"Clear Incompatibility" Between Antitrust and Securities Laws Implies Antitrust Immunity: Credit Suisse Securities v. Billing

“Clear Incompatibility” Between Antitrust and
Securities Laws Implies Antitrust Immunity:
Credit Suisse Securities v. Billing
Janice E. Rubin and Michael V. Seitzinger
Legislative Attorneys
American Law Division
Summary
In Credit Suisse Securities v. Billing, the Supreme Court examined whether entities
in a heavily regulated industry are necessarily entitled to immunity from prosecution
under the federal antitrust laws simply by virtue of their regulated status. The Court had
previously ruled that, absent a specific congressional mandate, such immunity may be
granted only by findings either of “clear repugnance” between the regulatory scheme and
enforcement of the antitrust laws, or sufficiently pervasive regulation of an industry as
would be disrupted by application of the antitrust laws; the Credit Suisse opinion
reaffirms that reasoning. A class of securities investors alleged that they had paid
artificially inflated prices for certain securities because of purportedly antitrust-violative
actions taken by the underwriters of some initial public offerings (IPOs). The challenged
practices included the formation of syndicates; requiring purchasers of IPOs to make
future purchases (“laddering”); and requiring purchasers to buy other, less desirable
securities (“tying”). In response, defendants/appellants asserted that they were immune
to prosecution under the antitrust laws because of the pervasive regulation of the
securities industry by the Securities and Exchange Commission (SEC), which
administers a comprehensive system of regulation including major parts of the Securities
Act of 1933 and the Securities Exchange Act of 1934. The SEC, they argued, should
be the sole arbiter of the validity of their actions, notwithstanding that Congress had not
expressly so provided in the applicable legislation. Although the district court, which
agreed with the underwriters, dismissed the case, the United States Court of Appeals for
the Second Circuit reversed after a lengthy discussion of Supreme Court case law in the
area. The Supreme Court reversed the court of appeals, accepting the “pervasive
regulation of the securities industry” argument. Specifically, it found that the conduct
at issue was “at the core of marketing new securities,” noted that “securities regulators
proceed with great care to distinguish the encouraged and permissible from the
forbidden,” and concluded, therefore, “that the securities laws are ‘clearly incompatible
with the application of the antitrust laws in this context.” This report will not be
updated.

Background
From an Antitrust Perspective. The basic antitrust law is section 1 of the
Sherman Act (15 U.S.C. § 1), which prohibits contracts and conspiracies in restraint of¹
trade. Although most alleged restraints are analyzed pursuant to the rule of reason, some
categories of anticompetitive activity (e.g., price fixing, joint refusals to deal, tying the
purchase of a desired commodity to the purchase of a less-desired commodity) have, over
the years, been deemed automatically to violate section 1 as per se offenses because “the
effect and ... purpose of the practice are to threaten the proper operation of a
predominantly free-market economy.”² As the antitrust laws are not industry-specific,
whether an entity is subject to the strictures of the antitrust laws depends on whether, and
under what circumstances, Congress has specifically exempted an industry or activity.³
Where Congress has been silent, however, the courts have created the doctrine of
“implied immunity” to cover situations in which the application of the antitrust laws
would be contrary to an expressed public policy or could subject entities to possibly
conflicting mandates.
The Supreme Court has been generally unreceptive to arguments in favor of implied
antitrust immunity (i.e., that inferred, with respect to a member of a regulated industry,
from the mere fact that Congress has given regulatory jurisdiction over an industry to a⁴
federal agency; or, with respect to those acting in purported furtherance of a
congressional statute, from the mere existence of the legislative pronouncement), except
in instances where “there is a plain repugnance” between the antitrust laws and the
regulatory scheme or statutorily expressed preference. As the Court put it in Silver v.
New York Stock Exchange,
the problem arises from the need to reconcile pursuit of the antitrust aim of
eliminating restraints on competition with the effective operation of a public policy
contemplating [certain activity] which may well have anti-competitive effects in
general and in specific applications. 373 U.S. 341, 349 (1963).

¹ Under the rule of reason, the anticompetitive results of an activity are balanced against the
procompetitive benefits of that activity. In other words, it is possible for a court to deem an
action that technically violates the antitrust laws as “reasonable.”
² Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1,2 (1979), citing,
United States v. United States Gypsum Co., 438 U.S. 422, 441 note 14 (1978).
³ E.g., the antitrust laws are applicable to the”business of insurance” only to the extent “such
business is not regulated by State law” (15 U.S.C. § 1012(b)); the making or carrying out of
certain joint rate agreements would be considered price fixing without the immunity from the
antitrust laws granted in 49 U.S.C. § 10706 (rail carriers) and 49 U.S.C. § 13703 (motor carriers);
joint agreements by members of “organized” professional sports leagues to sell the rights to
“sponsored” telecasts of team activity are specifically permitted by 15 U.S.C. § 1291.
⁴ “The Court has never held ... that the antitrust laws are inapplicable to anticompetitive conduct
simply because a federal agency has jurisdiction over the activities of one or more of the
defendants.” Gordon v. New York Stock Exchange, 422 U.S. 659, 692 (1975), (Justice Stewart,
concurring).

Distillation of the Court’s previous jurisprudence on implied immunity from the
antitrust laws — especially that concerning the securities industry — has yielded several
still-valid guidelines for determining whether a particular practice will be protected.
In Silver, supra, the practice at issue was the Exchange’s disconnection of a broker’s
private wire service, which service he alleged was critical to his ability to profitably do
business. Because the Court found the manner in which the Exchange and its members
carried out their collective refusal to deal to be “fundamentally unfair,”⁵ it decided that
“the Exchange ha[d] plainly exceeded the scope of its authority under the Securities
Exchange Act to engage in self-regulation and ha[d] not even reached the threshold of
justification under that statute for what would otherwise be an antitrust violation.”⁶
Moreover, since the SEC could exercise no regulatory supervision over the application
of the Exchange rules that permitted or required wire-service termination, there was no
potential for conflict between the securities regulatory scheme and enforcement of the
antitrust laws. Therefore, implied immunity was not available, and the actions were
amenable to prosecution under § 1 of the Sherman Act (15 U.S.C. § 1).
Gordon v. New York Stock Exchange⁷ involved an antitrust challenge to the system
of fixed commission rates for securities transactions of less than $500,000. There, because
there had been a time when “[t]he antitrust law had forbidden the very thing that the
securities law had then permitted, namely an anticompetitive rate setting process,”⁸ the
Court determined that immunity was required in order to make the securities market
scheme (and the SEC’s specifically authorized supervision of stock exchange commission
rates) work. As the Court explained:
[T]o deny antitrust immunity with respect to commission rates would be to subject the
exchanges and their members to conflicting standards. 422 U.S. at 689.
The third major Supreme Court securities/antitrust decision was U.S. v. National⁹
Association of Securities Dealers (NASD). In that instance, the Court looked at challenged
price restrictions imposed on the sale and transfer of mutual fund shares in the secondary
market (i.e., the market for transactions occurring after the initial sale of the shares). It
concluded that because the purpose of the Investment Company Act was to “restrict most¹⁰
of secondary market trading,” it had to reject the Government’s too-literal reading of the
applicable section of the act and find instead that the agreements in question were immune¹¹
as “among the kinds of restrictions Congress contemplated when it enacted that section.”
Moreover, even though the SEC had not prescribed any rules or regulations concerning the
restrictions, it had the power to do so:

⁵ Silver had been denied either prior notice of the action or a hearing to review it.
⁶ 373 U.S. at 365.
⁷ 422 U.S. 659 (1975).
⁸ Credit Suisse Securities v. Billing, 551 U.S. ____ , 127 S.Ct. 2383, 2391 (2007).
⁹ 422 U.S. 694 (1975).
¹⁰ Id. at 700.
¹¹ Id. at 721.

[Although t]he Government also urges that the SEC’s unexercised power ... is
insufficient to create repugnancy between its regulatory authority and the antitrust laws
... we see no way to reconcile the Commission’s power to authorize these restrictions
with the competing mandate of the antitrust laws. 422 U.S. at 721, 722.
From a Securities Law Perspective. The Securities and Exchange Commission
administers a comprehensive body of securities regulation statutes, including the Securities
Act of 1933 (15 U.S.C. §§ 77a et seq.), and the Securities Exchange Act of 1934 (15 U.S.C.
§§ 78a et seq.). The typical manner in which investment securities are offered to the public
first involves underwriting services offered by an underwriting firm to an issuer of
securities. The most common delivery of those services has been said to be by “firm-
commitment agreements.”¹² In such an agreement the underwriter agrees that on a fixed
date the issuer will be given a certain amount of money for a certain amount of its
securities. Such an agreement removes the uncertainty of an early cash infusion for the
issuer and transfers the risk of selling the issue to the underwriter.
In the first half of the twentieth century, syndicates, consisting of a few to many
underwriting firms, emerged to manage many of the risks that underwriters assume. A
syndicate often buys the entire new issue of the securities at a fixed price and then reoffers
it to the public at a somewhat higher predetermined price. The price difference is in effect
a kind of commission for the syndicate. These principal underwriters often contact other
brokers or underwriters who act as wholesalers of the securities. The issuer and the
underwriters often agree on the size and the pricing of the offering.
Credit Suisse Securities v. Billing¹³
Credit Suisse gave the Court the opportunity — not exercised since 1981¹⁴ — to
reiterate and apply its previously stated standards for granting implied antitrust immunity.
An antitrust suit (originally a class action) was filed by a group of IPO purchasers against
the underwriters of those issues (10 major investment banks) alleging conspiracy, price
fixing-related, and tying violations of § 1 of the Sherman Act. The particular, allegedly
harmful practices included (1) required investor promises to place bids in the aftermarket
at prices above the initial public offering price, referred to as “laddering”; (2) required
investor commitments to purchase other, less attractive securities, a kind of tying
arrangement; and (3) investor payment of excessive commissions. These requirements,
according to the investors, artificially inflated the share prices of the securities and
constituted per se price fixing.

¹² 1 Thomas Lee Hazen, T^HEL^AW^OFS^E^C^U^R^IT^IE^SR^EGULATI^O^N § 2.1[2][B], at 156 (5^th ed. 2005).
¹³ 551 U.S. ____ , 127 S.Ct. 2383 (2007), 2007 WL 1730141. The case was decided, 7-1, on June

18, 2007, Justice Kennedy not participating.

¹⁴ National Gerimedical Hospital & Gerontology Center v. Blue Cross, 452 U.S. 378, 391 (1981).
There, the exclusion by Blue Cross from its insurance plan of a hospital that had been constructed
in apparent violation of a local health care planning scheme was found amenable to antitrust
scrutiny even though Blue Cross had made its decision in furtherance of the policies expressed
in the National Health Planning and Resources Development Act of 1974 (P.L. 93-641,42 U.S.C.
§ 201 note).

At first glance, this system of agreement by the issuer and all of the major underwriters
of size and pricing of the offering does appear, in fact, to be antitrust-violative price
manipulation. However, not all underwriter manipulations have been prohibited. A “little
price manipulation” has been permitted in order to further appropriate market goals.¹⁵ The
Securities and Exchange Commission has traditionally recognized certain types of
manipulative activities, considered “stabilizing” activities, as permissible under section
9(a)(6) of the Securities Exchange Act¹⁶ and SEC Rule 10b-1.¹⁷ In fact, the Court itself
indicated that the complaint was an attack not on the existence of the SEC-approved joint
IPO activity, but rather, the abuse of that activity.¹⁸
The Court, in an opinion authored by Justice Breyer, began its analysis of the
availability of implied antitrust immunity in this instance by noting that all of the
challenged activities meet the basic prerequisite for implied antitrust immunity in the
regulated securities industry: they are “central to the proper functioning of well-regulated
capital markets.” Further, the SEC has, and has exercised, its specific authority to supervise
those activities. Moreover, injured investors are specifically authorized to recover
damages, and have successfully sued under the securities statutes, for violation of
applicable SEC regulations “for conduct virtually identical to the conduct at issue here.”¹⁹
Further, the Court observed, the challenged practices all seemed to describe “conditions
that the investors apparently were willing to accept in order to obtain an allocation of new
shares that were in high demand.”²⁰
Continuing, the opinion noted the variously nuanced SEC decisions concerning, e.g.,
commissions and future sales, and “laddering,” the Court observing that it would “often be
difficult for someone who is not familiar with accepted syndicate practices to ... distinguish
what is forbidden from what is allowed” — the more so because “evidence tending to show
unlawful antitrust activity and evidence tending to show lawful securities marketing activity
may overlap.”²¹ Further, since antitrust challenges to securities-marketing activities could
be brought “throughout the Nation in dozens of different courts with different nonexpert
judges,”²² the decision to defer to the SEC’s expertise seemed only logical.
We believe it fair to conclude that, where conduct at the core or the marketing of new
securities is at issue; where securities regulators proceed with great care to distinguish
the encouraged and permissible from the forbidden; where the threat to antitrust
lawsuits, through error and disincentive, could seriously alter underwriter conduct in

¹⁵ Strobl v. New York Mercantile Exchange, 768 F.2d 22, 28 (2d Cir. 1985).
¹⁶ 15 U.S.C. § 78i(a)(6).
¹⁷ 17 C.F.R. § 240.10b-1.
¹⁸ 551 U.S. at ____ , 127 S.Ct. at 2393.
¹⁹ Id. at 2392, 2393.
²⁰ Id. at 2388. A similar sentiment was expressed in 1977 when the Court examined allegations
of tying in the extension of credit to homebuyers: the scenario, noted the Court, “prove[d]
nothing more than a willingness to provide cheap credit in order to sell expensive houses.” U.S.
Steel Corp. v. Fortner Enterprises (Fortner II), 429 U.S. 610, 622 (1977).
²¹ 551 U.S. at ____ , 127 S.Ct. at 2394, 2395.
²² Id. at 2395.

undesirable ways, to allow an antitrust lawsuit would threaten serious harm to the
efficient functioning of the securities markets. 127 S.Ct. at 2396.
Given (1) Congress’s expressed concern that securities markets become and remain
stable, (2) the continued oversight and actions of a single expert regulatory agency versus
the probability of diverse and possibly conflicting decisions by nonexpert judges in the
event of securities/antitrust lawsuits, and (3) the likelihood of conflict between the
mandates of antitrust law and allowable activities under the securities laws, the Court found
that “the securities laws are ‘clearly incompatible’ with the application of the antitrust
laws.”²³ Accordingly, implied immunity from prosecution under the antitrust laws is
accorded to participants in securities markets.
Justice Stevens concurred separately to emphasize that, in his opinion, neither the
incompatibility between the antitrust and securities laws, nor the question of implied
antitrust immunity for regulated entities should have been the issue.
In my view, agreements among underwriters on how best to market IPOs, including
agreements on price and other terms of sale to initial investors, should be treated as
procompetitive joint ventures for purposes of antitrust analysis. In all but the rarest of
cases, they cannot be conspiracies in restraint of trade within the meaning of § 1 of the
Sherman Act .... 127 S.Ct. at 2398.
Justice Thomas’s dissent found fault with the Court’s assertion that the securities acts
were silent on whether the antitrust laws should be applicable to entities in the securities
industry. He noted that both the Securities Act of 1933 and the Securities and Exchange
Act of 1934 state, in “savings clauses,” that their remedies “shall be in addition to any and²⁴
all other rights and remedies that may exist at law or in equity”:
Therefore, both statutes explicitly save the very remedies the Court holds to be²⁵

impliedly precluded. 127 S.Ct. at 2399.
²³ Id. at 2397.
²⁴ 15 U.S.C. §§ 77p(a), 78bb(a); noted at Id. at 2399.
²⁵ Taken together, Justice Thomas’s emphasis on the “savings clauses” in the applicable securities
acts, and Justice Stevens’s belief that there was not any real possibility of an antitrust offense,
produce a Trinko-like result (Verizon Communications, Inc. v. Trinko, 540 U.S. 398 (2004), is
a controversial decision in which the Court found that the existence of an antitrust “savings
clause” in the Telecommunications Act of 1996 did not serve to create an antitrust action where
no cause of action would have existed but for a breach of obligation under the 1996
Telecommunications Act): i.e., even if the “savings clauses” were found to allow for antitrust
actions and remedies (a proposition the Court notes was unsuccessfully argued by the United
States as amicus in Gordon (id. at 2392)), there is no antitrust offense described in the complaint
that would trigger the use of the antitrust statutes.