Second Circuit: Grappling with ‘No-Poach’ Challenges and Antitrust Standing

Introduction

The Second Circuit in 2022 addressed a diverse array of antitrust issues, including antitrust standing, the ‘act of state’ doctrine, restrictions on competition in professional sports, and the pleading requirements to state a violation of the antitrust laws. With respect to antitrust standing in particular, the Second Circuit has continued its effort to evaluate the directness of various relationships between plaintiffs and defendants in the financial industry to determine whether the plaintiffs should be considered ‘efficient enforcers’ with antitrust standing to pursue claims. Courts within the Second Circuit have also been grappling with challenges to ‘no-poach’ agreements that allegedly suppress competition for employees in select industries, an area that has received increasing attention from both government regulators and private parties.

Precedential holdings

Celestin v Caribbean Air Mail, Inc

On March 31, 2022, the Second Circuit reversed in part and vacated in part a decision by the Eastern District of New York dismissing a price-fixing case against the government of Haiti and other defendants on the basis of the ‘act of state’ doctrine.^[2] The plaintiffs had alleged that the defendants (including Haitian government officials and multinational corporations) improperly fixed the price of remittances and telephone calls between the United States and Haiti in violation of Section 1 of the Sherman Act and state laws against false advertising and fraud. The Second Circuit held that the act of state doctrine did not foreclose the plaintiffs’ claims because no official act of Haiti needed to be deemed invalid by the court for liability to attach under the Sherman Act, and remanded to the district court to analyze whether any official act of Haiti would need to be declared invalid in order for the defendants to be liable on the state law claims. In addition, the Second Circuit vacated the district court’s alternative basis for dismissal of the plaintiffs’ claims – the doctrine of forum non conveniens – because the district court did not give sufficient deference to the plaintiffs’ choice of forum.

The plaintiffs alleged that the defendants clothed their illegal agreement to fix the pricing of phone calls for their own private gain in formal executive actions of the Haitian government. The district court dismissed the plaintiffs’ claims pursuant to the act of state doctrine, reasoning that to adjudicate the plaintiffs’ claims would require the court to judge the propriety of the official acts of the Haitian government. In the alternative, the district court determined that the plaintiffs’ claims could be heard in Haiti, and found dismissal was appropriate under the doctrine of forum non conveniens.

The Second Circuit reversed, explaining that the act of state doctrine is a rule of decision compelling federal and state courts to treat foreign official acts as valid in the sense that a court may not declare them null and void. When considering whether to dismiss a case before considering any evidence, the Second Circuit held that courts must simply assess whether, assuming the foreign acts are valid, a complaint plausibly states a claim entitling the plaintiff to relief.

Applying that framework to the plaintiffs’ claims, the Second Circuit found that the act of state doctrine did not foreclose the plaintiffs’ Sherman Act claim. It held that a court could give the acts of the Haitian government their full purported legal effect and still conclude that the plaintiffs plausibly alleged illegal price-fixing under the Sherman Act, even though doing so would necessarily imply that certain acts of the Haitian government were effectuated by improper means. As for the plaintiffs’ state law claims, the Second Circuit held that the district court must initially determine whether, assuming the validity of the Haitian government’s actions, the plaintiffs have stated a claim.

The Second Circuit next determined that the district court exceeded its discretion in summarily deciding not to give deference to the plaintiffs’ choice of forum in the course of granting dismissal on forum non conveniens grounds. It found that the district court clearly erred in determining that the plaintiffs had only ‘marginal links’ to an American forum because the complaint alleged that the named plaintiffs were all US residents, that many were US citizens, and that several resided in the forum where the litigation was brought. The Second Circuit left it to the district court to apply the correct level of deference before reassessing the other elements necessary to support dismissal on forum non conveniens grounds.

Laydon v Coöperatieve Rabobank UA

Addressing again issues relating to the use of benchmarks in the financial industry, the Second Circuit on October 18, 2022 affirmed the Southern District of New York’s dismissal for lack of antitrust standing of antitrust claims brought by a futures trader who sued numerous banks for allegedly manipulating the Japanese yen LIBOR and Euroyen TIBOR benchmark rates.^[3] The Second Circuit explained that the plaintiff was not an efficient enforcer of the antitrust laws because the plaintiff was, at most, an indirect victim of the alleged conspiracy.

The plaintiff, a futures trader who carried out currency futures transactions on the Chicago Mercantile Exchange (CME), alleged that a group of banks impermissibly manipulated the yen LIBOR rate, which indirectly affected the Euroyen TIBOR rate. The plaintiff traded three-month Euroyen TIBOR futures contracts during the proposed class period on the CME and claimed that the defendants’ alleged yen LIBOR-based manipulation caused him damages. The district court granted the defendants’ motion to dismiss, finding that the plaintiff lacked antitrust standing to assert a claim under the Sherman Act, rejecting the plaintiff’s Commodity Exchange Act claims, and barring the plaintiff from adding claims under the Racketeer Influenced and Corrupt Organizations Act.

The Second Circuit affirmed. With respect to the plaintiff’s antitrust claims, the Second Circuit held those claims were barred because he lacked antitrust standing. Applying the ‘first step rule,’ which holds that ‘injuries that happen at the first step following the harmful behavior are considered proximately caused by that behavior,’ the Second Circuit agreed that the plaintiff failed to sufficiently plead that his alleged injury was proximately caused by the defendants’ alleged manipulation.^[4] It noted that the plaintiff did not transact directly with the defendants, nor did they control the futures contracts he traded. The Second Circuit found that more direct victims existed – among them interest rate swaps traders who traded directly with the defendants in products expressly tied to yen LIBOR – and would be efficient enforcers of the Sherman Act.

The Second Circuit also concluded that the plaintiff’s alleged injuries were speculative based on the indirect manner in which the plaintiff was allegedly affected by the defendants’ conduct. Furthermore, it agreed that apportionment of damages would risk duplicative recovery because the plaintiff’s alleged damages would be calculated on the basis of transactions performed by the defendants with third parties, and it was otherwise improper to determine damages simply on the basis of trading volume in the markets at issue.

In re Platinum & Palladium Antitrust Litigation

On February 27, 2023, the Second Circuit affirmed in part, vacated in part, and reversed in part a decision of the Southern District of New York dismissing, on antitrust standing grounds, claims alleging anticompetitive conduct in the markets for physical platinum and palladium and for derivatives in those commodities.^[5] It held that, while an investor who traded in the physical market for platinum and palladium was not an efficient enforcer of the antitrust laws, investors who traded in exchange-based platinum and palladium were efficient enforcers and could pursue their antitrust claims against the defendants.

The plaintiffs alleged that the defendants – companies engaged in precious metals trading, most of whom were based outside the United States – conspired to manipulate the global benchmarks for platinum and palladium. The plaintiffs alleged that the defendants artificially depressed the benchmark prices for platinum and palladium both by collusively trading in those metals’ derivatives – and thereby affecting the price of platinum and palladium generally – and by manipulating the process of setting the benchmark prices for these metals. The defendants allegedly benefited from these actions by participating in the physical market for platinum and palladium and by holding short positions in the futures market that would become more valuable as prices decreased. Following motions to dismiss by the defendants, the district court concluded that it had personal jurisdiction over two of the defendants under a conspiracy theory of personal jurisdiction, but dismissed the plaintiffs’ antitrust claims, finding that the plaintiffs were not efficient enforcers of the antitrust laws and therefore lacked antitrust standing.

The Second Circuit affirmed the district court’s exercise of personal jurisdiction, but reversed the with regard to the district court’s efficient enforcer analysis. It explained that one plaintiff lacked antitrust standing to sue for the impact that the defendants’ alleged conduct had on the physical platinum and palladium market because the plaintiff did not transact directly with any defendant.

The Second Circuit reiterated that transactions in securities that incorporated the allegedly manipulated benchmark did not by themselves establish a causal connection between that plaintiff and the defendants. In particular, that plaintiff could not show how the defendants were specifically enriched from its transactions because it unilaterally decided to reference the allegedly manipulated benchmark without being influenced by the defendants.

The Second Circuit, however, held that the plaintiffs who participated in the futures market were efficient enforcers with regard to the alleged antitrust injury in that market and had antitrust standing to pursue claims based on that injury. In so holding, the Second Circuit held that the fact that the plaintiffs did not necessarily transact with the defendants because they traded through a clearinghouse did not defeat standing because the clearinghouse served as a mere conduit to the transaction, and there was no market intermediary that could otherwise sue to recover damages from the defendants.

Relevent Sports, LLC v United States Soccer Federation, Inc

The Second Circuit again had occasion to address one of the perennial antitrust issues in professional sports – restrictions on competition by a sanctioning body. On March 7, 2023, it vacated the Southern District of New York’s dismissal of a soccer promoter’s antitrust suit against the United States Soccer Federation (USSF) and the Fédération Internationale de Football Association (FIFA) for failure to state a claim and, for FIFA, lack of personal jurisdiction.^[6] The Second Circuit held that the promoter did not need to show evidence of an antecedent agreement to a 2018 FIFA policy prohibiting soccer leagues from playing official season games outside their home territory, because the promoter sufficiently alleged that the 2018 policy itself constituted an agreement by competitors to restrict competition. The Second Circuit further held that FIFA was subject to personal jurisdiction under New York’s long-arm statute.

In 2018, the plaintiff promoter contracted with Spain’s professional soccer league, La Liga, to host an official season game in Miami. The defendant, FIFA, is a private organization made up of hundreds of national soccer associations. La Liga and USSF are subject to FIFA rules, and it is a violation of FIFA’s rules for a soccer club affiliated with a FIFA-sanctioned league to play in the United States without USSF’s approval. Allegedly responding to the contract for the La Liga game in Miami, FIFA issued a policy in 2018 prohibiting FIFA’s members, including USSF, from sanctioning any official season games held outside the participants’ home territory. For La Liga, this policy meant that official season games could take place only in Spain. Because of FIFA’s policy, the proposed game in Miami never took place.

The promoter’s amended complaint alleged that FIFA and USSF violated Section 1 of the Sherman Act by imposing this rule. The district court dismissed the amended complaint for failure to state a claim because the promoter did not allege a horizontal conspiracy between USSF and FIFA’s other leagues and teams outside the United States. The 2018 policy itself, the district court held, was not sufficient to show a Section 1 violation without an antecedent agreement to restrict competition, nor did universal adherence to the policy sufficiently demonstrate a horizontal conspiracy. The district court also held that FIFA was not subject to personal jurisdiction in New York.

On appeal, the Second Circuit reversed. On the issue of whether an agreement existed for purposes of Section 1 of the Sherman Act, the Second Circuit rejected the district court’s determination that the promoter needed to show evidence of a separate agreement to agree to the 2018 policy, explaining that the lower court had misapplied the Second Circuit’s ruling in North American Soccer League, LLC v United States Soccer Federation, Inc;^[7] instead, it held that ‘the very promulgation of the 2018 [p]olicy is direct evidence of an agreement for purposes of Section 1.’^[8] In so holding, it explained that the adoption of the policy by FIFA, combined with its member leagues’ agreement (by joining FIFA) to adhere to FIFA’s policies, constituted an agreement to adhere to FIFA’s restriction on competition. The Second Circuit found the pleading of these facts to be sufficient at the motion-to-dismiss stage for the district court to accept that the 2018 policy reflected concerted action to divide geographic markets for its constituent members, as the plaintiff alleged. The Second Circuit emphasized that the rule allegedly restricted competition among leagues to compete for fan bases and sponsors within the others’ geographic territories.

While the defendants contended that the policy reflected a non-binding ‘sporting principle,’ the Second Circuit declined to consider this argument since it was contrary to the plaintiff’s allegations that violations of the policy could result in sanctions, and because the policy did not govern aspects of actual game play (such as how many players could be on the field).

With respect to personal jurisdiction, the Second Circuit held that FIFA was subject to personal jurisdiction in New York because USSF, a New York entity, was FIFA’s agent and transacted substantial business for FIFA, which satisfied New York’s long-arm statute. In addition, FIFA itself, by virtue of its relationship with USSF, had sufficient minimum contacts with New York to satisfy constitutional due process.

Fikes Wholesale v HSBC Bank

On March 15, 2023, the Second Circuit affirmed the Eastern District of New York’s approval of a class action settlement of a long-running lawsuit alleging antitrust violations by credit card network operators and banks that acted as payment card issuers for those networks.^[9] In doing so, it rejected an objection to the settlement based on the scope of the release granted to the defendants – an issue that had played a major role in the intra-class conflict problem that had scuttled an earlier negotiated settlement of this dispute.

In the underlying lawsuit, the plaintiffs alleged that the defendants adopted and enforced rules and practices relating to payment cards that had the combined effect of injuring merchants by allowing the networks to charge supracompe­titive fees to process every payment card transaction. The settlement specifically included a release for claims that accrued within five years of the settlement becoming final. As formulated, the release required all class members to forgo future relief for the same length of time, regardless of whether the class member was in business for the 15 years of the class period covered by the settlement, or for the final month only. Objectors to the settlement argued that such a release of future conduct resulted in inequitable treatment of class members who started accepting credit card payments only near the end of the class period.

The Second Circuit declined to rule that the release was overbroad or otherwise improper because the release contained a ‘de-facto severability clause, providing that the release extend[s] to, but only to, the fullest extent permitted by federal law.’^[10] It ruled that such language ensured that the settlement will stand even if certain aspects of the release fell, making it unnecessary to adjudicate the proper scope of the release since it would not directly affect whether the settlement itself was fair and valid. The Second Circuit, therefore, did not address whether extending the release to a hypothetical future claim by a merchant would violate federal law, and instead left that decision to a future district court.^[11] The Second Circuit affirmed the district court’s rejection of other objections to the settlement, except as to service awards that the district court had awarded to the lead plaintiff, as to which it remanded with instructions.

Non-precedential holdings

In re AMR Corporation

On March 20, 2023, the Second Circuit brought an end to another long-running antitrust dispute when it affirmed the dismissal of claims brought by a group of consumers and travel agents that challenged the 2013 merger of American Airlines and US Airways as a violation of the Clayton Act.^[12] The Second Circuit also affirmed the lower courts’ refusal to allow plaintiffs to amend their complaint to add factual allegations and demand a jury trial.

The litigation began in 2013 when the plaintiffs brought an adversary proceeding in the Bankruptcy Court for the Southern District of New York seeking a temporary restraining order to block the then-pending merger between the two airline operators. The bankruptcy court denied the request for the temporary restraining order, and the merger closed, but the plaintiffs persisted with their lawsuit, which ultimately led to a 2019 bench trial in the bankruptcy court. The plaintiffs lost both the trial and their appeal of that result to the district court.

On appeal to the Second Circuit, the plaintiffs argued that they had shown a high post-merger market share and that such evidence should have been conclusive of an antitrust violation under Section 7 of the Clayton Act. The lower courts, however, applied a ‘burden-shifting framework that treated Plaintiffs’ assertion of post-merger market share as prima-facie evidence of a Section 7 violation but permitted Defendants to produce other evidence to show that the merger would not in fact have anticompetitive effects.’^[13] On appeal, the plaintiffs contended that the lower courts erred in applying this burden-shifting framework. The plaintiffs also asserted that the lower courts should have granted the plaintiffs’ motion for leave to amend the complaint to add a demand for treble damages under the Clayton Act and a corresponding demand for a jury trial.

The Second Circuit found no merit in either argument; instead, it found that the lower courts did not commit a legal error by considering the defendants’ evidence rebutting the plaintiffs’ prima facie case about post-merger market share based on ample authority and practice both in and outside the Second Circuit that adopted that approach. In addition, the Second Circuit noted that courts had held – at least since the 1970s, when the Supreme Court began requiring a more searching analysis for antitrust claims – that it was improper to ‘blindly equate a substantial increase in market share with a likely substantial decrease in competition’ and instead must require ‘more careful consideration of a Section 7 defendant’s rebuttal evidence.’^[14] The Second Circuit noted that ‘enhanced market share and increased concentration cannot guarantee litigation victories’ to merger challengers.^[15]

In addition, the Second Circuit held that the bankruptcy court did not abuse its discretion when it denied the plaintiffs’ motion for leave to amend. The bankruptcy court found that the plaintiffs had delayed filing that motion and that granting the motion could unduly prejudice the defendants, because the motion was filed ‘about two years after the close of discovery, five months after the district court’s summary judgment ruling, and just two months before trial.’^[16] Because a court considering an amended complaint ‘has discretion to deny leave for good reason, including futility, bad faith, undue delay, or undue prejudice to the opposing party,’^[17] the Second Circuit found that the bankruptcy court did not abuse its discretion in denying the plaintiffs’ motion.

Notable district court decisions

Borozny v Raytheon Technologies Corporation

On January 20, 2023, in a case challenging no-poach agreements in the aerospace industry, the District Court of Connecticut denied motions to dismiss a putative antitrust class action alleging a conspiracy to restrict competition in the market for aerospace workers in violation of Section 1 of the Sherman Act. The court ruled that the plaintiffs had adequately alleged a per se violation and, alternatively, a claim under the ‘rule of reason.’^[18] The court also held that the plaintiffs alleged facts sufficient to support an inference that the defendants had participated in a conspiracy to restrain competition in that market.

The plaintiffs, workers in the aerospace industry, alleged that the defendants, among the largest aerospace engineering firms in the United States, violated Section 1 by secretly agreeing to restrict competition in the recruitment and hiring of aerospace engineers and other skilled workers. According to the plaintiffs, this agreement was actualized through no-poach agreements among the defendants. The plaintiffs alleged that, once any defendant hired any aerospace worker, no other defendant could recruit or hire that same employee, allowing the defendants to artificially suppress the market wages for aerospace workers.

In denying the motions to dismiss, the court first held that the plaintiffs adequately alleged violations of the Sherman Act. The court rejected the defendants’ argument that they had a vertical, rather than a horizontal, relationship with each other, ruling that the alleged conspiracy was one of market allocation, in which the defendants were horizontal competitors for the employees’ services. Having held that the plaintiffs had sufficiently alleged a horizontal conspiracy, the court then ruled that the plaintiffs adequately alleged that the no-poach agreements at issue had no legitimate business purpose and, therefore, would be subject to the per se rule. The court separately concluded that the plaintiffs also adequately pleaded an antitrust claim under the rule of reason doctrine, holding that the complaint alleged a plausible relevant market – aerospace workers in the State of Connecticut – and that the plaintiffs sufficiently pleaded an adverse effect on competition in that market because the alleged conspiracy had the effect of actually reducing the compensation paid to the plaintiffs.

With respect to the complaint’s factual allegations of a conspiracy, the court ruled that the plaintiff had adequately alleged an agreement based on specific facts alleged in the complaint, as well as plausible inferences on issues such as motive.

Giordano v Saks Incorporated

In another decision addressing alleged no-poach agreements, the Eastern District of New York on February 1, 2023 dismissed Sherman Act claims against Saks Incorporated and several luxury clothing brands (the brand defendants) for allegedly agreeing to refrain from hiring luxury retail employees who worked at Saks within six months of their employment unless managers of both companies agreed to an exception. The agreement allegedly prevented the plaintiffs from changing jobs and advancing their careers and, therefore, restrained competition in the market for those workers and reduced their compensation.^[19]

The court held that the claims brought by three of the four plaintiffs were untimely. While the court held that the fourth plaintiff plausibly alleged a conspiracy, it concluded that the plaintiff alleged insufficient facts to support a direct adverse effect on competition, and likewise failed to show that the brand defendants held sufficient market power in the market for luxury retail employees. The fourth plaintiff, therefore, failed to allege an adverse effect on competition as a whole in the relevant market.

The plaintiffs worked as skilled luxury retail employees at Saks, where they allegedly received extensive training and helped to maintain the image of the brand by creating ‘an atmosphere of exclusivity and opulence.’^[20] The plaintiffs alleged that Saks and the brand defendants entered into express agreements to suppress luxury retail employees’ compensation, and that the agreements artificially suppressed their pay and decreased worker mobility in violation of Section 1 of the Sherman Act.

The court found that three of the plaintiffs’ claims were facially untimely because each first suffered injury under the conspiracy prior to the four-year limitations period provided by the Sherman Act. The court also held that they failed to allege an overt act committed by the defendants within the limitations period, which would have made their claims timely.

With respect to the one timely claim, the court found that the plaintiff plausibly alleged an agreement between Saks and the brand defendants. It declined to apply the per se rule, and said that the defendants were not ‘naked’ collaborators because they often collaborated and sold each other’s goods. The court also declined to apply the ‘quick look’ standard and found that the challenged agreements ‘might plausibly be thought to have a net procompetitive effect,’ because they ‘allow[ed] Saks stores to exist and the brand defendants to sell their products through a nationwide retailer.’^[21]

Applying the rule of reason to the plaintiff’s claim, the court found that the plaintiff alleged insufficient facts to support a direct adverse effect on competition and likewise failed to show that the defendants held market power in the relevant market sufficient to state a claim for a Section 1 violation. It noted that, while the plaintiff allegedly suffered restricted job mobility as a result of the no-hire agreements, that diminished mobility did not lead to the conclusion that the no-hire agreements had a market-wide adverse effect on competition, and the plaintiff offered no facts to support the conclusory assertion that suppressing compensation at a large employer like Saks removes significant competitive pressure on the brand defendants. Moreover, while the plaintiff alleged that Saks paid its luxury retail employees less than the brand defendants, that alone did not demonstrate that Saks controlled luxury retail employees’ salaries on a market-wide basis.

Notes