One case has been closely watched on Wall Street. It is a class-action lawsuit against more than a dozen leading investment banks and institutional investors that took part in syndicates to underwrite the initial public offerings of hundreds of technology companies in the 1990s.
The suit, brought by purchasers of the stocks, charges that the sharing of information among the underwriters and the way in which they allocated shares to their customers amounted to an antitrust conspiracy.
The Federal District Court in Manhattan dismissed the lawsuit in 2003, finding that the defendants were entitled to antitrust immunity because much of the conduct they were said to have engaged in was explicitly permitted by the Securities and Exchange Commission.
The United States Court of Appeals for the Second Circuit, however, reinstated the suit last year, ruling that Congress had granted no such immunity.
The issue for the Supreme Court in this case, Credit Suisse First Boston v. Billing, No. 05-1157, is how to treat the inherently collaborative activity of an underwriting syndicate, activity that — while it would appear to violate the Sherman Antitrust Act — is permitted by the regulatory agency that oversees it.
While the eventual outcome of the case is uncertain, there is little uncertainty about the second antitrust case the court accepted. The question in that case, Leegin Creative Leather Products v. PSKS, No. 06-480, is how antitrust law should treat the minimum prices that manufacturers require retailers to charge for their products.
In a 1911 case known as the Dr. Miles precedent, this practice of “resale price maintenance” was deemed always illegal under the Sherman Act. The case asks the justices to re-evaluate the precedent in light of modern economic theory, and instead to make these arrangements subject to case-by-case analysis under what is known as the rule of reason.
In other areas of antitrust law, the court has steadily backed away from a categorical view of antitrust liability and is highly likely to use this case as a vehicle for doing the same for resale price maintenance.
Leegin, a privately owned company, manufactures the Brighton line of women’s leather goods and does business only with retailers, mostly small specialty stores, who agree to abide by the suggested retail prices for the products. In 2002, after learning that Kay’s Kloset, a store in Lewisville, Tex., was discounting Brighton products, Leegin suspended shipments.
The store brought an antitrust suit and won more than $1 million in damages, which are tripled under antitrust law. The United States Court of Appeals for the Fifth Circuit, in New Orleans, upheld the judgment. In August, the justices granted a stay to enable Leegin to file a Supreme Court appeal. Such a stay is a fairly unusual action that sends a strong signal that the justices believe that a case is worthy of their attention and that the lower court’s decision was probably wrong.
Leegin’s appeal argues that “the per se rule against resale price maintenance squarely conflicts with this court’s modern antitrust jurisprudence” and has “no foundation in economic theory.” It argues that minimum prices can enhance competition and help consumers by providing incentives to retailers to compete in such nonprice areas as customer service.
If the court accepts Leegin’s argument, a decision about whether any particular minimum price arrangement actually confers a consumer benefit would be subject to case-by-case appraisal under the rule-of-reason analysis that the court already applies to the setting of price ceilings and nonprice retail conditions. Formerly, the court applied a rule of categorical invalidity to those practices as well.
In the securities underwriting case, the court will be scrutinizing a variety of practices that amount to standard conduct on Wall Street: forming a syndicate, ascertaining potential customer interest to determine the size and price of the offering, and then sharing information and markets among competitors. The plaintiffs contend that the underwriters inflated prices by improperly dividing the market and imposing unlawful conditions on their customers.
When the appeal reached the Supreme Court last spring, the justices asked the solicitor general’s office to advise them of the federal government’s view. That request presented a problem because there was no unified government view. Conduct that the Justice Department’s antitrust division regarded as barred under the Sherman Act was seen by the S.E.C. as legal.
A carefully worded brief by the solicitor general, filed last month, urged the court to take the case and find a way to reconcile “two federal statutes critical to the efficient functioning of our economy.”
The brief said the court of appeals failed “to make sufficient accommodation for the securities laws’ policy of encouraging certain types of collaborative activity.”
It added, however, that the district court was also wrong to consider all conduct connected with initial public offerings to be immune from antitrust liability. The brief said the complaint in this lawsuit needed to be examined carefully to make sure that it was based on something more than “conclusory or ambiguous allegations.”
Briefs urging the justices to hear to hear the case were also filed by the New York Stock Exchange, NASD and other industry groups.