Tera Group, Inc. v. Citigroup, Inc.

Background

Plaintiffs Tera Group, Inc., Tera Advanced Technologies, LLC, and TeraExchange, LLC alleged that six financial institutions conspired to prevent TeraExchange from entering the credit-default-swap market. A credit default swap is a financial contract whose value depends on whether a specified company or other entity experiences a credit event, such as a default or credit-rating downgrade.

TeraExchange operated an anonymous trading platform using a central electronic order book. Tera alleged that the defendants refused to trade on or clear transactions made through the platform, prevented inter-dealer brokers from using it, charged high clearing fees for its transactions, and supported trading systems using a request-for-quote process that benefited the defendants. Tera alleged that these actions stopped additional trading on TeraExchange after its first anonymous swap transaction on June 13, 2014.

The case involved two claims: a claim under Section 1 of the federal Sherman Act and a claim under New York’s Donnelly Act. Defendants jointly moved to dismiss the amended complaint under Federal Rule of Civil Procedure 12(b)(6), which applies when a complaint does not adequately state a legally valid claim.

Sherman Act Claim

The court explained that a Sherman Act Section 1 claim based on an alleged group boycott required Tera to plausibly allege an agreement among at least two legally separate entities and an unreasonable restraint of trade. Because Tera characterized the alleged boycott as unlawful by its nature, the central issue was whether the defendants acted pursuant to an agreement rather than independently.

The court found that the amended complaint relied heavily on group allegations. Of the factual paragraphs concerning the defendants’ conduct, only seventeen identified a particular defendant. The remaining allegations generally referred to the defendants collectively and did not explain which defendant took which action or with whom it allegedly conspired. The court concluded that these allegations did not give each defendant fair notice of the alleged conspiracy.

The particularized allegations showed parallel conduct only at a general level: defendants allegedly refused to trade on TeraExchange or clear transactions executed there. The court stated that similar conduct, by itself, does not plausibly establish a conspiracy because businesses may independently make similar decisions in response to the same market conditions.

The court considered three recognized “plus factors,” meaning additional circumstances that may support an inference of an agreement: a common motive to conspire, conduct against the defendants’ individual economic interests, and substantial communications among the firms. The court found that Tera plausibly alleged a common motive because the defendants benefited from the existing request-for-quote system and had an interest in promoting another trading platform. But that motive alone did not imply an agreement, because each defendant could independently choose not to support a platform that threatened its trading profits.

The court also found that the amended complaint no longer included several allegations that had previously provided stronger support for coordinated action. Tera had withdrawn allegations about nearly simultaneous calls by four defendants after the first trade, incomplete audits of Tera’s rulebook, and multiple defendants actually calling TeraExchange a “Trojan Horse.” The remaining allegations about refusals by UBS and Credit Suisse to sign an end-user license agreement and phone calls involving Credit Suisse and JP Morgan did not provide enough detail to show coordination.

The court further found little support for the argument that defendants acted against their own economic interests. Although they may have lost clearing fees by refusing to clear TeraExchange trades, Tera did not allege that those fees exceeded the profits defendants obtained from their own platforms and the broader request-for-quote trading system.

The court therefore held that Tera had not plausibly pleaded a Sherman Act Section 1 conspiracy and granted the motion to dismiss that claim as to all defendants.

Donnelly Act Claim

The court explained that New York’s Donnelly Act is modeled on the Sherman Act and generally uses the same standard for evaluating a well-pleaded antitrust claim. Because the Donnelly Act claim tracked the failed Sherman Act claim, the court granted the motion to dismiss the Donnelly Act claim as to all defendants.

Disposition

The court granted defendants’ motion to dismiss Tera’s Sherman Act claim and Donnelly Act claim and dismissed the amended complaint with prejudice as to all defendants. The court directed the Clerk of Court to terminate the motion and close the case. The order was signed by Richard J. Sullivan, United States Circuit Judge, sitting by designation.