Gelboim v. Bank of America Corp.

          Argued: November 13, 2015

         Plaintiffs-appellants, comprising individuals and entities that held diverse financial instruments, allege that the defendant banks colluded to depress a benchmark incorporated into those instruments, thereby decreasing the instruments' financial returns in violation of Section One of the Sherman Act. The United States District Court for the Southern District of New York (Buchwald, J.) dismissed the lawsuit for failure to allege antitrust injury. We vacate the judgment and remand for further proceedings consistent with this opinion.

          THOMAS C. GOLDSTEIN (with Eric F. Citron on the brief), Goldstein & Russell, P.C., for Plaintiffs-Appellants Ellen Gelboim and Linda Zacher in Case No. 13-3565.

          ROBERT F. WISE, JR. (with Arthur J. Burke & Paul S. Mishkin on the brief), Davis Polk & Wardwell LLP, for Defendants- Appellees Bank of America Corporation, Bank of America, N.A., and Merrill Lynch, Pierce, Fenner & Smith, Inc. (f/k/a Banc of America Securities LLC) (additional counsel for the many parties and amici are listed in Appendix A)

          Before: JACOBS, RAGGI, and LYNCH, Circuit Judges.

          DENNIS JACOBS, Circuit Judge

         Appellants purchased financial instruments, mainly issued by the defendant banks, that carried a rate of return indexed to the London Interbank Offered Rate ("LIBOR"), which approximates the average rate at which a group of designated banks can borrow money. Appellees, 16 of the world's largest banks ("the Banks"), were on the panel of banks that determined LIBOR each business day based, in part, on the Banks' individual submissions. It is alleged that the Banks colluded to depress LIBOR by violating the rate-setting rules, and that the payout associated with the various financial instruments was thus below what it would have been if the rate had been unmolested. Numerous antitrust lawsuits against the Banks were consolidated into a multi-district litigation ("MDL").

         The United States District Court for the Southern District of New York (Buchwald, J.) dismissed the litigation in its entirety on the ground that the complaints failed to plead antitrust injury, which is one component of antitrust standing. The district court reasoned that the LIBOR-setting process was collaborative rather than competitive, that any manipulation to depress LIBOR therefore did not cause appellants to suffer anticompetitive harm, and that they have at most a fraud claim based on misrepresentation. The complaints were thus dismissed on the ground that they failed to allege harm to competition. We vacate the judgment on the ground that: (1) horizontal price-fixing constitutes a per se antitrust violation; (2) a plaintiff alleging a per se antitrust violation need not separately plead harm to competition; and (3) a consumer who pays a higher price on account of horizontal price-fixing suffers antitrust injury. Since the district court did not reach the second component of antitrust standing --a finding that appellants are efficient enforcers of the antitrust laws--we remand for further proceedings on the question of antitrust standing. The Banks urge affirmance on the alternative ground that no conspiracy has been adequately alleged; we reject this alternative.

         BACKGROUND

         "Despite the legal complexity of this case, the factual allegations are rather straightforward." In re: LIBOR-Based Fin. Instruments Antitrust Litig., 935 F.Supp.2d 666, 677 (S.D.N.Y. 2013) ("LIBOR I"). Appellants entered into a variety of financial transactions at interest rates that reference LIBOR. Because LIBOR is a component or benchmark used in countless business dealings, it has been called "the world's most important number."^[1] Issuers of financial instruments typically set interest rates at a spread above LIBOR, and the interest rate is frequently expressed in terms of the spread. LIBOR rates are reported for various intervals, such as one month, three months, six months, and twelve months.

         The LIBOR-based financial instruments held by the appellants included: (1) asset swaps, in which the owner of a bond pegged to a fixed rate pays that fixed rate to a bank or investor while receiving in return a floating rate based on LIBOR; (2) collateralized debt obligations, which are structured asset-backed securities with multiple tranches, the most senior of which pay out at a spread above LIBOR; and (3) forward rate agreements, in which one party receives a fixed interest rate on a principal amount while the counterparty receives interest at the fluctuating LIBOR on the same principal amount at a designated endpoint. These examples are by no means exhaustive.

         The Banks belong to the British Bankers' Association ("BBA"), the leading trade association for the financial-services sector in the United Kingdom. During the relevant period, the BBA was a private association that was operated without regulatory or government oversight and was governed by senior executives from twelve banks.^[2] The BBA began setting LIBOR on January 1, 1986, using separate panels for different currencies. Relevant to this appeal, the U.S. Dollar ("USD") LIBOR panel was composed of 16 member banks of the BBA.

         The daily USD LIBOR was set as follows. All 16 banks were initially asked: "At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 a.m.?" Each bank was to respond on the basis of (in part) its own research, and its own credit and liquidity risk profile. Thomson Reuters later compiled each bank's submission and published the submissions on behalf of the BBA. The final LIBOR was the mean of the eight submissions left after excluding the four highest submissions and the four lowest. Among the many uses and advantages of the LIBOR-setting process is the ability of parties to enter into floating-rate transactions without extensive negotiation of terms.

         Three key rules governed the LIBOR-setting process: each panel bank was to independently exercise good faith judgment and submit an interest rate based upon its own expert knowledge of market conditions; the daily submission of each bank was to remain confidential until after LIBOR was finally computed and published; and all 16 individual submissions were to be published along with the final daily rate and would thus be "transparent on an ex post basis."^[3]Thus any single bank would be deterred from submitting an outlying LIBOR bid that would risk negative media attention and potential regulatory or government scrutiny. Collectively, these three rules were intended as "safeguards ensuring that LIBOR would reflect the forces of competition in the London interbank loan market."^[4]

         Although LIBOR was set jointly, the Banks remained horizontal competitors in the sale of financial instruments, many of which were premised to some degree on LIBOR. With commercial paper, for example, the Banks received cash from purchasers in exchange for a promissory obligation to pay an amount based, in part, on LIBOR at a specified maturity date (usually nine months); in such transactions, the Banks were borrowers and the purchasers were lenders. Similarly, with swap transactions, the Banks received fixed income streams from purchasers in exchange for variable streams that incorporated LIBOR as the reference point.

         A LIBOR increase of one percent would have allegedly cost the Banks hundreds of millions of dollars. Moreover, since during the relevant period the Banks were still reeling from the 2007 financial crisis, a high LIBOR submission could signal deteriorating finances to the public and the regulators.

         Appellants allege that the Banks corrupted the LIBOR-setting process and exerted downward pressure on LIBOR to increase profits in individual financial transactions and to project financial health. In a nutshell, appellants contend that, beginning in 2007, the Banks engaged in a horizontal price-fixing conspiracy, with each submission reporting an artificially low cost of borrowing in order to drive LIBOR down. The complaints rely on two sources.

         The vast majority of allegations follow directly from evidence collected in governmental investigations.^[5] The United States Department of Justice ("DOJ") unearthed numerous potentially relevant emails, communications, and documents, some of which are referenced in the complaints and only a few of which are referenced for illustrative purposes. Prompted by the DOJ investigations, three banks--Barclays, UBS, and RBS--have reached settlements over criminal allegations that they manipulated and fixed LIBOR.

         In addition, the complaints rely on statistics. The DOJ compiled evidence that from June 18, 2008 until April 14, 2009, UBS's individual three-month LIBOR submissions were identical to the later-published LIBOR benchmark that was based on all 16 submissions; the statistical probability that UBS independently predicted LIBOR exactly over approximately ten consecutive months is minuscule. Furthermore, prior to 2007, the value of LIBOR had moved in tandem with the Federal Reserve Eurodollar Deposit Rate ("FRED"), with LIBOR tracking slightly above FRED. Beginning in 2007, however, the two rates switched positions, and LIBOR did not consistently again rise above FRED until around October 2011, when the European Commission began an inquiry into allegations of LIBOR-fixing. The complaints adduce other analyses and phenomena to support the hypothesis that the Banks conspired to depress LIBOR.

         Procedural History

         This sprawling MDL involves a host of parties, claims, and theories of liability; the present appeal has taken a circuitous route to this Court, having already once been to the Supreme Court.

         Four groups of plaintiffs filed complaints that became subject to the Banks' motions to dismiss; three of the complaints were purported class actions. The members of one putative class are the purchasers of "'hundreds of millions of dollars in interest rate swaps directly from at least one [d]efendant in which the rate of return was tied to LIBOR.'" LIBOR I, 935 F.Supp.2d at 681 (quoting OTC Second Amended Complaint at 7 ¶ 12). The district court helpfully labeled this group as over-the-counter ("OTC") plaintiffs; the lead OTC plaintiffs are the Mayor and City Council of Baltimore and the City of New Britain Firefighters and Police Benefit Fund. The members of the second putative class are bondholders who allege that the conspiracy reduced the returns on debt securities in which they held an interest. The lead bondholder plaintiffs are: Ellen Gelboim, the sole beneficiary of an individual retirement account that owned a LIBOR-based debt security issued by General Electric Capital Corporation; and Linda Zacher, a similarly situated beneficiary with rights to a LIBOR-based debt security issued by Israel.

         Third, the Schwab plaintiffs, who filed three separate amended complaints, ^[6] each assert injuries substantially similar to those claimed by the OTC and bondholder plaintiffs. Finally, the members of the third putative class (the Exchange-based plaintiffs) claim injury from the purchase and trading of contracts based on U.S. dollars deposited in commercial banks abroad (Eurodollar futures contracts). The buyer of a typical Eurodollar futures contract pays the seller a fixed price at the outset and the seller in exchange pays the buyer a "settlement price" at the end date, calculated on the basis of the three- month LIBOR. Options on Eurodollar futures contracts can be traded, and their value depends on the settlement price. The seven lead plaintiffs^[7] allege that the Banks' "suppression of LIBOR caused Eurodollar contracts to trade and settle at artificially high prices, " reducing gains made in trades. LIBOR I, 935 F.Supp.2d at 683.

         The Exchange-based plaintiffs commenced proceedings on April 15, 2011; the OTC plaintiffs followed a couple of months later; and numerous individual cases accumulated. The Judicial Panel on Multidistrict Litigation transferred and consolidated the cases in the Southern District of New York. See In re: LIBOR- Based Fin. Instruments Antitrust Litig., 802 F.Supp.2d 1380, 1381 (J.P.M.L. 2011). The Schwab and bondholder plaintiffs subsequently enlisted. In addition to the federal antitrust claims, the complaints assert numerous federal and state law causes of action irrelevant to this appeal.^[8] After each group of plaintiffs amended their respective complaints, the Banks moved to dismiss. Several new complaints were added. As a management measure, the district court stayed the filing of new complaints until resolution of the pending motions to dismiss. See LIBOR I, 935 F.Supp.2d at 677.

         The motions to dismiss were granted based on the finding that none of the appellants "plausibly alleged that they suffered antitrust injury, thus, on that basis alone, they lack standing." Id. at 686. This ruling rested on three premises:

[2] "Plaintiffs' injury would have resulted from [d]efendants' misrepresentation, not from harm to competition, " because the LIBOR-setting process was cooperative, not competitive. Id. at 688.

[2] Although the complaints "might support an allegation of price fixing, " antitrust injury is lacking because the complaints did not allege restraints on competition in pertinent markets and therefore failed to "indicate that plaintiffs' injury resulted from an anticompetitive aspect of defendants' conduct." Id.

[3] Supreme Court precedent forecloses a finding of antitrust injury if "the harm alleged . . . could have resulted from normal competitive conduct" as here, because LIBOR could have been depressed if "each defendant decided independently to misrepresent its borrowing costs to the BBA." Id. at 690.

         The district court rejected the notion that LIBOR operated as a proxy for competition and distinguished cases cited by appellants on the ground that they involved "harm to competition which is not present here." Id. at 693.

         The ensuing motions to amend, made by the OTC, bondholder, and Exchange-based plaintiffs, were denied on the ground that, given "the number of original complaints that had been filed" and "the obvious motivation to craft sustainable first amended complaints containing all factual and legal allegations that supported plaintiffs' claims, the [district court] was entitled to rely on those pleadings to contain the strongest possible statement of plaintiffs' case based on the collective skills of plaintiffs' counsel." In re: LIBOR-Based Fin. Instruments Antitrust Litig., 962 F.Supp.2d 606, 626 (S.D.N.Y. 2013) ("LIBOR II"). The denial of the motions to amend was also premised on the alternative ground of futility because the proposed amendments lacked allegations "that the process of competition was harmed because defendants failed to compete with each other or otherwise interacted in a manner outside the bounds of legitimate competition." Id. at 627-28.

         Appeals filed by the bondholder plaintiffs and the Schwab plaintiffs in 2013 were dismissed sua sponte for lack of subject matter jurisdiction "because a final order ha[d] not been issued by the district court as contemplated by 28 U.S.C. § 1291, and the orders appealed from did not dispose of all claims in the consolidated action." In re: LIBOR-Based Fin. Instruments Antitrust Litig., Nos. 13-3565(L) & 13-3636(Con), 2013 WL 9557843, at *1 (2d Cir. Oct. 30, 2013). On a writ of certiorari, the Supreme Court unanimously reversed, holding that "[p]etitioners' right to appeal ripened when the [d]istrict [c]ourt dismissed their case, not upon eventual completion of multidistrict proceedings in all of the consolidated cases." Gelboim v. Bank of Am. Corp., 135 S.Ct. 897, 902 (2015).

         To alleviate any ensuing risks of piecemeal litigation, the Supreme Court highlighted Federal Rule of Civil Procedure 54(b), which provides for the entry of partial judgment on a single or subset of claims: "[d]istrict courts may grant certifications under that Rule, thereby enabling plaintiffs in actions that have not been dismissed in their entirety to pursue immediate appellate review." Id. at 906. Numerous plaintiffs in the MDL action availed themselves of this mechanism, and these appeals were consolidated on April 15, 2015. See In re: LIBOR-Based Fin. Instruments Antitrust Litig., No. 13-3565 (2d Cir. Apr. 15, 2015) (Doc. 231). After extensive briefing on both sides, including the submission of numerous amicus briefs, this appeal is now ripe for disposition.

         DISCUSSION

         "We review the grant of a motion to dismiss de novo, accepting as true all factual claims in the complaint and drawing all reasonable inferences in the plaintiff's favor." Fink v. Time Warner Cable, 714 F.3d 739, 740-41 (2d Cir. 2013). The denial of leave to amend is similarly reviewed de novo because the denial was "based on an interpretation of law, such as futility." Panther Partners Inc. v. Ikanos Commc'ns., Inc., 681 F.3d 114, 119 (2d Cir. 2012).

         An antitrust plaintiff must show both constitutional standing and antitrust standing. See Associated Gen. Contractors of Calif., Inc. v. Calif. State Council of Carpenters, 459 U.S. 519, 535 n.31 (1983) ("Harm to the antitrust plaintiff is sufficient to satisfy the constitutional standing requirement of injury in fact, but the court must make a further determination whether the plaintiff is a proper party to bring a private antitrust action."); Port Dock & Stone Corp. v. Oldcastle, Northeast, Inc., 507 F.3d 117, 121 (2d Cir. 2007) ("Antitrust standing is distinct from constitutional standing, in which a mere showing of harm will establish the necessary injury."). Like constitutional standing, antitrust standing is a threshold inquiry resolved at the pleading stage. See Gatt Commc'ns. v. PMC Assocs., L.L.C., 711 F.3d 68, 75 (2d Cir. 2013). In this case, the harm component of constitutional standing is uncontested, and easily satisfied by appellants' pleading that they were harmed by receiving lower returns on LIBOR- denominated instruments as a result of defendants' manipulation of LIBOR. See Sanner v. Bd. of Trade of City of Chi., 62 F.3d 918, 924 (7th Cir. 1995) (holding that farmers who sold crop at allegedly depressed prices suffered harm sufficient for Article III standing).

         Less clear is appellants' demonstration of an antitrust violation and antitrust standing. The interplay between these two concepts has engendered substantial confusion.^[9] To avoid a quagmire, this Court (among others) assumes "the existence of a violation in addressing the issue of [antitrust] standing." Daniel v. Am. Bd. of Emergency Med., 428 F.3d 408, 437 (2d Cir. 2005) ("Thus, while the issue of an antitrust violation in this case is by no means clear, for purposes of this appeal we assume the alleged violation and assess only plaintiffs' standing to pursue their claim."). This expedient can cause its own problems.^[10] The district court proceeded directly to the question of antitrust injury--omitting any mention of antitrust violation--but then elided the distinction between antitrust violation and antitrust injury by placing considerable weight on appellants' failure to show "harm to competition." LIBOR I, 935 F.Supp.2d at 688. Although we would not ordinarily consider whether the complaints state an antitrust violation when assessing antitrust standing, it is easy to blur the distinction between an antitrust violation and an antitrust injury, as the district court did; so we will examine both for purposes of judicial economy.

         I. ANTITRUST VIOLATION

         To avoid dismissal, appellants had to allege an antitrust violation stemming from the Banks' transgression of Section One of the Sherman Act: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1; see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 553-63 (2007). Schematically, appellants' claims are uncomplicated. They allege that the Banks, as sellers, colluded to depress LIBOR, and thereby increased the cost to appellants, as buyers, of various LIBOR-based financial instruments, a cost increase reflected in reduced rates of return. In short, appellants allege a horizontal price-fixing conspiracy, "perhaps the paradigm of an unreasonable restraint of trade." NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 100 (1984).

         Since appellants allege that the LIBOR "must be characterized as an inseparable part of the price, " and since we must accept that allegation as true for present purposes, the claim is one of price-fixing. Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 648 (1980). In urging otherwise, the Banks argue that LIBOR is not itself a price, as it is not itself bought or sold by anyone. The point is immaterial. LIBOR forms a component of the return from various LIBOR- denominated financial instruments, and the fixing of a component of price violates the antitrust laws. See id.; see also United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 222 (1940) ("[P]rices are fixed . . . if the range within which purchases or sales will be made is agreed upon, if the prices paid or charged are to be at a certain level or on ascending or descending scales, if they are to be uniform, or if by various formulae they are related to the market prices. They are fixed because they are agreed upon." (emphasis added)); Plymouth Dealers' Ass'n of No. Cal. v. United States, 279 F.2d 128, 132 (9th Cir. 1960) (holding that use of a common fixed list price constituted price-fixing despite independently negotiated departures from said list price).

         Horizontal price-fixing conspiracies among competitors are unlawful per se, that is, without further inquiry. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886 (2007) ("Restraints that are per se unlawful include horizontal agreements among competitors to fix prices . . . ."); Catalano, 446 U.S. at 647 ("A horizontal agreement to fix prices is the archetypal example of such a practice [that is plainly anticompetitive]. It has long been settled that [such] an agreement to fix prices is unlawful per se."). The unfamiliar context of appellants' horizontal price-fixing claims provides no basis to disturb application of the per se rule. See Arizona v. Maricopa Cty. Med. Soc'y, 457 U.S. 332, 349 (1982) ("We are equally unpersuaded by the argument that we should not apply the per se rule in this case because the judiciary has little antitrust experience in the health care industry. The argument quite obviously is inconsistent with Socony-Vacuum. In unequivocal terms, we stated that, '[w]hatever may be its peculiar problems and characteristics, the Sherman Act, so far as price-fixing agreements are concerned, establishes one uniform rule applicable to all industries alike.'" (alteration in original) (quoting Socony-Vacuum, 310 U.S. at 222)).

         Appellants have therefore plausibly alleged an antitrust violation attributable to the Banks, for which appellants seek damages.

          II. ANTITRUST STANDING

         Although appellants charge the Banks with hatching and executing a horizontal price-fixing conspiracy, a practice that is per se unlawful, they are not "absolve[d] . . . of the obligation to demonstrate [antitrust] standing." Daniel, 428 F.3d at 437. Two issues bear on antitrust standing:

[1] have appellants suffered antitrust injury?

[2] are appellants efficient enforcers of the antitrust laws? The second raises a closer question in this case.

         The efficient enforcer inquiry turns on: (1) whether the violation was a direct or remote cause of the injury; (2) whether there is an identifiable class of other persons whose self-interest would normally lead them to sue for the violation; (3) whether the injury was speculative; and (4) whether there is a risk that other plaintiffs would be entitled to recover duplicative damages or that damages would be difficult to apportion among possible victims of the antitrust injury. See Port Dock, 507 F.3d at 121-22; see also Associated Gen. Contractors, 459 U.S. at 540-44. Built into the analysis is an assessment of the "chain of causation" between the violation and the injury. Associated Gen. Contractors, 459 U.S. at 540.

          The district court, having found that appellants failed to plausibly allege antitrust injury, had no occasion to consider the efficient enforcer factors. We conclude that, although the district court erred in finding that appellants suffered no antitrust injury, remand is necessary for proper consideration of the efficient enforcer factors.

         A. ...