As I have previously noted on this site (for example, here), a long-standing and frequently recurring litigation pattern has been the filing of a corporate or securities lawsuit in the wake of an antitrust enforcement action. In the latest example of this pattern, the card payment processing company Visa has been hit with a securities class action lawsuit after the DOJ launched an antitrust enforcement action against the company in September. There are several interesting features to this new lawsuit, as discussed below. The November 20, 2024, complaint against Visa can be found here.
Background
Visa is, according to the securities class action complaint, one of the largest digital payment platforms in the world. Nearly 60% of all debit transactions are processed by Visa. The company has been enormously profitable and enjoys very substantial profit margins. As the complaint also alleges, citing the DOJ’s prior action halting Visa’s planned merger with the digital payments provider Plaid, that “Visa’s market dominance has previously landed it in the crosshairs of federal antitrust regulators.”
On September 24, 2024, the U.S. Department of Justice sued Visa for monopolizing debit payment market. The DOJ’s press release about the action can be found here. In its civil lawsuit, the complaint for which can be found here, the agency alleges four separate violations of the Sherman Antitrust Act. The complaint alleges that the company dominance of the debit payment processing market is the result of allegedly anticompetitive actions designed to prevent smaller competitors from gaining market share and competing with Visa. Visa, the complaint alleges, uses its existing monopoly position to freeze out competition and to coerce merchants to exclusively use its payment processing platform, thereby allegedly causing harm to consumers. The suit characterizes Visa’s actions as “willful” and “unlawful.” The suit seeks a variety of remedies including permanent injunctions against the anticompetitive actions, such as coercive contract structures, that enable Visa to collect such high profits.
The Securities Lawsuit
On November 20, 2024, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Visa and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased Visa’s securities between November 16, 2023, and September 23, 2024.
The complaint alleges that while the company’s SEC filings warned about the risks the company faces from litigation and regulatory action, the company’s disclosure documents “fail to disclose that the Company was in violation of federal antitrust law, and therefore subject to lawsuits and penalties from by federal agencies.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
Discussion
Follow-on securities litigation in the wake of an antitrust enforcement action is an established phenomenon. 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.
In addition, 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.
While plaintiffs’ securities lawyers have shown an interest in pursuing these kinds of follow-on claims, that does not mean that the cases have been particularly successful; indeed, many of them have in fact been dismissed outright, and, as I have previously noted, the dismissals arguably represent a strong signal that merely because a company is caught up in antitrust proceedings does not mean that the company has committed or is liable for securities fraud. Indeed, some courts have evinced a skepticism of the plaintiff’s efforts to try to “piggyback” a securities fraud claim onto allegations of antitrust misconduct.
The attempt to translate 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. In other words, the follow-on suit transforms a matter that would not trigger the policy into something that does trigger the policy. The follow-on suits accordingly are a phenomenon that should be of concern to D&O insurers.
With respect to this particular lawsuit, it has only just been filed and it remains to be seen how it will fare. However, it does seem worth noting that the disclosure documents the complaint quotes do seem to undercut many of the plaintiff’s allegations; at a minimum, the disclosure seems inconsistent with the plaintiff’s liability theory. For example, the complaint quotes the company’s 2003 Annual Report as saying, in a section headed “We may be adversely affected by the outcome of litigation or investigations,” that “in the event we are found liable or reach a settlement in any action, particularly in a large class action lawsuit, such as one involving an antitrust claim entitling the plaintiff to treble damages in the U.S., or we incur liability arising from a government investigation, we may be required to pay significant awards, settlements, or fines.” In other words, the disclosure document specifically raised potential threat to the company of an antitrust lawsuit.
The other thing about the complaint is that it quotes extensively from the government’s antitrust complaint’s allegations about the company’s market share and how the company was able to use its market position to produce huge profits. Presumably, the company’s market clout and profitability were an important reason an investor would consider investing in the company. The fact that the company was an effective competitor presumably was one of the reasons it was an attractive investment. It seems ironic for the class action complaint to now cite the company’s profitability and competitive success as evidence of securities fraud, especially since the company did expressly raise the possibility that it might face antitrust claims.