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In re Credit Default Swaps Antitrust Litigation: Big Banks Still Must Face Section 1 Sherman Act Claim

In a decision upholding most of the class action antitrust claims against 12 of the world’s largest financial institutions, Judge Cote of the Southern District of New York held that the plaintiffs had standing and alleged sufficient facts to satisfy their Section 1 claim under the Sherman Act. While Judge Cote denied plaintiffs’ conspiracy to monopolize claim under Section 2 of the Sherman Act, she did suggest two ways antitrust plaintiffs could bring a conspiracy to monopolize claim even where an oligopoly, not a monopoly, is present.


Plaintiffs in the case primarily allege they paid inflated prices for Credit Default Swaps (“CDS”) because the defendants conspired to fix prices on CDS transactions and prevent the development of ­exchange-traded CDS platforms.

The defendants, mostly dealers of CDS instruments, felt threatened when electronic exchanges moved to enter the CDS market since these electronic exchanges would compete with dealers and reduce (or entirely eliminate) the bid/ask spread which would significantly impact the dealers’ profit margins.

In the fall of 2008, CME Group Inc. and Citadel LLC entered into a joint venture to create an electronic exchange entitled the Credit Market Derivatives Exchange (“CMDX”). The defendants allegedly conspired to keep CMDX out of the market by (1) restricting its access to needed licenses owned by Markit, a private financial information company, and ISDA, a financial trade association, and (2) forcing it to accept conditions that severely limited its ability to clear trades.

Judge Cote’s Decision

Among other claims, defendants argued (1) the plaintiffs lacked standing; (2) the plaintiffs failed to plead facts under Twombly supporting Section 1 and Section 2 Sherman Act claims; (3) the Clayton Act’s four-year statute of limitations barred all claims stemming from conduct prior to May 3, 2009; and (4) the Dodd-Frank Wall Street Reform and Consumer Protection Act implicitly precluded application of the antitrust laws after its effective date, July 21, 2011.

Defendants primarily argued the plaintiffs lacked standing because they could not demonstrate that their injury stemmed from a competition reducing aspect of the defendants’ behavior. Defendants argued that their practices were not anticompetitive because defendants eventually collaborated with CMDX. Judge Cote rejected this argument, instead finding that Markit’s withholding of a needed license from CMDX (which plaintiffs’ alleged was against Markit’s interest) reduced competition in the CDS market and resulted in plaintiffs’ injury of paying inflated bid/ask spreads.

Judge Cote also upheld plaintiffs’ Section 1 claim. Specifically, she found that plaintiffs had adequately pled a conspiracy to restrain trade because Markit and ISDA, the two licensors, had initially expressed interest in CMDX but both “abruptly and simultaneously” told CMDX they would not deal with it so long as it had an exchange component. Providing further credibility to the conspiracy claim, the plaintiffs alleged that Markit and ISDA were acting against their interests in refusing to deal with CMDX and instead were acting in the dealers’ interest by keeping CMDX out of the market.

Markit also argued that the “controlling shareholder rule,” holding that a parent and its wholly owned subsidiary are legally incapable of conspiring under Section 1 of the Sherman Act, should be extended to this case. Judge Cote declined to extend the rule to a situation where, as here, the dealers had no unity of interest with Markit even though they had part-ownership and Board membership in Markit. Furthermore, Judge Cote found that the dealer-defendants had exerted pressure not just as board members and part-owners, but also as the largest customers of Markit.

Judge Cote also rejected Markit’s reliance on Texaco Inc. v. Dagher, in which the Supreme Court held it was not per se illegal for a lawful joint venture to set the prices at which it sells its products. Though the dealers held ownership interests and board positions on Markit, Judge Cote found that the allegations in the complaint made clear that Markit and the dealers conspired to withhold necessary licenses from competitors that had nothing to do with their prior joint work in standardizing CDS contract terms.

Judge Cote dismissed the plaintiffs’ Sherman Act Section 2 claim, however. Plaintiffs alleged a conspiracy to monopolize even though there was no evidence the defendants wanted to confer monopoly power on a single entity. Judge Cote expressed her support for Judge Lynch’s dicta in Arista Records LLC v. Lime Group LLC that a conspiracy to monopolize claim could be successful (1) if the aim of the conspiracy is to form a single entity to possess the illegal market power or (2) where two or more competitors seek to allocate a market and exclude competitors. Since neither was present here, however, Judge Cote dismissed the claim.

Judge Cote tolled the statute of limitations for plaintiffs’ claims based on conduct prior to May 3, 2009 on the ground that there was fraudulent concealment by defendants. In so finding, Judge Cote noted that in order for the dealers to successfully boycott electronic exchanges, such as CMDX, it required a number of participants and concealment to remain successful. Thus, such a boycott was a typical “self-concealing” conspiracy that warranted tolling of the statute of limitations.

Finally, Judge Cote was unpersuaded that the Dodd Frank Act barred antitrust claims for conduct after July 21, 2011. In fact, she found provisions of the Dodd Frank Act imposed greater duties on the defendants than the antitrust laws. Specifically, the Dodd Frank Act forbids “adopt[ing] any process or tak[ing] any action that results in any unreasonable restraint of trade,” whereas the antitrust laws forbid contracts, combinations, or conspiracies “in restraint of trade.”

Takeaway Points

● To have sufficient standing in an antitrust suit alleging an agreement under Section 1 of the Sherman Act, plaintiffs need to explain in detail how defendants’ behavior is anticompetitive. In particular, plaintiffs need to distinguish between necessary collaboration—not actionable under the antitrust laws—and collusion to restrain trade or limit competition. Plaintiffs’ allegation of a specific restraint of trade distinguishes this case from the unsuccessful Section 1 claims alleged in the LIBOR antitrust suits.

● Allegations that multiple parties “abruptly and simultaneously” switched their positions, especially if their new position harms their own interests, may support an inference that a conspiracy existed.

● The exception to Sherman Act Section 1 liability for wholly-owned subsidiaries and joint ventures is interpreted narrowly.

● It may be possible to bring a conspiracy to monopolize claim even where the defendants did not form a monopoly in two situations: (1) if the conspiracy is to form a single entity possessing monopoly power or (2) if the conspiracy is to split the market between them.

● Group boycotts that require concealment to remain successful may be sufficient to toll the Clayton Act’s statute of limitations.

● The Dodd-Frank Act does not preclude application of the antitrust laws; indeed, it imposes greater obligations than the antitrust laws.