Second Circuit Rules Exchange Traders Are Efficient Enforcers With Antitrust Standing In Precious Metals Benchmarking Case
03/24/2023On February 27, 2023, the United States Court of Appeals for the Second Circuit reversed and remanded the Southern District of New York’s dismissal of antitrust claims alleging that defendants conspired to manipulate the market value of platinum and palladium. In re Platinum and Palladium Antitrust Litigation, No. 20-1458 (2d Cir. Feb. 27, 2023). The Second Circuit ruled that certain plaintiffs who traded futures contracts on an exchange were efficient enforcers with standing to sue under Section 1 of the Sherman Act, while traders in the physical markets for these metals were not efficient enforcers and lacked antitrust standing.
Plaintiff-appellants are sellers in the physical and derivatives markets for platinum and palladium. One group of plaintiffs—the “Exchange Plaintiffs”—traded futures contracts for these metals on a mercantile exchange through a clearinghouse during the relevant period, while another—KPFF Investment, Inc. (“KPFF”)—transacted solely in physical platinum and palladium. Defendant-appellees are companies engaged in trading these metals. Between 2008 and 2014, there was a formal auction process for setting the benchmark market prices for platinum and palladium called the “Fixing,” which occurred twice daily in a conference call among defendants. Plaintiffs alleged that defendants manipulated the benchmark prices for platinum and palladium by collusively trading on the futures market to depress the price of these metals and by abusing this process for setting the benchmark prices. In March 2020, the district court dismissed the antitrust claims against defendants on the basis that plaintiffs were not “efficient enforcers” of the antitrust laws, and therefore did not have antitrust standing, because they had no direct sales to or purchases from defendants. Plaintiffs appealed the district court’s dismissal of their Sherman Act claims, along with several other claims.
The Second Circuit began its opinion with an analysis of plaintiffs’ standing to bring their Sherman Act claims. The Court emphasized that in order to establish antitrust standing, claimants must show that they are proper plaintiffs in light of four efficient enforcer factors: “(1) the directness or indirectness of the asserted injury, (2) the existence of more direct victims or 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 extent to which the claim is highly speculative, and (4) the importance of avoiding either the risk of duplicate recoveries on the one hand, or the danger of complex apportionment of damages on the other.”
First, the Court assessed whether KPFF was an efficient enforcer. KPFF allegedly traded in the physical market for platinum and palladium and never transacted directly with any defendant. The Court found that this lack of a direct connection precluded KPFF from showing that it was an efficient enforcer for purposes of antitrust standing. The Court found that KPFF had not sufficiently alleged a direct injury stemming from defendants’ setting of benchmark prices despite an alleged causal link between the benchmark prices and the prices in KPFF’s transactions. Significantly, KPFF independently decided to “tie” or “key” its prices to the benchmark prices established in the “Fixing” and incorporate these prices into its contracts with third parties. Therefore, KPFF’s alleged injury was “separated from defendants’ conduct” such that it was “indirect for purposes of antitrust standing.” The Court also emphasized that there were other platinum and palladium sellers who did transact directly with defendants and would be more efficient enforcers than KPFF. Although the panel noted that KPFF’s alleged injury “may have been foreseeable, predictable, and even calculable,” the existence of more direct victims along with KPFF’s inability to show a direct connection between the harm it suffered, and defendants’ alleged violation were decisive factors in the Court’s ruling.
Turning to an analysis of these factors as to the Exchange Plaintiffs, the Court held that these plaintiffs were efficient enforcers and therefore had established antitrust standing. First, the Court found that, according to the allegations in the Complaint, the Exchange Plaintiffs did suffer direct injury because, in contrast to the markets in which KPFF transacted, defendants were direct and “large participants” in the futures and options exchanges on which the Exchange Plaintiffs transacted. According to the Court, the Exchange Plaintiffs plausibly alleged that defendants profited from their manipulation of the futures market by “exploit[ing] their foreknowledge of downward swings in the [benchmark price] to make advantageous trades” on the exchange and at the direct expense of the Exchange Plaintiffs. The Court did not find it material that although the Exchange Plaintiffs and defendants all traded in the same market, each traded directly only with a clearinghouse. Although the clearinghouse was the formal counterparty to every transaction, the Court held that it was merely a conduit that matched buyers and sellers in the marketplace.
The Second Circuit held that the remaining efficient enforcer factors also weighed in favor of antitrust standing for the Exchange Plaintiffs. With respect to the second factor, defendants argued that, even if one assumed the truth of the allegations in the complaint, sellers who sold physical platinum and palladium to defendants would be more direct victims and more efficient enforcers than the Exchange Plaintiffs. The Court disagreed, noting there were no more direct victims in the exchange markets than the Exchange Plaintiffs, and the existence of alleged victims in one market—the market for physical platinum and palladium—does not disqualify alleged victims in a different market—the exchange market—from bringing suit. On the third factor, the panel ruled that calculating damages would not be so “highly speculative” as to deny the Exchange Plaintiffs antitrust standing. Finally, the Court reasoned that there was no risk of “duplicate recoveries” or “complex apportionment of damages” with regard to the Exchange Plaintiffs, because there was no intermediary or other party between these plaintiffs and defendants who could sue for defendants’ anticompetitive conduct in the exchange markets.
The Second Circuit went on to rule that the district court also erred in dismissing claims under the Commodities Exchange Act, finding plaintiffs had adequately alleged domestic conduct and transactions as required under that statute. The Second Circuit then upheld the lower court’s assertion of personal jurisdiction over certain defendants, affirmed its denial of jurisdiction over others, and remanded the case to the Southern District of New York for further proceedings.