust Law De-

velopments series, and with another project just

in the beginning phases, a proposed all-encom-passing EXEMPTIONS & IMMUNITIES MANUAL, a one-

stop resource for antitrust exemptions.

Recent months have seen Committee members

provide testimony, or support the testimony of

Section leadership, on proposed federal legisla-

tion involving statutory immunities in the rail-

road and healthcare industries. More activity on

this front looms, and help will be needed in

preparing and presenting views on behalf of the

Section of Antitrust Law.

And, of course, opportunities abound in the more

frequent publications and informational presen-

tations of the Committeethrough its E&I Up-

date newsletter, brown bags (often in conjunction

with other Committees of the Section), and our

caselaw updates broadcast to the listserv. Each of

these not only offers the chance for those in-

volved to learn more themselves, while assisting

and educating others, but also provides a plat-

form for recognition nationally and within the

Committee and Section. Each caselaw update car-

ries an attribution naming the author and his/her

law firm and city. Contributors are identified in

the newsletter as Contributing Editors. Frequent

participants are invited to join Committee lead-

ership on a quarterly conference call to discuss is-

sues important to the work and mission of the

Committee.

If you are interested in stepping up to join us as

an active contributor to the Committee on any of

these projects, or if you would just like additional

information about any of them, please contactour Chairman, John Roberti, at (202) 263-3428 or

[email protected].

WE WA N T Y O U T O B E C O M E A N A C T I V EA N D C O N T R I B U T I N G M E M B E R O F T H E C O M M I T T E E


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E & I C A S E L A W U P D A T E

In re Western States Wholesale Natural Gas Antitrust Litigation, MDL No. 1566, 2009 WL 3270480

(D. Nev. Oct. 12, 2009)

In this consolidated multidistrict case, the federal district court for Nevada denied the defendants

motion for judgment on the pleadings. Specifically, the court rejected the defendants argument that

plaintiffs antitrust claims were barred by implied immunity under Credit Suisse v. Billing, 551 U.S. 264

(2007), based upon a putative plain repugnancy between plaintiffs claims and the regulatory

regime established by the Commodity Exchange Act (CEA) and enforced by the Commodity Fu-

tures Trading Commission (CTFC).

Plaintiffs had alleged that defendants conspired to engage in a variety of activities to artificially in-

flate the price of natural gas for consumerse.g., by knowingly delivering false reports to trade in-

dices (fictitious trades, altered price reports, etc.), churning, engaging in wash trades, and the

likeall in violation of the antitrust laws. Defendants countered that allowing the antitrust claims to

go forward would be incompatible with the [CEA] because [as was held to be true in Billing] evi-

dence of unlawful activity would overlap with evidence of lawful activity, such [that] cases would

involve complex legal line drawing which should be done by an expert agency and not by non-ex-

pert judges and juries, and that the CEA provides for limited remedies for violations of the Act

which should not be circumvented through antitrust actions.

The court first examined whether Congress had expressly preempted the debate by including in the

CEA a savings clause that explicitly preserved antitrust claims in the area addressed by the Act. Al-

though it found considerable evidence in the legislative history that Congress did not intend to oust

completely the application of the antitrust laws to the regulated area, the court found no provision

of the CEA that expressly and sufficiently specifically preserved all antitrust actions.

So, the court proceeded to apply the four-part test prescribed by the Supreme Court in Billing, to de-

termine whether antitrust actions should be deemed to have been impliedly precluded by the CEA:

(1) the existence of regulatory authority under the [regulatory] law to supervise the activities

in question; (2) evidence that the responsible regulatory entities exercise that authority; . . .

(3) a resulting risk that the [regulatory] and antitrust laws, if both applicable, would produce

conflicting guidance, requirements, duties, privileges, or standards of conduct[, and] (4) . . .

the possible conflict affect[s] practices that lie squarely within an area of . . . activity that the

[regulatory] law seeks to regulate.1

But the defendants motion in Western States foundered on the third Billing criterion. Contrary to the

Supreme Courts determination in the securities context in Billing, the Western States court found that[n]o special expertise is required to evaluate the illegal conduct targeted there by the plaintiffs,

[and] therefore courts were not likely to make unusually serious mistakes . . . such that permissi-

ble or encouraged conduct under the CEA would be deterred. The court also concluded that, unlike

the setting in Billingwhere the defendant entities often needed to work as syndicates with respect

to IPOsthe independent gas companies in Western States did not need to form joint enterprises to

trade gas or gas futures. Further, the court held, the remedies afforded to private plaintiffs by the an-

titrust laws were a useful supplement to the regulatory and criminal penalties of the CEA, as en-

forced by the CFTC, and such antitrust litigation would not upset or conflict with the CEA

enforcement scheme. There was, in sum, no disqualifying clear repugnancy or incompatibility

between the regulatory scheme and the plaintiffs antitrust claims.

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Consequently, the court ruled, plaintiffs antitrust claims were not impliedly repealed or precluded

by the CEA.

[Thanks to Ken Carroll]

Luxpro Corp. v. Apple, Inc., No. 08-CV-4092, 2009 WL 3152210 (W.D. Ark. Sept. 28, 2009)

In Luxpro Corp. v Apple, the federal district court for the Western District of Arkansas recently rejected

Apples motion to dismiss based on Noerr-Pennington immunity, with respect to certain letters Apple

had sent to Luxpros customers after Apple had commenced litigation against Luxpro, a competitor.

The court found that Apple had not shown that its post-litigation conduct of sending warning let-

ters, making threats, and exerting pressure on Luxpros clients were [sic] incidental to the prosecu-

tion of the . . . litigation, or that its conduct was in any way related to its right to petition a court.

The court did, however, ultimately dismiss most of Luxpros claims on other, non-Noerrgrounds.

Luxpro is a small Taiwanese corporation that produced a variety of MP3 players. In 2005 it began mar-

keting its products to a number of outlets in countries other than the U.S. In an unfortunate maneu-

ver, it christened one of its products the Super Shuffle, which predictably prompted Apple to seek

protection of its Shuffle trademark. Apple procured an injunction from a court in Germany pro-

hibiting Luxpro from using the name Shuffle to market any of its products. It then moved more ag-

gressively to secure a further and much broader preliminary injunction from a Taiwanese court that

prohibited Luxpro from manufacturing, distributing, or marketing any of its MP3 players pending

trial. While this injunction was on appeal, Apple sent letters to various customers of Luxpro, warn-

ing them of the injunction and demanding that they cease doing business with Luxpro. Although

Luxpro attacked Apples entire over-arching course of conduct in targeting Luxpro (including thefiling of the lawsuits in Germany and Taiwan), it was these warning or threat letters that were the

principal focus of the courts Noerranalysis.

The court began by determining that Apples litigation in Germany and Taiwan did not itself fall

within the sham exception to Noerr, even though the broad preliminary injunction in Taiwan was

ultimately vacated on appeal. The court held that Apples claims against Luxpro in those foreign law-

suits were not objectively baseless, and therefore not sham litigation under PRE. Thus, neither

the litigation itself nor the attendant threat letters were deprived of Noerrimmunity on the basis of

sham petitioning. (Curiously, in this analysis the court did not even address the question (dis-

cussed at pages 85-87 of the Sections new monograph on The Noerr-Pennington Doctrine) whether

petitioning a foreign court should enjoy the protections of Noerr. See Coastal States Marketing v.

Hunt, 694 F.2d 1358, 1366-67 (5th Cir. 1983) (finding Noerrdoes extend to petitioning foreign gov-ernments); ANTITRUST DIVISION, U.S. DEPT OFJUSTICE & FTC, ANTITRUST ENFORCEMENT GUIDELINES FOR

INTERNATIONAL OPERATIONS, 3.34 (1995). This omission seemed the more curious when the court

began its direct analysis of the threat or warning letters, themselves, by explaining that [i]t is ones

right to petition the government under the First Amendment that is ultimately being protected by the

Noerr-Pennington doctrinean observation seemingly more apt to petitioning a government to

which the First Amendment actually applies.2

In assessing the potential immunity for Apples threat letters to Luxpros customers, the court ac-

knowledged that pre-litigation demands and threats customarily have been accorded Noerrprotec-

tion under PRE, Coastal States, Sosa v. Direct TV, 437 F.3d 923 (9th Cir. 2006), and other authorities. But,

the court concluded, Applespost-litigation threat letters to Luxpros customers were distinguish-


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able from thepre-litigation letters to potential defendants in Sosa, for example. Citing Laitram Ma-

chinery, Inc. v. Carnitech A/S, 901 F. Supp. 1155, 1161 (E.D. La. 1995), it held that sending such post-lit-

igation threat letters to non-parties to the foreign lawsuits was not in any way related to [Apples]

right to petition a court. It therefore denied Noerr-Pennington immunity to Apples conduct and re-

jected Apples motion, at least on this ground.

1 (quoting Billing, 551 U.S. at 275-76). As was true in Billing itself, the court fairly quickly determined

that the first, second, and fourth factors were satisfied.

2 (emphasis added)

[Thanks to Ken Carroll]

California Pharmacy Management LLC v. Zenith Insurance Co., No. SACV09-0242 DOC (FMOx),2009 WL 3756559 (C.D. Cal. Nov. 5, 2009)

California Pharmacy Management LLC v. Redwood and Casualty Insurance Co., No. SACV 09-0141

DOC (ANx), 2009 WL 3514571 (C.D. Cal. Oct. 26, 2009)

In two related cases from the Central District of California, California Pharmacy Management LLC v.

Zenith Insurance Co. and Znat Insurance Co., 2009 WL 3756559 (C.D. Cal. Nov. 5, 2009) and California

Pharmacy Management LLC v. Redwood and Casualty Insurance Co. et al, 2009 WL 3514571 (C.D. Cal. Oct.

26, 2009), the district court declined to apply Noerr Pennington immunity to dismiss the complaints

on 12(b)(6) grounds based upon the presence of lulling allegations in the amended complaints.

More specifically, the court refused to rule that allegations that Defendants lulled the plaintiff into

supposed good faith negotiations, plus telling other industry actors that the plaintiff was under in-

vestigationall of which predated litigation conduct that was the gravamen of the complaint andwhich led to the prior dismissalsgave rise to Noerrimmunity absent a fuller factual record show-

ing their relation to the immunized litigation conduct.

These cases originate from the workers compensation arena. Plaintiff California Pharmacy Manage-

ment (CPM) employed a physician in-office medication dispensing program which apparently in-

volved referral fees to the physicians in exchange for direct access to the patient in the physicians

office. The complaints in both actions alleged RICO violations predicated upon mail fraud and wire

fraud. Factually, the complaints alleged that the defendants, various workers compensation insurers

and administrators, colluded and conspired to eradicate the program, putting CPM out of business.

To effectuate this scheme, the complaint alleged that the Defendants engaged in three general col-

lective actions: 1) ceasing reimbursement to CPM; 2) delivering letters to CPM with pretextual ob-

jections to claims for payment; and 3) consolidating all CPM lien claims, over 800 in all, before the

California Workers Compensation Board (WCAB), an adjudicatory body. With respect to the con-

solidation actions before the WCAB, Plaintiff alleged that the Defendants had no actual financial in-

terest in the outcome of these lien adjudications. Instead, the consolidations were intended to delay

reimbursements to CPM, starving it of operating funds.

The original complaints in both cases went through two dismissals and amendment, one by stipula-

tion and one by court order. In both instances, the opinions addressed the third attempt by the Plain-

tiff to state a cause of action, and considered a request by the Defendants to dismiss with prejudice.

In the prior order of dismissal, the district court found that the amended complaint failed to state a

cause of action because the exclusive focus on the Defendants exercise of their rights to contest liens

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Winter 2010

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and claims before the WCAB was immunized under Noerr-Pennington. Second, the allegation of base-

less objections to CPMs claims did not allege mail or wire fraud. Third, there were no allegations of

concrete injury flowing from the alleged racketeering scheme.

Defendants again moved to dismiss the second amended complaint on Noerr-Pennington grounds, but

additional allegations caused the Court to rule that there was no Noerrimmunity. More specifically,the amended complaint included lulling claimsallegations that the Defendants had lulled CPM

into believing that they would negotiate in good faithand also that the Defendants communicated

to other carriers and administrators that CPM was under investigation for fraud and other illegal ac-

tivity. In at least one of the cases, a companion state court action explicitly asserted that CPM was en-

gaged in unlicensed operation of a pharmacy and unlawful fee splitting and referral payments from

physicians.

The additional allegations removed the claim from Noerr-Pennington immunity for 12(b)(6) purposes,

ruled the Court, because neither concerned petitioning activity and both predated the WCAB dis-

pute. The opinion stated that the Court will not apply Noerr-Pennington immunity prospectively to

conduct that occurred long prior to protected petitioning activity and was not in contemplation of lit-

igation. The Court did note that it would reconsider Noerrimmunity on summary judgment afterdiscovery, to determine if the lulling activities were undertaken in anticipation of litigation.

The Court also considered whether the allegations that consolidation before the WCAB was a tactic,

employed by Defendants solely for delay without an actual interest in the outcome, amounted to

sham litigation such that there could be no Noerr-Pennington immunity as matter of law for that con-

duct. The Court ruled that the sham exception was not applicable, because the Defendants had an in-

terest in the outcome, even if that process also led to delay.

[Thanks to Richard K. Fueyo]

Electronic Trading Group, LLC v. Banc of America Securities, LLC, 588 F.3d 128 (2d Cir. 2009)

In Electronic Trading Group, LLC v. Banc of America Securities, LLC, the Second Circuit Court of Ap-

peals affirmed the dismissal of the plaintiffs antitrust claim, holding that those claims were impliedly

precluded by the securities laws.

The plaintiff, Electronic Trading Group (ETG), was a short seller of securities. A short sale is one

in which the short seller identifies a security that it believes will drop in price. The short seller then

contacts a broker; pursuant to SEC regulations, the broker must locate the security requested beforeit can accept the short sellers order. Once the security is located, the broker loans the security to the

short seller, and charges, in addition to any other fees, a borrowing fee. The short seller then sells the

borrowed security in the open market. In order to complete the transaction, the short seller must then

buy the security in the open market and return the newly purchased security to the broker.

The borrowing fee charged by the broker is affected by the scarcity of the security at issuethe more

difficult it is for the broker to locate and borrow the security, the higher the borrowing fee charged

by the broker. The SEC permits a broker to develop a list of securities that are relatively easy to lo-

cate and borrow, and a list of those that are relatively difficult to find and borrow.


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ETG alleged that the defendants, brokers that participated in the short selling market, conspired to

charge artificially high borrowing fees by agreeing to designate certain securities as difficult to bor-

row and fixing minimum borrowing fees for those securities. ETG asserted that the defendants vio-

lated Section One of the Sherman Act and brought various state law claims. The United States District

Court for the Southern District of New York dismissed the antitrust claim, relying on Credit Suisse Se-

curities (USA) LLC v. Billing, 551 U.S. 264 (2007), and declined to exercise supplemental jurisdictionover the state law claims. On appeal, the Second Circuit affirmed.

The general test for implied preclusion is whether the securities laws are clearly incompatible with

the application of the antitrust laws in a particular context. To make that determination, the Second

Circuit examined four factors identified in Billing: (1) whether the practices put at issue by the antitrust

claims lie within the heartland of securities regulation; (2) whether the SEC has the authority to reg-

ulate; (3) whether there exists ongoing SEC regulation; and (4) whether there is conflict between the

securities laws and the antitrust laws. The Courts examination of each factor was driven by its in-

terpretation of the analysis set forth in Billing.

As for the first factor, the Court looked to whether the underlying market activity, short selling, is

within the heartland of the securities business. The Court chose to examine the allegations of thecomplaint at this level of generality, rather than examining whether the specific conduct at issue

fixing borrowing fees and agreeing to designate hard-to-borrow securitieslay within the heart-

land of securities regulations because the Billing opinion looked to the broad underlying market

activity. At this level of generality, even ETG recognized that short selling is market activity regu-

lated by the securities law[s]. The Second Circuit also seemed to agree with the trial courts finding

that the liquidity and pricing benefits provided by short selling supported a finding that the activi-

ties lie within the heartland of securities regulation.

In its evaluation of the second factor, the Second Circuit chose an intermediate level of generality. That

is, rather than looking to the practice of short selling in general, and rather than examining the spe-

cific anticompetitive conduct alleged, the Court examined whether the SEC has the authority to reg-

ulate (a) the role of the brokers in short selling, and (b) the borrowing fees charged by the prime

brokers. The Second Circuit concluded that the second Billing factor weighed in favor of implied

preclusion. Section 10(a) of the Securities Exchange Act of 1934 provides that it is unlawful to effect

a short sale in contravention of the rules and regulations prescribed by the SEC, and the SEC inter-

prets that provision as a grant of plenary authority to regulate short sales of securities registered on

a national securities exchange. Further, Section 6 of the Securities Exchange Act grants the SEC the

authority to permit exchanges to fix the fees charged by their members if the fees are reasonable and

do not burden competition any further than is necessary or appropriate.

The Second Circuit also chose an intermediate level of generality in its evaluation of the third Billing

factorwhether there is evidence that the SEC exercises its authority. The Court looked to whether

the SEC exercises its authority to regulate the role of brokers in short selling, and found ample ev-idence from a regulation adopted in 2004 and a recent SEC roundtable. The regulation, 17 C.F.R.

242.203(b)(1)(i)-(iii), provides that a broker must actually borrow the requested security, have an

agreement to borrow the security, or have reasonable grounds to believe the security can be bor-

rowed so that it can be delivered when needed, before the broker can accept a short sale order. At the

time that the parties presented argument to the Second Circuit, the SEC conducted a roundtable dis-

cussion regarding securities lending and short sales. Further, ETGs complaint alleged that bro-

kers had been fined for failing to comply with the regulation, and that federal prosecutors had begun

an investigation into the brokers alleged price gouging. The Second Circuit therefore concluded

that the SEC actively exercises its authority to regulate the role of brokers in short selling.

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Winter 2010

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The Second Circuit then examined the fourth Billing factor, whether there was a risk that the secu-

rities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, du-

ties, privileges, or standards of conduct. To evaluate this factor, the Court focused on the

anticompetitive conduct alleged, which the Court described as arrangements for borrowing fees.

The Court found that there was an actual conflict and a potential conflict between the securities laws

and the antitrust laws. The Court characterized ETGs claim as charging communications betweenbrokers to designate which securities were difficult to locate and an agreement to fix the borrowing

fees associated with those securities. The Court, however, found that brokers are permitted to com-

municate about the availability and price of securities, and it is a lot to expect a broker to distin-

guish what is forbidden from what is allowed. Because the Court found that the prospect of antitrust

liability would act as an incentive for brokers to curb their permissible exchange of information and

thereby harm the efficient functioning of the short selling market, it found that there was an actual

conflict between the antitrust and securities laws.

The Court also found a potential conflict because there was the possibility that the SEC will act upon

its authority to regulate the borrowing fees set by the brokers. The SEC allows brokers to rely on the

lists of securities that are easily borrowed in accepting a short sale order, and the SEC had noted that

lists of securities that are difficult to borrow are not widely used by brokers. The Court stated that ifand when such hard-to-borrow lists come into broader use, it is easy to see how they could increase

the efficiency of the short selling market, in which event the SEC could move quickly to regulate the

borrowing fees charged by brokers for securities appearing on such lists. The Court ruled that the

potential for conflict weighed in favor of a finding of implied preclusion.

The Second Circuit acknowledged that much depends on the level of particularity or generality at

which each Billing consideration is evaluated, and that if it had examined the Billing factors at dif-

ferent levels of particularity, ETG might have succeeded. The Second Circuit also cautioned that its

analysis was not intended to suggest that the level of particularity applied to each consideration in

this case is prescriptive in every context.

[Thanks to Gregory M. Garrett]


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Contributing Editors

Peter Barile

Howrey LLP

1299 Pennsylvania Ave, NW

Washington, DC 20004

(202) 783-0800

[email protected]

Barbara Blank

Federal Trade Commission

601 New Jersey Avenue, NWWashington, DC 20580

(202) 326-2523

[email protected]

Richard K. Fueyo

Trenam Kemker

101 E. Kennedy Blvd., Suite 2700

Tampa, Florida 33602

(813) 227-7471

[email protected]

Greg Garrett

Tydings and Rosenberg LLP

100 East Pratt Street

28th Floor

Baltimore, MD 21202

(410) 752-9767

[email protected]

Paula Garrett Lin

Mayer Brown LLP

1675 Broadway

New York, NY 10019

(212) 506-2215

[email protected]

Scott A. Westrich

Orrick, Herrington & Sutcliffe LLP

405 Howard Street

San Francisco, CA 94105-2669

(415) 773-4235

[email protected]

Vice-Chairs:

James M. Burns

Williams Mullen PC

1666 K Street, NW, Suite 1200

Washington, DC 20006-1200

(202) [email protected]

Ken Carroll

Carrington Coleman Sloman & Blumenthal, LLP

901 Main Street, Suite 5500

Dallas, Texas 75202

(214) 855-3029

[email protected]

Gregory P. Luib

Federal Trade Commission

600 Pennsylvania Avenue, NW

Washington, DC 20580

(202) 326-3249

[email protected]

Mary Anne Mason

Hogan & Hartson LLP

555 Thirteenth Street, NW

Washington, DC 20004-1109

(202) 637-5980

[email protected]

Chair:

John Roberti

Mayer Brown LLP

1909 K Street, NWWashington, DC 20006-1101

(202) 263-3428

[email protected]

Council Representative:

Andrew I. Gavil

Howard University School of Law

2900 Van Ness Street, NWWashington, DC 20006-1154

(202) 806-8018

[email protected]

C O M M I T T E E L E A D E R S H I P

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