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From Antitrust Law Daily, August 27, 2014

Sovereign immunity shields London Metal Exchange from aluminum conspiracy claims

By Jeffrey May, J.D.

The London Metal Exchange Ltd. (LME)—the self-described “world centre for industrial metals trading”—is immune under the Foreign Sovereign Immunities Act (FSIA) from claims that it participated in a conspiracy to restrict the supply of aluminum, the federal district court in New York City has decided. Although the court “initially found this result somewhat surprising and counterintuitive,” the LME's immunity was “dictated by the prevailing case law.” Therefore, the LME's motion to dismiss for lack of subject matter jurisdiction was granted, and leave to replead was denied (In re Aluminum Warehousing Antitrust Litigation, August 25, 2014, Forrest, K.).

Purchasers of aluminum at purportedly inflated prices alleged a conspiracy to restrain the output of aluminum among the LME, owners and operators of metal storage warehouses, and metals traders, including Glencore, Goldman Sachs, and JP Morgan. According to the plaintiffs, the amount of aluminum stored in LME-certified warehouses had “soared” in recent years. They alleged intentional delays in the defending warehouses’ “loading out” of aluminum. It was alleged that a conspiracy to manipulate so-called warehouse load-out rules restrained aluminum output, thereby increasing prices. All of the defendants had moved to dismiss the claims; however, the court's August 25 decision was limited to the LME's motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1), based on the FSIA.

The FSIA provides that a foreign state is immune from the jurisdiction of U.S. courts unless one of several statutorily defined exceptions applies, the court explained. Thus, in order to be immune from suit under the FSIA: (1) the LME must fall within the definition of a foreign state or an “organ” of a foreign state, and (2) a statutory exception—in this case the “commercial activity” exception—must not apply.

The court ruled that the record compelled the following determinations: (1) the LME was an organ of the U.K. government; and (2) the LME was not engaging in commercial activity when it allegedly manipulated the load-out rules for aluminum.

Organ of foreign state. Although a privately-held and for-profit company, the LME was an “organ” of the United Kingdom, the court ruled. While not formed by the U.K. government, the LME was charged by statute with performing the public function of regulating metals commodities markets, including the market for aluminum warrants.

In addition, the conduct of the LME—including its load-out rules for LME-approved warehouses—was actively supervised by the Financial Conduct Authority (FCA). The FCA regulates the U.K. financial services industry in the United Kingdom and is accountable to the U.K. Parliament through the U.K. Treasury, the court explained.

The plaintiffs pointed out that the FCA had conceded that the “LME’s warehousing arrangements are not directly regulated.” However, supervision may occur in the absence of regulation, it was decided. The court also noted that the U.K. judiciary viewed the LME as acting as a public body.

According to the court, a balancing of the five “Filler factors” tipped in favor of finding the LME an organ of the U.K. government:

(1)

whether the foreign state created the entity for a national purpose;

(2)

whether the foreign state actively supervises the entity;

(3)

whether the foreign state requires the hiring of public employees and pays their salaries;

(4)

whether the entity holds exclusive rights to some right in the [foreign] country; and

(5)

how the entity is treated under foreign state law.

Commercial activity exception. The FSIA does not bar a suit based on the organ of a foreign state participating in the marketplace in the manner of a private citizen or corporation, the court noted. However, the LME’s alleged conduct did not within the “commercial exception” of the FSIA, as the plaintiffs asserted.

Looking to the nature of the challenged activity—a conspiracy to manipulate warehouse load-out rules in order to restrain aluminum output and increase price—it was clear that the conduct that gave rise to the plaintiffs’ claims did not constitute “commercial” activity. The load-out rules were a form of market regulation implemented by the LME, and were therefore regulatory, not commercial, in nature, the court decided.

The plaintiffs' argument that the LME’s arrangements with the warehouses were contractual and therefore necessarily commercial was rejected. “There are numerous instances in which a public organ might use a contractual arrangement to fulfill its public function,” the court explained.

This is Case 1:14-cv-03116-KBF (MDL No. 2481).

Attorneys: Edith M. Kallas (Whatley Kallas LLP), and John G. Emerson, Jr. (Emerson Poynter LLP) for Claridge Products and Equipment, Inc. Robert M. Rothman (Robbins Geller Rudman & Dowd LLP) for Thule, Inc. Daniel E. Becnel, Jr. (Becnel Law Firm, LLC) for River Parish Contractors, Inc. Christopher Lovell (Lovell Stewart Halebian Jacobson LLP), Harold Z. Gurewitz (Gurewitz & Raben, PLC), and James J. Sabella (Grant & Eisenhofer) for Custom Aluminum Products, Inc., and International Extrusions, Inc. Margaret M. Zwisler (Latham & Watkins LLP) and William H. Horton (Giarmarco, Mullins & Horton, PC) for London Metal Exchange Ltd.

Companies: London Metal Exchange Ltd.; Glencore Xstrata plc; Goldman Sachs Group, Inc.; JP Morgan Chase & Co.

MainStory: TopStory Antitrust NewYorkNews

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