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Questioning 2nd Circ. Analysis in Aluminum Antitrust Case

Competition Law360
August 26, 2016

By James Robertson Martin
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In a painstaking dissection of the “inextricably intertwined” standard often used by courts to determine whether plaintiffs can show they suffered “antitrust injury” if they neither purchased from, nor competed with, a defendant, the Second Circuit recently held that consumers that are used as tools to manipulate a defendant’s market can pursue damage claims suffered from manipulation in that market. However, the Second Circuit went on to hold, consumers that suffered the consequences of a defendant’s unlawful conduct in another market cannot because their injuries were not the “very means” by which defendants corrupted the market in which the defendants participated. In re Aluminum Warehousing Antitrust Litig., No. 14-3574(L), 2016 WL 4191132, at *8 (2d. Cir., Aug. 9, 2016).

This seems a bridge too far.

Under the facts as pled in the aluminum cases, consumers in the corrupted market should have no need to resort to any specialized doctrine to establish their right to pursue statutory claims because Congress enacted Section 4 specifically to “open[ ] the door of justice” to victims of antitrust violations. Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). Denying standing to consumers in a disrupted market would therefore leave a significant antitrust violation “unremedied” and an entire category of American consumers exposed to anti-competitive conduct. Associated Gen. Contractors of Cal. Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 542 (1983) (“AGC”). As Justice Diane Wood of the Seventh Circuit wrote in a similar case, such a “draconian rule would give a green light to antitrust scofflaws to conspire to fix prices in a particular market and would create incentives to engage in antitrust conspiracies in markets with complicated distribution structures.” Loeb Industries Inc. v. Sumitomo Corp., 306 F.3d 469, 490 (7th Cir. 2002).

Fortunately, the recent Second Circuit decision will not be the last word on antitrust injury in the sprawling Aluminum case. It only disposed of claims brought by “downstream” purchasers of aluminum. The trial court previously denied motions to dismiss “upstream” purchasers. Defendants have already sought reconsideration of that ruling, arguing that “[a]ntitrust plaintiffs thus must allege more than that their injury was proximately caused by an antitrust violation.” In re Aluminum Warehousing Antitrust Litig., 13-md-2481-KBF-RLE, ECF No. 1050 at 13 (Aug. 17, 2016). The trial court will therefore have to decide whether the Second Circuit opinion mandates dismissal of all consumer claims. If it does, the Second Circuit will then be faced with the option of permitting a clear, nonspeculative harm to aluminum consumers to go unremedied or allowing the plaintiffs to go forward. The Seventh Circuit chose the latter. Loeb, 306 F.3d at 492. One hopes the Second Circuit (if not the trial court) would do the same.

Facts

The facts of the aluminum cases are complex and one can read the various opinions to delve into them. One does not need to digest any more than the following assumption, however, to consider the potentially broad implications of the Second Circuit’s decision. The plaintiffs plausibly alleged that the defendants conspired to corrupt a market (in which the defendants were not sellers), which proximately caused consumers in that market to suffer economic losses. In re Aluminum, 2016 WL 4191132 at *8. The defendants did so primarily to reap unlawful benefits in a second market (the market for storage of physical aluminum). Id. Even under this scenario, the Second Circuit would hold that victimized consumers could not bring a private action under Clayton Act Section 4 because they were not “‘the very means’” by which the defendants achieved that illegal end” and were therefore “collateral damage.” Id.

The Trial Court Decision

The plaintiffs’ core allegation is that the defendants conspired to increase certain warehouse inventories primarily for the purpose of reaping benefits in derivatives transactions. In re Aluminum Warehousing Antitrust Litig., 95 F. Supp. 3d 419, 441 (S.D.N.Y. 2015). By restricting supply, the defendants’ scheme increased the price of aluminum. Specifically, the plaintiffs alleged that there was a direct relationship between publicly reported warehouse inventories and a financial benchmark that all aluminum sellers incorporated into the supply contracts known as the MidWest Premium (“MWP”). Those allegations, assumed to be true, should be sufficient to meet the plaintiffs’ initial burden of showing a violation of Section 1 of the Sherman Act because the conduct exerted an adverse effect on competition in the market for aluminum. Geneva Pharms. Tech. Corp. v. Barr Labs. Inc., 386 F.3d 485, 506-07 (2d Cir. 2004).

With regard to the right of consumers to seek damages under Clayton Act Section 4, the district court found that the conduct caused aluminum purchasers to suffer “necessary yet collateral damages.” In re Aluminum, 95 F. Supp. 3d at 442. According to the district court, aluminum purchasers were the real-world users whose demand for aluminum created the market for financial derivatives trades. The district court found that all purchasers of aluminum under contracts that incorporated the MWP as a price term suffered “antitrust injury,” but it limited antitrust standing to the first purchasers to pay the MWP rather than the downstream purchasers. The indirect purchasers appealed.

The Second Circuit Decision and the McCready Mistake

The Second Circuit started its analysis by correctly observing that consumers in a market where competition is allegedly restrained are presumptively proper plaintiffs. In re Aluminum, 2016 WL 4191132 at *4. The analysis went awry, however, when the Second Circuit found that “[g]enerally, only those that are participants in the defendants’ market can be said to have suffered antitrust injury.” Id. (emphasis added). The Second Circuit wrote that the only “narrow exception” to this asserted general rule arises when, as in Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), the defendants use plaintiffs in a different market to manipulate the defendants’ market. In re Aluminum, 2016 WL 4191132 at *5. As recognized by the Seventh Circuit in Loeb, however, McCready should not be read as the only factual scenario for victims of antitrust conspiracies to bring private claims. Instead, McCready should be viewed as “helpful insofar as it recognizes that different injuries in distinct markets may be inflicted by a single antitrust conspiracy.” Loeb, 306 F. 3d at *481.

Even the cases that the Second Circuit cited in support of its analysis do not necessarily support its asserted general rule. In particular, the root decision from which all of the other cases cited by the Second Circuit grew, AGC, enunciated no such directive. To the contrary, in AGC the U.S. Supreme Court explained that Congress enacted the Sherman Act to assure customers the benefits of price competition and prior cases emphasized the central interest in protecting the economic freedom of “participants in the relevant market.” AGC, 459 U.S. at 538. McCready, it explained, was simply a case in which defendants restrained competition in a market in which the plaintiff was a consumer. Id. AGC did not limit the Clayton Act’s protections to consumers in “the defendants’ market.”

The rule remains that an antitrust injury need only “reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation.” Brunswick Corp. v. Pueblo Bowl–O–Mat Inc., 429 U.S. 477, 489 (1977). Consumers in any such market should have a remedy.

—By James Robertson Martin, Zelle LLP

James Robertson Martin is a partner in Zelle's Washington, D.C., office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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