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From Antitrust Law Daily, January 7, 2016

Zinc market manipulation claims dismissed

By Jeffrey May, J.D.

The federal district court in New York City has rejected efforts by zinc purchasers to “piggyback” on a pending action alleging market manipulation of another industrial metal—aluminum—to pursue antitrust claims in the zinc market. The court dismissed claims that trading and metals warehouse operating affiliates of Glencore plc, Goldman Sachs Group, Inc., and JPMorgan Chase & Company engaged in a conspiracy to monopolize and otherwise restrain trade in the market of services for zinc stored in warehouses licensed by the London Metal Exchange (In re Zinc Antitrust Litigation, January 7, 2016, Forrest, K.).

Last year, the court permitted industrial users of aluminum to pursue claims against some of the same defendants named in the current suit for conspiring to raise prices for purchases of aluminum. Now, producers of galvanized metal products that purchased physical zinc have brought antitrust claims similar to those raised in the aluminum warehousing litigation. Noting that counsel were largely overlapping for both the plaintiffs and defendants, the court suggested that it was unsurprising that the plaintiffs piggybacked on an early complaint and judicial opinions in the aluminum warehousing case. However, the zinc purchasers apparently did not “learn” from the court’s decisions in the earlier matter, according to the court.

The zinc purchasers attempted to allege anticompetitive activity in the market for London Metal Exchange (LME) warehouse services to manipulate the price of zinc premiums, which are used to create global benchmarks for physical contracts for the delivery of those metals. The plaintiffs alleged that this conduct drove up the price of physical zinc.

“While there are certainly many similarities between this case and Aluminum, the allegations differ in important ways that justify different outcomes as to certain claims,” the court decided. The zinc purchasers did not adequately allege that zinc price movements were due to a plausible antitrust violation, as opposed to parallel or unilateral conduct beyond the reach of that statutory scheme, the court held.

Standing. At the outset, the court ruled that the plaintiffs adequately alleged antitrust standing to pursue their Sherman Act, Section 1 claim. The plaintiffs asserted that they paid higher prices for zinc than they would have paid in the absence of the defendants’ actions. Standing is often limited to consumers or competitors in the restrained market, with some exceptions. The zinc purchasers were neither competitors of any of the defendants nor consumers of their products or services. They did not operate warehouses, did not have commodities trading arms, and did not allege that they directly consume any of defendants’ trading products or zinc warehouse-related products or services.

Although the plaintiffs operated in a separate market, they were the first level of purchasers to pay and be harmed by inflated prices of zinc. Thus, they sufficiently positioned themselves as efficient enforcers of the antitrust laws to pass muster at the pleading stage with respect to their Section 1 claim, according to the court.

The zinc purchasers did not allege standing to pursue Sherman Act, Section 2 claims. Section 2 is concerned with the monopolization of a particular market that raises prices or restricts output in that market, the court explained. Thus, plaintiffs’ alleged injury in the market for physical zinc—a different market than that in which the defendants allegedly conspired to monopolize—was not of the type of injury that Section 2 was intended to prevent, in the court's view.

There were other potential plaintiffs, such as entities that stored their metal at Glencore’s warehouses, that were more appropriately situated to pursue a monopoly claim in the LME zinc warehouse services market. The plaintiffs were simply too remote from that market to have antitrust standing, according to the court.

Inference of anticompetitive agreement or concerted action. Although the plaintiffs alleged standing to pursue a Section 1 claim, they failed to plead a plausible unlawful agreement to support those claims. Among other things, the plaintiffs alleged that JPMorgan, Goldman Sachs and Glencore engaged in parallel conduct when they acquired significant influence over the LME by each acquiring a major metal warehousing operator in 2010. These defendants purportedly used these positions to make warehousing-related policy recommendations to the LME, including with respect to issues such as setting minimum load-out rules and the maximum storage rental rate in LME-certified warehouses. However, the challenged practices were equally consistent with rational economic decision-makers acting independently, in the court’s view. The court also was unconvinced by the “plus factors” alleged to support the conspiracy claims based on parallel conduct, such as the defendants’ opportunity to conspire through their involvement in the LME.

“It hardly seems remarkable to have commodities traders decide—if they can afford it—to buy and hold the commodity to drive up the price,” the court explained. “While this may violate LME rules, financial regulations, or even market expectations, that alone does not render such conduct a violation of the antitrust laws.”

The court also rejected allegations that Glencore-affiliated entities and the Goldman Sachs-affiliated entities entered into an anticompetitive agreement to allocate the markets for zinc and aluminum. There were “simply not enough dots to connect to draw a plausible picture of an agreement.”

A purported hub-and-spoke type conspiracy with Glencore’s Pacorini Metals USA, LLC at the hub, and the Goldman Sachs and JPMorgan trading defendants at the spokes also was inadequately pleaded. The court concluded that the allegations did not support a horizontal agreement among the defendants who made up the “spokes.” The plaintiffs pointed to a so-called “Queue Order Agreement” under which Glencore’s warehouse operator Pacorini released zinc tonnage in a certain agreed upon order. However, the plaintiffs did not plausibly show that such an agreement was unlawful or that it could have caused harm, let alone antitrust injury, to these plaintiffs.

The Section 1 claim was dismissed with prejudice. There was no reasonable prospect that the plaintiffs could do any more to strengthen the claim. Because the plaintiffs relied on the same allegations and theories of an unlawful agreement to support their Section 2 conspiracy to monopolize claim, that claim also was dismissed without leave to replead.

Monopoly, attempted monopoly claims. The court dismissed claims that Glencore “willfully acquired and maintained monopoly power in the market for LME Zinc Warehouse Services in the United States” by owning a substantial majority of warehouses in New Orleans, where most LME-licensed warehouses were located, and alternatively attempted to monopolize the “market for LME-licensed zinc warehousing in the United States.” The plaintiffs’ alleged injury did not arise directly from Glencore’s dominance of the market allegedly monopolized. Moreover, they failed to allege that the defendants engaged in conduct constituting monopoly maintenance.

The plaintiffs were, however, permitted to amend their complaint to replead the monopolization and attempted monopolization claims. The court could not determine at this stage of the proceedings whether any effort to recast these claims would be futile.

This is Case No. 1:14-cv-03728-KBF.

Attorneys: Christopher Lovell (Lovell Stewart Halebian Jacobson LLP) for Duncan Galvanizing Corp. Margaret M. Zwisler (Latham & Watkins LLP) for London Metal Exchange Limited. Chelsea Rebekah McLean (Curtis, Mallet-Prevost, Colt & Mosle LLP) for Glencore Ltd.

Companies: Duncan Galvanizing Corp.; London Metal Exchange Limited; LME Holdings Limited; Hong Kong Exchange & Clearing Limited; Glencore Ltd.; Goldman Sachs Group, Inc.; JPMorgan Chase & Co.

MainStory: TopStory Antitrust NewYorkNews

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