Antitrust Law Daily Claims that CBOT acted anticompetitively against an electronic futures trading platform fail
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Tuesday, March 24, 2020

Claims that CBOT acted anticompetitively against an electronic futures trading platform fail

By Nicole D. Prysby, J.D.

Antitrust immunity existed under Noerr-Pennington for actions taken in an attempt to prevent the platform from receiving regulatory approval.

Claims brought by an electronic-based futures trading platform developer that the Board of Trade of the City of Chicago, Inc. (CBOT) and Chicago Mercantile Exchange, Inc. (CME) torpedoed the plaintiff’s new futures exchange have been rejected by the U.S. Court of Appeals in Chicago. U.S. Exchange Holdings, Inc. and its subsidiary U.S. Futures Exchange, L.L.C. (USFE) set out to launch a new electronic-based futures trading platform and claimed that existing exchanges CBOT and CME kept the futures exchange from viability by delaying the regulatory approval process and by enacting an internal rule that deprived the new exchange of liquidity. Summary judgment for the defendants was affirmed. The defendants had immunity under the Noerr-Pennington doctrine for actions taken during the regulatory approval process. The fraudulent misrepresentation and sham litigation exceptions to Noerr-Pennington did not save the claims. Moreover, implied antitrust immunity protected the defendants (U.S. Futures Exchange, LLC v. Board of Trade of the City of Chicago, Inc., March 23, 2020, Manion, D.).

Impact of ruling. "The ruling sets an important precedent for the futures industry and other highly regulated markets," said Skadden partner Albert Hogan, who represented CBOT and CME. "For the first time, a CFTC rule was deemed to be impliedly immune under the antitrust laws, a holding that gives clarity regarding deference to expert agencies like the CFTC. Also, by rejecting the claim that CME and CBOT may be sanctioned under the antitrust laws for submissions they made to the CFTC, the decision underscores the First Amendment right of individuals and businesses to petition their regulators."

Background. In the early 2000s, USFE set out to offer a then-novel electronic-based futures trading platform, which would have been an alternative to the floor trading model used by the CBOT. Before USFE could begin operations, it needed to be approved as a designated contract market (DCM) by the Commodity Futures Trading Commission (CFTC). The CFTC solicited public comment and CBOT raised a number of objections. The CFTC set a public hearing which was postponed at CBOT’s request.

Meanwhile, USFE approached the Board of Trade Clearing Corporation (BOTCC), to obtain clearing services but was again blocked by CBOT, which drained its open contracts from BOTCC, depriving USFE of access to a significant amount of liquidity. In 2004, the CFTC finally approved USFE as a DCM. According to USFE, the delay—attributable to the defendants—caused such uncertainty that the exchange flopped. USFE sued the defendants, alleging two theories under the Sherman Act: (1) the "delay theory," whereby defendants flooded the CFTC with frivolous objections in order to stall DCM approval and harm USFE; and (2) the "open interest theory," in which defendants conspired to deprive USFE of liquidity by transferring CBOT’s open interest out of BOTCC. A trial in the case had been set, but the federal district court in Chicago ultimately held that the plaintiffs’ Sherman Act claims were barred by Noerr-Pennington and implied antitrust immunity doctrines. The plaintiffs appealed.

Delay theory. The delay theory failed, because the petitioning activity was immune from antitrust liability under the Noerr-Pennington doctrine, according to the Seventh Circuit. Under the fraudulent misrepresentations exception to Noerr-Pennington, fraudulent misrepresentations made in an adjudicative proceeding before an administrative agency are not protected from antitrust liability, the appellate court observed. The fraudulent misrepresentations exception to Noerr-Pennington did not apply because the CFTC’s DCM application review process was legislative, not adjudicative. The CFTC utilized an informal fact-finding process and received no testimony under oath, affirmation, or penalty of perjury as part of the application review. The weight afforded to ex parte communications and public comment subjected the CFTC’s fact-finding efforts to political influence—a hallmark of the legislative process, the court noted.

USFE’s representatives met with the CFTC, its staff, and its attorneys on several occasions to discuss the DCM application. All this activity was perfectly legitimate in the context of the CFTC’s DCM application review process, which would not be the case in an adjudicative proceeding. Also, USFE had to demonstrate it met and would continue to comply with more than twenty statutory requirements in order to be designated and the CFTC has no discretion to deny an application that meets the statutory requirements.

The sham litigation exception to Noerr-Pennington also did not apply, the court decided. Under this exception, objectively baseless lawsuits brought to directly interfere with the business relationships of a competitor through the use of the governmental process as opposed to the outcomeof that process, are held liable as anticompetitive. The fact that the defendants sent multiple comments, letters, etc. (an alleged "pattern" of sham petitioning) did not change the sham petitioning standard: protections for nonfrivolous petitioning do not disappear merely because the defendant exercises its right to engage in such activity on multiple occasions, the court explained.

While four circuit courts have adopted some version of the view that multiple lawsuits may allow a court to disregard the "objectively meritless" prong of the sham lawsuit exception, the Seventh Circuit sided with the First Circuit, which has held that a petitioner does not lose the right to file an objectively reasonable petition merely because it chooses to exercise that right more than once in the course of pursuing its desired outcome. And here, the defendants engaged in only a single legislative proceeding, so even the broader standard adopted in some other circuits would not apply. The fact that USFE’s application was eventually approved did not mean that the defendants’ petitions lacked merit, the court noted.

Open interest theory. Claims based on the open interest theory also failed. USFE claimed that the defendants, conspiring with another entity, enacted a rule to transfer open interest away from USFE’s preferred clearinghouse and thus deprive USFE of much-needed liquidity. The defendants had implied antitrust immunity for the decision to enact the rule, the court determined.

The CFTC has clear and adequate regulatory authority to approve exchange rules and indeed exercised this regulatory authority by the proposed rule. The CFTC approved the rule in spite of potential anticompetitive effects, and considered anticompetitive concerns but deemed them outweighed by the innovative gains to be had in the futures industry. Therefore, the trial court correctly concluded that the CFTC’s approval of the rule was "clearly incompatible" with the antitrust laws and their objectives. Implied immunity thus precluded USFE’s open interest claims.

The case is No. 18-3558.

Attorneys: Kenneth M. Kliebard, Stephanie Schuster and David B. Salmons (Morgan, Lewis & Bockius LLP) for U.S. Futures Exchange, L.L.C and U.S. Exchange Holdings, Inc. Albert L. Hogan, III, William E. Ridgway, Gretchen M. Wolf, Jonathan Lee Marcus, and Lindsey Sieling (Skadden, Arps, Slate, Meagher & Flom LLP) for Board of Trade of the City of Chicago and Chicago Mercantile Exchange.

Companies: U.S. Futures Exchange, LLC; U.S. Exchange Holdings, Inc.; Board of Trade of the City of Chicago; Chicago Mercantile Exchange

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