U.S. Futures Exch., L.L.C. v. Bd. of Trade of Chi., Inc.

953 F.3d 955

U.S. FUTURES EXCHANGE, L.L.C., et al., Plaintiffs-Appellants,

v.BOARD OF TRADE OF THE CITY OF CHICAGO, INC., et al., Defendants-Appellees.

No. 18-3558

United States Court of Appeals, Seventh Circuit.

Argued December 13, 2019

Decided March 23, 2020

Rehearing and Rehearing En Banc Denied April 23, 2020^*

Kenneth M. Kliebard, Attorney, Morgan, Lewis & Bockius LLP, Chicago, IL, Stephanie Schuster, Attorney, David B. Salmons, Attorney, Morgan, Lewis & Bockius LLP, Washington, DC, for Plaintiffs - Appellants.

Albert L. Hogan, III, Attorney, William E. Ridgway, Attorney, Lindsey Sieling, Attorney, Gretchen M. Wolf, Attorney, Skadden, Arps, Slate, Meagher & Flom LLP, Chicago, IL, Jonathan Lee Marcus, Esq., Attorney, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, for Defendants - Appellees.

Before Manion, Kanne, and Brennan, Circuit Judges.

Manion, Circuit Judge.

This antitrust case comes to us from the commodities and futures marketplace. As USFE tells it, Defendants torpedoed its new futures exchange by delaying the regulatory approval process and enacting an internal rule that deprived the new exchange of liquidity. The real question is whether Defendants violated the antitrust laws in doing so. We hold they did not.

I. Background

In the early 2000s, U.S. Exchange Holdings, Inc., and its subsidiary U.S. Futures Exchange, L.L.C. (together, "USFE"), set out to offer a then-novel electronic-based futures trading platform. Electronic trading posed a direct competitive threat to entrenched exchanges that utilized the more traditional but less efficient floor-trading model, like the Board of Trade of the City of Chicago, Inc. ("CBOT.")

USFE targeted February 1, 2004, as its launch date. That would have given USFE about a month to establish itself before a number of futures and options contracts were set to expire, at which time traders could transfer their business from CBOT and elsewhere to USFE. Before it could begin operations, however, USFE needed to be approved as a designated contract market ("DCM") by the Commodity Futures Trading Commission. USFE filed its DCM application in July 2003 and hoped for fast-track approval by mid-November.

The Commission solicited public comment as part of the application review. CBOT and another futures exchange, Chicago Mercantile Exchange Inc. ("CME"), raised fifty-four objections to USFE's application. Many other members of the public submitted critical letters and raised objections, too. At the close of the comment period, the Commission set a public hearing on USFE's application for December 17, 2003. But before the hearing could convene, Defendants CBOT and CME requested the matter be postponed due to scheduling conflicts. The Commission obliged.

In the background, USFE approached the Board of Trade Clearing Corporation ("BOTCC") to negotiate an agreement for clearing services.¹ This would have provided USFE with access to essential startup liquidity in the form of open interest created by market participants and held at BOTCC.² The problem for USFE was that CBOT also used this clearinghouse. Once it caught wind that USFE intended to contract with BOTCC, CBOT proposed a new exchange rule—Rule 701.01—to the Commission for approval. The Commission approved the rule after more than a month of deliberation. Rule 701.01 compelled the transfer of CBOT's open interest from BOTCC to its new, exclusive clearing partner: CME.³ By draining its open contracts from BOTCC, CBOT deprived USFE of access to a significant amount of liquidity.

The Commission finally approved USFE as a DCM on February 4, 2004, and USFE launched on February 8. According to USFE, the delay—attributable to Defendants—caused such uncertainty that market participants were unable and/or unwilling to trade on the new exchange. The exchange flopped.

USFE sued Defendants for violating the Sherman Antitrust Act and related state common law prohibitions against tortious interference. The case spent fifteen years in federal district court before reaching us. After multiple amended complaints and motions to dismiss, a venue change, on-and-off discovery, three rounds of summary judgment briefing, and reassignment to a new district judge, the matter culminated in summary judgment for Defendants. USFE appeals.

II. Discussion

We review summary judgment de novo , asking whether a genuine dispute exists over any material fact. Kopplin v. Wis. Cent. Ltd. , 914 F.3d 1099, 1102 (7th Cir. 2019).

USFE's antitrust claims can be divided into two theories. The first is the "delay theory," whereby Defendants flooded the Commission with frivolous objections in order to stall DCM approval and harm USFE. Second, in the "open interest theory," Defendants conspired to deprive USFE of liquidity by transferring CBOT's open interest from BOTCC to CME.⁴ We address each theory in turn.

A. Delay Theory: Noerr-Pennington and its Exceptions

In connection with USFE's DCM application, Defendants filed fifty-four objections (most, considered but rejected by the Commission) and submitted letters requesting the December 2003 hearing on USFE's application be postponed. Defendants engaged in this petitioning despite their apparent belief that USFE's application would be approved eventually.

The district court held this petitioning immune from antitrust liability under the Noerr - Pennington doctrine.⁵ The doctrine "extends absolute immunity under the antitrust laws to businesses and other associations when they join together to petition legislative bodies, administrative agencies, or courts for action that may have anticompetitive effects." Mercatus Grp., LLC v. Lake Forest Hosp. , 641 F.3d 834, 841 (7th Cir. 2011) (internal quotation and citations omitted). The doctrine flows from First Amendment origins: antitrust laws do not supersede the people's right to petition their government in favor of a desired monopoly. See id. at 841–42 (citing Premier Elec. Constr. Co. v. Nat'l Elec. Contractors Ass'n, Inc. , 814 F.2d 358, 371 (7th Cir. 1987) ). Noerr - Pennington immunity is not absolute, however. Exceptions exist for petitioners who present fraudulent misrepresentations or bring sham lawsuits.⁶ USFE invokes both.

i. The "Fraudulent Misrepresentations" Exception

Fraudulent misrepresentations made in an adjudicative proceeding before an administrative agency are not protected from antitrust liability. Mercatus , 641 F.3d at 842. Those made in a legislative, political setting, however, enjoy immunity. Mercatus identifies five considerations to weigh when drawing the line between legislative and adjudicative proceedings for Noerr - Pennington purposes: (1) the general nature of the authority exercised by the agency; (2) the formality of the agency's fact-finding process; (3) the extent to which fact gathering is subject to political influence; (4) whether the agency received any testimony made under oath, affirmation, or penalty of perjury; and (5) whether the agency acted ultimately as a matter of discretionary authority or instead acted in accordance with more definite standards subject to judicial review. Id. at 845–46. This is a threshold inquiry; the fraud exception "does not apply at all outside of adjudicative proceedings." Id. at 844.⁷

Applying Mercatus 's factors here, we conclude the district court classified the Commission's DCM application review process properly as legislative instead of adjudicative. First , we consider the nature of the Commission's authority when it reviewed USFE's application. The Commission's DCM review process mirrors its public rulemaking function, which includes entertaining ex parte meetings on proposed rules, providing notice to the public, and seeking comment before promulgating, amending, or repealing a rule.

In certain circumstances not present here, like when reviewing a decision to deny a DCM application, the Commission adjudicates. Blurring this line, USFE interprets the Commission's review of a denied application and the Commission's initial assessment of a DCM application as "different phases of the same proceeding." (Reply Br. at 4.) The regulations reflect the opposite. The procedures governing initial designation are found at subpart 38.3. And as encompassed by part 38, the designation procedures apply only to "every board of trade that has been designated or is applying to become designated as a contract market ...." 17 C.F.R. § 38.1 (emphasis added). They do not apply to boards that have applied but were denied designation. Instead, when the Commission denies a DCM application, the aggrieved party may initiate review of the denial through a new, distinct proceeding subject to the Commission's Rules of Practice, which govern "adjudicatory proceedings." 17 C.F.R. §§ 10.1, 10.1(a).⁸ These Rules contemplate filing a complaint and notice of hearing, see §§ 10.21, 10.22, filing an answer, § 10.23, discovery, §§ 10.42, 10.44, and motions practice, § 10.26. An administrative law judge presides over all proceedings covered by the Rules, § 10.8, evidence must meet admissibility standards, § 10.67, and in stark contrast to the DCM application review process, ex parte communications are prohibited and even sanctionable, § 10.10.

The Rules of Practice employ many signature adjudicative features, yet none applied to the Commission's review of USFE's application. The regulations illustrate a clear dichotomy between the process for reviewing DCM applications and that for reviewing denials. We reject USFE's attempt to bring the two under the same roof.

Second , the Commission utilized an informal fact-finding process. Although the Commission compiled a "record," the contents of that record were not bound by any "strict rules of relevance and admissibility" as if before a court or other adjudicative body. Mercatus , 641 F.3d at 845. The Commission was "free to base its actions on information and arguments that [came] to it from any source," including information, opinion, and argument submitted by the public. Metro Cable...