Antitrust Alert: Judge Easterbrook on Section 8 Director Interlocks and Antitrust Injury
Although Section 8 of the Clayton Act, 15 U.S.C. § 19, which prohibits competing corporations from sharing directors or officers, is an important concern for the business community, the statute has received surprisingly little attention from government enforcers or judicial opinions in recent years. Therefore, when two of the leading antitrust voices on the federal bench – Judges Easterbrook and Posner of the U.S. Court of Appeals for the Seventh Circuit – offer a perspective on Section 8, it is worth noting.
On June 13, 2012, in a unanimous opinion authored by Judge Easterbrook (joined by Judges Posner and Bauer), the Seventh Circuit reversed and remanded with instructions to enter judgment for defendants a shareholders’ derivative suit alleging that Sears Roebuck & Co. violated Section 8 by having on its Board of Directors two individuals who also served on the boards of Sears competitors. Robert F. Booth v. Crowley, No. 10-3285 (7th Cir. June 13, 2012) Specifically, the suit asserted that William C. Crowley served on the boards of AutoNation, Inc. and Auto Zone, Inc. and that Ann N. Reese was a member of the board of Jones Apparel Group, Inc., businesses that allegedly competed with Sears, such that the resulting director interlocks violated Section 8.
In denying a motion to dismiss, the district court had concluded that Section 8 could be enforced through a shareholders’ derivative action even though the alleged coordination with a competitor presumably benefits, rather than harms, the corporation involved. Following this ruling, the shareholder plaintiffs and Sears proposed a settlement under which one of the two contested directors would resign and the plaintiffs’ lawyers would receive up to $925,000 in attorneys’ fees. (As Judge Easterbrook noted, it is not clear how this settlement could resolve the Section 8 issue since one of the director interlocks would remain.) Another Sears investor, Mr. Frank, sought leave to intervene to oppose the settlement and to seek dismissal of the lawsuit.
In ordering dismissal of the derivative suit, Judge Easterbrook reversed the district court and found that neither the plaintiffs (nor any other investor) had suffered the necessary antitrust injury as a result of the alleged Section 8 violation. He also was not persuaded by the argument that the plaintiff shareholders and Sears benefitted from the lawsuit, rejecting their claim that removing the interlocking director from the board eliminated any chance the federal antitrust authorities would file a Section 8 complaint to break up the interlock:
We don’t get it. In order to avoid a risk of antitrust litigation, the company should be put through the litigation wringer (this suit) with certainty? How can replacing a 1% or even a 20% chance of a bad thing with a 100% chance of the same bad thing make investors better off?
Judge Easterbrook then goes on to offer some interesting perspectives about the current state of Section 8 enforcement:
Actually, the chance of a suit by the United States or the FTC is not even 1%. The national government rarely sues under §8. Borg-Warner Corp. v. FTC, 746 F.2d 108 (2d Cir. 1984), which began in 1978, may be the most recent contested case. See ABA Section of Antitrust Law, I Antitrust Law Developments 425-31 (6th ed. 2007). When the Antitrust Division or the FTC concludes that directorships improperly overlap, it notifies the firm and gives it a chance to avoid litigation (or to convince the enforcers that the interlock is lawful). For more than 30 years, this process has enabled antitrust enforcers to resolve §8 issues amicably – either avoiding litigation or entering consent decrees contemporaneous with a suit’s initiation.
Whether the federal antitrust agencies would agree with this assessment is unclear, but Judge Easterbrook’s summary certainly reflects the advice most experienced antitrust attorneys would provide their clients on the risks of Section 8 liability.
Judge Easterbrook summed up his view of the merits of the derivative suit as follows:
In addition to its perspectives on Section 8, this opinion also merits attention for its focus on the role of antitrust injury as a predicate for establishing antitrust liability. It provides a useful reminder of the scrutiny that reviewing courts will apply to antitrust claims and their reluctance to allow such claims to go forward in the absence of a showing that plaintiffs have, in fact, been injured by conduct forbidden by the antitrust laws. In the Section 8 context, this focus on antitrust injury should lower the risk of future derivative actions being brought to challenge direct interlocks.
The suit serves no goal other than to move money from the corporate treasury to the attorneys' coffers, while depriving Sears of directors whom its investors freely elected. Directors other than Crowley and Reese would not have violated their fiduciary duty of loyalty by concluding that these two directors benefit the firm. Usually serving on multiple boards demonstrates breadth of experience, which promotes competent and profitable management. If the Antitrust Division or the FTC sees a problem, there will be time enough to work it out. Derivative litigation in the teeth of the demand requirement and the antitrust-injury doctrine is not the way to handle this subject.
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