In prior posts on this site (for example, here), I have noted the phenomenon of directors’ and officers’ liability claims arising in the wake of antitrust enforcement actions. These follow-on civil actions arguably represent one part of an increasing trend toward trying to hold individual directors and officers accountable for their companies’ antitrust violations. According to a recent paper, as a result of trends in relevant doctrines and enforcement policies, the risk to directors and officers from these developments is “likely to continue rising in the foreseeable future.” In his February 12, 2020 paper entitled “D&O Liability for Antitrust Violations” (here), University of Arizona Law Professor Barak Orbach details the developments contributing to these trends and reviews the implications for director and officer liability. Professor Orbach’s paper raises a number of interesting considerations, particularly from an insurance perspective, as discussed below.
Increased Focus on Individual Liability
Professor Orbach’s observations about antitrust liability arise within the larger context in which regulatory and enforcement authorities increasingly are focused on holding corporate directors and officers accountable for their involvement in corporate wrongdoing – as reflected, for example, in the U.S. Department of Justice’s Yates Memo. These accountability efforts focus not only on the individuals’ direct involvement in the wrongdoing but also on their alleged failures to detect, prevent, corporate wrongdoing. Oversight responsibilities are, Professor Orbach notes, an increasing important part of the DOJ’s antitrust enforcement guidelines.
Sources of Individual Liability for Corporate Antitrust Violations
Potential director and officer liability for corporate antitrust violations can be found in three sources: the antitrust laws themselves; general corporate law; and the federal securities laws. Under the antitrust laws, the individuals who formulated, negotiated, authorized, directed or executed policies or agreements that constituted steps in an antitrust violation may be criminally and civilly liable for the violation. Under the general corporate laws, individuals who were aware of the violations or who failed to make good faith efforts to oversee material risks and compliance with applicable laws may be held liable for losses caused by the unlawful acts. Under the securities laws, individuals may be held liable for material misrepresentations or omissions concerning antitrust risk.
In his paper, Professor Orbach details the specific provisions of the federal antitrust laws that are the basis of individual antitrust liability. He also reviews the important areas of corporate law contributing to individual liability for a corporation’s antitrust violations, including under the Caremark duty of oversight, as recently embellished by the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill (about which refer here and here).
Professor Orbach also reviews in detail the bases on which underlying antitrust enforcement actions have led to follow-on securities class action litigation. As he notes, “where an antitrust action claims that a company engaged in wrongful anticompetitive conduct, the question is whether past representations about competition and legal risk were adequate.” In recent years, he notes, “the initiation of antitrust actions has triggered securities class action lawsuits against companies and their senior executives.”
Individual Directors’ and Officers’ Defenses and Protections
As Professor Orbach discusses, while individual directors and officers can be subject to claims based on their companies’ alleged antitrust violations, the individuals do have a variety of defenses and protections. These defenses and protections include the business judgment rule; exculpatory clauses; indemnification; advancement; and insurance. The business judgment rule and exculpatory clauses provide defenses to liability. Indemnification, advancement, and insurance provide the individuals with protection against the costs of defense and liabilities in the form of settlements and judgments.
D&O insurance can be an important part of the protections available to corporate officials who are targeted for their company’s antitrust violations. However, as Professor Orbach notes, these policies frequently contain exclusions for criminal misconduct.
Increased Emphasis on Oversight Duties
In his conclusion, Professor Orbach notes that changing attitudes toward corporate wrongdoing and an increasing emphasis on holding individuals accountable have “affected the expectations for D&O oversight of antitrust risks.” Until recently, the focus has been on individuals who participated in the alleged violations.
However, more recently, enforcement authorities are focused on the corporate officials’ general oversight responsibilities and the extent to which their companies have adopted, maintained and overseen corporate compliance programs. Parallel developments in corporate and securities laws “have further reinforced the growing expectations for oversight of antitrust compliance and require D&O to meet heighted oversight responsibilities.”
The value of Professor Orbach’s overview of potential director and officer antitrust liability is his insight that the liability can arise not just under the antitrust laws themselves, but under the general corporate laws and the securities laws as well. His discussion about the potential liabilities arising under the duty of oversight principles, as recently elaborated under the Delaware Supreme Court’s Marchand decision, is particularly helpful in showing the ways that individuals can be held liable under for their company’s antitrust violations. As he notes, “D&O already face an increased risk of such liability and that this risk is likely to continue growing.”
One particular aspect of Professor Orbach’s analysis that is worth emphasis is his discussion of the ways in which underlying allegations of antitrust wrongdoing can lead to securities class action litigation. In numerous prior posts, I have discussed specific situations in which companies caught up in antitrust enforcement actions can become the target of follow-on securities litigation.
For example, as discussed here, numerous companies in the poultry production industry were hit with follow-on securities lawsuits, after a number of companies in the industry were targeted with private antitrust litigation alleging that companies in the industry had engaged in price-fixing.
Similarly, as discussed here, a number of generic drug companies were hit with securities suits after news that the federal antitrust authorities were pursuing criminal antitrust charges against certain companies in the industry on price-fixing charges.
Similarly, plaintiffs’ lawyers initiated a number of securities suits against auto parts companies (refer, for example, here) following news that the DOJ and the EU were investigating companies in the auto parts industry for possible collusion and price-fixing.
Other examples of cases where securities class action lawsuit followed in the wake of antitrust enforcement activity include the securities suit filed against Reddy Ice Holding and certain of its directors and officers (about which refer here), as well as the securities suit filed against Horizon Lines and certain of its directors and officers (refer here).
The translation of antitrust enforcement actions into potential liabilities under the securities laws has significant implications from a D&O insurance perspective. Under most public company D&O insurance policies, the policies’ entity coverage extends only to securities claims. Many antitrust enforcement actions target the entity; but antitrust enforcement actions against the corporate entity would not trigger the D&O insurance policies’ entity coverage. A securities claim against a publicly traded company typically would trigger the company’s D&O insurance policy’s entity coverage.
To be sure, Professor Orbach’s paper was focused on individual liability for antitrust violations, as opposed to entity liability. All else equal, an antitrust enforcement action against an individual presumptively would trigger the D&O insurance policy.
There are of course a number of policy provisions that potentially could be applicable. For example, as Professor Orbach notes, the policy’s criminal conduct exclusion at least potentially could be in play. However, in the current era, most criminal misconduct exclusions are not triggered by mere allegations; the exclusion only operates to preclude coverage upon a final adjudication that the precluded conduct actually happened. Thus, in most instances, the D&O insurance would be available to defend individuals from the underlying allegations, as well as any follow-on civil claims.
There is an additional D&O insurance coverage issue that needs to be discussed when it comes to potential antitrust liabilities, and that has to do with the antitrust exclusion that can be found in the base forms of many private company D&O insurance policies. In that regard, it is worth noting that there is nothing about the antitrust laws that limits their reach just to publicly traded companies. A private company very much could be the subject of antitrust allegations from enforcement authorities as well as in private enforcement actions.
Were a private company and its directors and officers to be hit with either a regulatory or private antitrust action, the presence of an antitrust exclusion could very much affect the availability of coverage. The important thing to note about these kinds of exclusions when it comes to policy placement is that even though many insurers have an antitrust exclusion in their base forms, many of the insurers will upon request remove these exclusions by endorsement, or at least offer some amount of sublimited antitrust coverage. Other insurers will at least limit the exclusion to the entity only or specify that the exclusion does not apply to defense expense. The important thing is to be aware if the policy has an antitrust exclusion, in order to address the exclusion at the time of policy placement.
One last thing to keep in mind about the antitrust exclusion is that though we refer to it as “the antitrust exclusion” for shorthand purposes, the exclusion itself often is about much more than just claims arising under the antitrust laws as such. Frequently, these exclusions are broadly written and potentially sweep all sorts of other claims, including, for example, claims deceptive trade practices, unfair trade practices, or restraint of trade.
Not only do these exclusion sweep more broadly than just antitrust issues, but the exclusions are often written on a broad “based upon, arising out of” basis, extending the exclusion’s coverage preclusive reach even further. These considerations even further underscore the importance for private company insurance buyers to try to address the antitrust exclusion at the time of policy placement.
The bottom line is that, as Professor Orbach emphasizes in his paper, antitrust liability represents a growing area of personal risk for corporate directors and officers, and this risk is likely to continue rising for the foreseeable future. Accordingly, it is increasingly important that these considerations are taken into account when D&O insurance coverage is put in place.