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From Antitrust Law Daily, March 30, 2015

Aluminum purchasers press forward with conspiracy claims against warehouse operators, financial institutions

By Greg Hammond, J.D.

Industrial users of aluminum stated sufficient claims that various warehouse operators and financial institutions engaged in a webbed conspiracy to restrain trade and artificially raise prices for purchases of aluminum for physical delivery by imposing a supra-competitive Midwest Premium. The federal district court in New York partially denied the defendants’ motions to dismiss, finding that the plaintiffs had antitrust standing and adequately alleged an agreement and concerted action among the defendants (In re Aluminum Warehousing Antitrust Litigation, March 26, 2015, Forrest, K.).

Background. Purchasing plaintiffs, consisting of industrial users of aluminum, allege that two groups of defendants—(1) financial institutions with commodities trading arms that trade financial instruments tied to physical metals and (2) operators of warehouses that store metals—conspired to restrain aluminum traded by way of the London Metal Exchange Ltd. (LTD), which is associated with the Platts Midwest Premium. The Midwest Premium reflects current offers for immediately available aluminum for delivery from producers, traders, and holders of warehouse aluminum.

Specifically, the financial institutions allegedly acquired LTD-approved warehouses in or around 2010. They then worked with affiliated warehouses to insure that stocks of aluminum were obtained and maintained at unusually high levels, the plaintiffs asserted, by: (1) slowing the pace of load-outs of aluminum, by using the 1500-metric ton daily requirement for load-outs set by the LME as a de facto maximum for each warehouse owner, and not loading out more than that; (2) increasing the amount of aluminum stored in their warehouses by offering aluminum producers financial incentives to store with them; and (3) entering into agreements with each other and third parties to shuffle aluminum around so as to meet the 1500-metric ton daily load-out requirement.

The commodities trading arms of the financial institutions allegedly assisted in the stockpiling by obtaining large numbers of aluminum warrants; strategically cancelling warrants, thereby delaying load-outs of aluminum legitimately seeking to exit the warehouses; and lobbying the LME not to alter its rules concerning load-out amounts. This horizontally and vertically webbed conspiracy allegedly resulted in higher prices of aluminum.

In their third amended complaint and joint amended complaint, the plaintiffs brought claims for: (1) conspiracy to restrain trade in violation of Section 1 of the Sherman Act; (2) conspiracy to artificially raise prices for purchasers of aluminum for physical delivery by imposing a supra-competitive Midwest Premium; (3) an “LME Combination” in violation of Section 1 of the Sherman Act; and (4) state law claims. The remaining defendants moved to dismiss the third amended complaint and joint amended complaint.

Antitrust standing. The court first concluded that both complaints adequately alleged antitrust injury and that the plaintiffs are efficient enforcers, with regard to the Section 1 conspiracy claims. Specifically, allegations that the defendants’ actions altered the normal competitive price-setting dynamic of aluminum, resulting in an abnormally high Midwest Premium, and that the plaintiffs were forced to pay that premium as part of their purchases of physical aluminum, were sufficient to support an injury of the type the antitrust laws were intended to prevent. The plaintiffs were deemed efficient enforcers because: (1) each plaintiff allegedly bought aluminum directly from a producer, using contract prices tied to the Midwest Premium; (2) the plaintiffs are the first parties in the distribution chain to be affected by fluctuations in the Midwest Premium; and (3) the alleged damages are non-speculative.

Separate entities. Although the financial firm co-conspirators had control over the warehousing defendants and agents affiliated with them, allegations of a web of agreements or understandings between a number of entities from different corporate families was sufficient to satisfy the separate entity requirement.

Relevant market. The complaints alleged two relevant markets—a primary aluminum market and a market for LME-certified warehouse services for aluminum—which contained particular product and geographic characteristics and facts concerning elasticities and substitutability, including domestic and foreign sources of supply, the feasibility of transport, and pricing dynamics. A national market for primary aluminum was also alleged for the plaintiffs’ monopolization claim. The court concluded that these markets were sufficiently alleged at this stage of litigation because the issue is the use of the particular market for LME-certified warehouse services for aluminum insofar as the services offered therein is a necessary and clear component of the Midwest Premium.

Concerted action. Various emails and documents that purportedly demonstrate that (1) Metro International Trade Services LLC was at the heart of the alleged conspiracy and was more active than any other participant and (2) Metro understood and intended that load-out delays would result in an increase in the Midwest Premium, and that JPMorgan Chase’s commodities unit understood that as well, were sufficient to support a conspiracy claim. The motions to dismiss the Section 1 conspiracy claims were therefore denied.

Monopolization claims. The Section 2 conspiracy and monopolization claims both failed, however, because the third amended complaint did not support the allegations that Metro and its Goldman Sachs financial affiliates, alone, would be able to carry out a scheme to knowingly and directly inflate the Midwest Premium and other aluminum prices to increasingly higher levels, or that Metro had or was on the cusp of exercising market power. At most, according to the court, the allegations support Metro’s ability to slow-roll the supply of aluminum from its warehouses owned by others. The Section 2 conspiracy and monopolization claims were therefore dismissed.

State law claims. The motion to dismiss the state law claims was denied to the extent the New York Donnelly Act, California Cartwright Act, and Michigan Antitrust Reform Act claims are analogous to the Section 1 conspiracy to restrain trade claims. However, because the Section 2 Sherman Act claims were not plausibly alleged, the state law claims were dismissed to the extent they are predicated on unlawful monopolization.

The case number is 13-md-2481 (KBF).

Attorneys: Benjamin Martin Jaccarino (Lovell Stewart Halebian Jacobson LLP) for Superior Extrusion Inc. Phillip Timothy Howard (Howard & Associates PA) for Master Screens Inc., and Grace Adrianna Fletcher. Daniel E. Becnel, Jr. (Becnel Law Firm, LLC) for River Parish Contractors, Inc. Azra Zahoor Mehdi (The Mehdi Firm) for Viva Railings, LLC. Benjamin M. McGovern (Holland & Knight, LLP) for GS Power Holdings LLC, and Metro International Trade Services, LLC. Jennifer Lynn Giordano (Latham & Watkins LLP) for London Metal Exchange Ltd. Henry Liu (Covington & Burling LLP) for Henry Bath LLC. John M. Nannes (Skadden, Arps, Slate, Meagher & Flom LLP) for Pacorini Metals U.S.A., LLC.

Companies: Superior Extrusion Inc.; Master Screens Inc.; River Parish Contractors, Inc.; Viva Railings, LLC; GS Power Holdings LLC; Metro International Trade Services, LLC; London Metal Exchange Ltd.; Henry Bath LLC; Pacorini Metals U.S.A., LLC

MainStory: TopStory Antitrust NewYorkNews

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