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:
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.
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.
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