Decisions Concerning Procedures and Immunities

Like its decisions on substantive antitrust liability rules, the Roberts Court’s three decisions on antitrust procedures and immunities have reflected decision theory concerns.

Credit Suisse

Authored byJustice Breyer, the Court’s decision in Credit Suisse Securities (USA) LLC v. Billing41 explicitly embraced decision-theoretic reasoning in holding that antitrust challenges to certain securities marketing practices were implicitly precluded by the federal securities laws. The plaintiffs in that case were investors who had purchased newly issued securities in initial public offerings (IPOs). They claimed that the defendants, various investment banks that had formed underwriting syndicates to help issuing companies sell their newly issued securities, had violated the antitrust laws in agreeing not to sell shares of a popular new issue to any buyer who would not commit to (1) buy additional shares of the security in the future at escalating prices; (2) buy less desirable securities, in addition to the popular issue; or (3) pay the underwriter an unusually high commission on subsequent security purchases. The defendant banks moved to dismiss the complaint on the ground that the federal securities laws impliedly preclude application of the antitrust laws to the conduct in question. The district court agreed and dismissed the claim, but the US Court of Appeals for the Second Circuit reversed.

In reversing the Second Circuit, the Supreme Court began by reviewing its precedents addressing the relation of the securities laws to the antitrust laws. Those precedents, the Court observed, establish that the securities laws implicitly preclude an antitrust complaint when there is a “clear repugnancy” between the complaint and the securities laws or, put differently, when the two are “clearly incompatible.” The precedents also prescribe four factors that are critical in determining whether such incompatibility exists: (1) whether the challenged practice lies squarely within an area of financial market activity that the securities laws seek to regulate; (2) whether an administrative body has legal authority to supervise the practice; (3) whether the regulator has exercised its regulatory authority; and (4) whether permitting the antitrust action would risk conflicting guidance, requirements, or standards.

With respect to the complaint before it, the Court concluded that no one could “reasonably dispute” that the first three factors favored implicit preclusion: the activities in question lay squarely within the sphere the securities laws regulate; the Securities and Exchange Commission (SEC) had statutory authority to supervise the challenged activities; and the SEC had exercised its authority to regulate the type of conduct at issue. The only question before the Court, then, was whether the plaintiff’s complaint threatened to create a conflict between antitrust and securities law.

The plaintiffs maintained that their lawsuit (and others like it) could not be incompatible with securities law concerns because the SEC had already disapproved of the complained of activities and would likely continue to do so into the foreseeable future. Thus, they contended, there could be no significant downside to allowing them to pursue their antitrust claims. In rejecting that view and concluding that maintenance of the antitrust action at issue would be incompatible with the securities laws, the Court made little effort to identify specific points of conflict between the securities and antitrust laws. Instead, it invoked decision theory concerns, comparing the expected error costs of permitting the action at issue (and others like it) to the expected error costs of deeming such actions to be implicitly precluded.

Contrary to the plaintiffs’ claim that there could be no downside to antitrust lawsuits attacking anticompetitive conduct of which the SEC had already disapproved, the Supreme Court saw a cause for concern: potential antitrust condemnation of socially beneficial securities marketing practices. Even if one assumes that the SEC has disapproved of the complained of conduct and will likely continue to do so in the future, as the Court did, antitrust actions based on securities marketing practices are prone to generate false convictions. The Court pointed to four factors that create potential for such errors: (l) the fine distinctions between permissible and impermissible conduct in the securities marketing context; (2) the need for securities-related expertise, which generalist courts lack, to draw these distinctions and to determine whether the SEC’s disapproval of a complained of practice is likely to remain permanent; (3) the fact that the evidence presented in antitrust lawsuits arising from securities marketing practices would likely permit contradictory, but mutually reasonable, inferences; and (4) the high risk of inconsistent court results as antitrust plaintiffs “bring lawsuits throughout the Nation in dozens of different courts with different nonexpert judges and different nonexpert juries.” It asserted that those factors, taken together, “make mistakes unusually likely” in this context.

Having thus disposed of the first part of the formula for estimating the cost of Type I errors—the likelihood of false convictions that would chill conduct that should be legal—the Court turned to the second component: the magnitude of losses from such mistakes. It observed that false positives would create significant social costs in the context at hand, for “the role that joint conduct plays in respect to the marketing of IPOs, along with the important role IPOs themselves play in relation to the effective functioning of capital markets, means that the securities-related costs of mistakes is unusually high.” The Court thus concluded that the error costs of permitting the antitrust action at issue (and others like it) would likely be high.

The Court then compared those expected costs to the expected error costs of deeming the action to be implicitly precluded. Any errors resulting from such a decision would, of course, consist of Type II errors—false acquittals of practices that would have been condemned had antitrust actions been permitted. The Court concluded that the costs associated with such errors would likely be relatively small. First, if the conduct is already forbidden by the SEC, as the plaintiffs assumed, either it or private investors could bring securities lawsuits to stop the offensive practices. Moreover, there is less need for antitrust to intervene to thwart anticompetitive practices because the securities laws already require the

SEC “to take account of competitive considerations when it creates securities- related policy and embodies it in rules and regulations.” Accordingly, antitrust liability in this context adds little social value, and the costs of reining in its reach so that it fails to capture some anticompetitive conduct would be relatively low.

It was thus an analysis of error costs—a comparison of the costs of too much antitrust intervention versus too little—that led the Court to conclude that there was an inevitable conflict between the sort of antitrust action at issue and the effective implementation of the securities laws. While the Court did not expressly analyze likely decision costs, consideration of such costs would only have bolstered its conclusion, for a legal regime permitting plaintiffs to choose between two types of lawsuits (involving very different substantive doctrine, procedural rules, and damages formulae) in challenging a single set of business practices would almost certainly involve higher decision costs than a regime that dealt with such practices under a single body of law. Thus, the reasoning of Credit Suisse explicitly embraces decision theory’s error cost analysis, and the holding of the case comports with decision theory as a whole.

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