Seventh Circuit Finds Interlocking Directors Cause No Antitrust Injury To Shareholders

The U.S. Court of Appeals for the Seventh Circuit has rejected a shareholder derivative action on the ground that that the shareholders suffered no antitrust injury from interlocking directorships even though such accumulation of market power may violate federal antitrust law.

The Seventh Circuit reached this conclusion in ordering the dismissal of the complaint in Robert F. Booth Trust v. Crowley, a shareholder derivative action that alleged a violation of the rarely-litigated prohibition on interlocking directorships found in § 8 of the Clayton Act, 15 U.S.C. § 19.

After Sears, Roebuck & Co. merged with Kmart Corp. in 2005, the board of Sears Holdings Corp. inherited directors from both companies.  Two shareholders brought a derivative action claiming a violation of the Clayton Act’s prohibition on interlocking directorships.  William Crowley, a director, also served on the boards of AutoNation, Inc. and AutoZone, Inc, and Ann Reese, another director, also served on the board of Jones Apparel Group, Inc.  The plaintiffs alleged that the consolidated business competes with those other firms in violation of the ban on interlocking directorships. 

The district court denied a motion to intervene by another shareholder, who sought to dismiss the derivative action.  That shareholder appealed to the Seventh Circuit Court of Appeals, which decided, in an opinion by Chief Judge Easterbrook, that the motion to intervene should have been granted, and the derivative action dismissed.

Much of the Seventh Circuit’s opinion focuses on the procedural rules of intervention and the corporate law rules of derivative actions.  However, the court’s ruling hinged on its conclusion that shareholders lack standing to bring a derivative suit for interlocking directorates where the shareholders stand to benefit from the interlock.

The court cites Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) for the antitrust-injury doctrine, stating that “private antitrust litigation is limited to suits by those persons for whose benefit the laws were enacted.”  In the words of Chief Judge Easterbrook, “It seems odd to allow investors, who stand to gain if producers with market power cooperate, to invoke an antitrust doctrine that is designed for strangers’ benefit.” 

The court concluded that “neither plaintiff nor any other investor (in his role as investor) suffers antitrust injury.”  Lacking the essential element of antitrust injury, the antitrust action could not survive.