The Arguments for and Against the Deputization Theory
Despite a steady drumbeat of statements and press releases from the Agencies about their reinvigorated commitment to enforcing Section 8, the Agencies have so far declined to explain the reason for their view that Section 8 reaches indirect interlocks. Thus, absent any recent explanation from the Agencies, the best explanation we have comes from a 2003 amicus curiae brief that the DOJ filed in a private litigation, which set forth the DOJ’s arguments (as of then) as to why Section 8 reaches indirect interlocks.
Arguments From Section 8’s Plain Language
The first argument in support of the deputization theory comes from the language of the Clayton Act itself. Section 8 prohibits a “person” from simultaneously “serv[ing] as a director or officer” in two competing corporations. The DOJ’s 2003 amicus brief points out that the Clayton Act specifically defines the term “person” “to include corporations and associations.” Given this definition, DOJ argues, the reference to “persons” in Section 8 must reach not only natural persons, but also corporations. Thus, the DOJ reasons, because a corporation can only act through a human being acting as its agent, a corporation violates Section 8 by having any two of its agents serve as directors on two competing boards.
This argument fixates on the subject of Section 8’s operative sentence, but ignores the sentence’s predicate. Even if a corporation can be a “person” for purposes of Section 8 this does not mean that the term always includes corporations. Section 8 only forbids persons from “serv[ing] as a director or officer” of two competing corporations at the same time. It is unclear how a corporation could meaningfully “serve” as a director. Under Delaware law, for instance, only a “natural person” may serve as a member of a corporate board of directors. Given this “serv[ing]” requirement, we would argue that the better reading is that Section 8 should only be violated through direct interlocks.
Arguments That Congress Could Have Written Section 8 Differently
The next argument from the DOJ’s 2003 brief is that, if Congress had wanted to limit Section 8 to direct interlocks, “it easily could have done so.” For example, DOJ argues that Congress could have written Section 8 to apply to “No natural person” rather than to “No person.” Alternatively, Congress could have written Section 8 to say something like “No officer or director in one corporation shall, at the same time, serve as an officer or director of a competing corporation.”
The problem with this argument is that it cuts both ways. For example, if Congress had wanted Section 8 to unambiguously reach indirect overlaps, then it could have written Section 8 to say something along the lines of “No person shall, at the same time, serve or have its agents serve as a director or officer in competing corporations.” Or, Congress could have eschewed the “serv[ing]” requirement altogether, so that Section 8 would say that “No person shall, at the same time, employ, supervise, appoint, control, or direct a director or officer in two competing corporations.”
There is no question Congress could have written a clearer statute. But Congress’s failure to do so cuts neither in favor of nor against either interpretation of Section 8.
Arguments From Legislative Purpose
The DOJ dedicated much of its 2003 amicus brief to arguing that the deputization theory promotes Section 8’s underlying legislative purpose. Quoting a Second Circuit decision from 1977, the DOJ argued that “Section 8 has a ‘prophylactic purpose’ to ‘nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates.’” This broad, prophylactic purpose, DOJ argues, would be undermined if a single firm could circumvent the ban on interlocks by designating separate individuals to serve as representatives on competing boards.
The problem with this argument is that, while Section 8 certainly serves a broad prophylactic purpose, it also is quite clearly a bright-line rule striking a measured balance between countervailing interests. On its face, Section 8 is an intentionally limited statute. It applies to interlocks only at the “director or officer” level, meaning that it does not reach interlocks among lower-level executives or employees—even though interlocks at lower organizational levels (e.g., a pricing analyst working part-time for two competitors) can pose the same competitive concerns as interlocks higher up the chain. Section 8 has a one-year grace period for situations where two companies become competitors only in the middle of an interlocking director’s term. Section 8 also includes three different safe harbors, namely, where (i) either corporation’s competitive sales are less than $4,525,700; (ii) either corporation’s competitive sales are less than 2% of its total sales; or (iii) each corporation’s competitive sales are less than 4% of its total sales. The limited scope of Section 8, the grace period, and these safe harbors all show that Congress was concerned about unduly burdening businesses for interlocks that would only have a de minimis impact on competition.
The implicit reason for all these limitations is that, while unfettered interlocks can harm competition, compliance with Section 8 also comes with costs. Every time Section 8 disqualifies a director from serving on a company’s board, it deprives the company of that director’s wisdom, resources, business judgment, outside relationships, and institutional knowledge.
On a cost-benefit basis, the deputization theory increases the costs of complying with Section 8 considerably. Because the deputization theory disqualifies not just individuals but entire organizations from having representation on boards, the deputization theory imposes a far greater cost to companies in terms of talent and relationships than a narrow reading of Section 8 would impose. At the same time, the incremental benefits to competition that the deputization theory achieves are far less clear than the benefits achieved from a narrow reading of Section 8. The concern with direct interlocks is that an individual who serves as a director of two competitors will be exposed to the competitively sensitive information of both companies, and the information that the director learns from one competitor may be shared with or have some influence on the director’s decision-making for the other competitor. Even if that individual wanted to treat each company independently, they cannot “unknow” information that has already been learned from service on the competitor’s board. But with an indirect interlock, the concern is that when a firm appoints one individual to the board of one competitor and another individual to the board of a different competitor, the two individuals will turn around and share everything they learn about the two companies with one another. But this sharing of information is unlikely—it would require violating the directors’ fiduciary duties to the two corporations, and it may well run afoul of Section 1 of the Sherman Act. In economic terms, the deputization theory therefore achieves “diminished marginal returns” in its value to competition compared to a straightforward reading of Section 8, and it does so at a much greater cost.
With Section 8, Congress imposed a modest cost to businesses in the name of antitrust prophylaxis. But it does not necessarily follow that Congress wanted antitrust prophylaxis to be had at any price. Instead, Congress carefully drew a bright-line rule, and it undermines Congress’s intent for the Agencies to extend this bright-line rule any farther than it was drawn.
Arguments from Legislative History
Notably, the 2003 amicus brief was silent about Section 8’s legislative history. Based on the House and Senate reports on the adoption of the Clayton Act, however, it appears that Congress’s singular concern in enacting Section 8 was the elimination of direct overlaps. Most notably, in the House debates on the Clayton Act, Representative John Nelson of Wisconsin criticized the Clayton Act on grounds that, in his view, the Act was too permissive and did not go far enough to cure competitive harms. With respect to Section 8 specifically, Congressman Nelson argued:
We are told also that a great reform is accomplished by the prohibition of interlocking directorates. But this part of the bill has no great terrors for Wall Street. It is merely an annoyance. Instead of dealing with the real evil, the interlocking control of competing corporations, which grows out of common stock ownership, it deals only with one manifestation of this evil, the acting of the same men as directors of two or more corporations. The common stock ownership is allowed to continue. The interlocking control may still be exercised through dummy directors, voting trusts, or in any other manner than that of interlocking directorates.
Congressman Nelson’s words thus provide direct evidence that at least one contemporary member of Congress believed that Section 8 would only prohibit “the acting of the same men as directors of two or more corporations” and would not reach, in Nelson’s colorful phrase, “dummy directors.” This undermines not only the DOJ amicus brief’s argument from Section 8’s plain language, but it also undermines the brief’s argument that Congress could have chosen different words if it wanted to. Moreover, the fact that this reading came from a member of Congress who opposed the Clayton Act on the ground that it did not go far enough answers the amicus brief’s argument from legislative purpose, because it shows that Congress deliberately did not intend for Section 8 to impose open-ended costs on businesses. Instead, Congress drew a bright-line rule to achieve some limited benefits to competition, while deliberately falling short of a much broader, costlier vision.
Another important fact from legislative history is that, in 1990, the House Judiciary Committee released a report on Section 8, which in no uncertain terms stated that “Section 8 only regulates direct interlocks.” This report is especially significant because 1990 is the last time that Congress meaningfully revised Section 8. The 1990 revision was the source of Section 8’s safe-harbor exceptions as well as its carve-out for trust companies, both of which evince a Congressional intent for Section 8 not to apply in cases of de minimis competitive harm. The fact that the most recent Congress to reform Section 8 officially understood the law to “only regulate[ ] direct interlocks” provides a further answer to the argument that Congress could have chosen different words to express its intent.
It bears acknowledgment, however, that legislative history is at best an imperfect indicator of Congressional intent. As the Supreme Court has said, comments by an individual legislator “are frail substitutes for bicameral vote upon the text of a law and its presentment to the President.” Moreover, a partial answer to the 1990 House Judiciary Committee Report is the principle that “the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one.” Finally, in fairness, there is plenty of legislative history from the 1914 record—including Congressman Nelson’s statement above—showing that the Clayton Act reflected an overarching legislative concern with the consolidation of corporate power into the hands of a small number of large corporations, which proponents of the deputization theory can certainly cite as support for their argument from legislative intent.
What Courts Have Said About the Deputization Theory
Having considered the arguments for and against the deputization theory, the next question is how courts have considered the deputization theory in the context of specific cases. Litigated cases under Section 8 are quite rare, and litigated cases under the deputization theory are even rarer. We are aware of only three cases that discuss the deputization theory in any meaningful way.
United States v. The Cleveland Trust Co.
First, in United States v. The Cleveland Trust Co., the DOJ brought a lawsuit alleging that the defendant—a trust company before the 1990 revision to Section 8—violated Section 8 by designating its former Chairman and CEO (“Individual 1”) and its former Executive Vice President (“Individual 2”) to sit on the boards of three competing manufacturing companies (Companies “A,” “B,” and “C”). Individual 1 sat on the board on Company A, and Individual 2 sat on the boards of Companies B and C. This case therefore involved claims of both a direct interlock (as between Companies B and C) as well as an indirect interlock (as between Company A, on the one hand, and Companies B and C, on the other).
Two facts were critical to the case. First, between the filing of the case and the court’s decision on the defendant’s motion to dismiss, Company C, for reasons unrelated to the litigation, divested its business unit that posed any competitive overlap with Companies A and B; accordingly, the court ruled, the issue of the direct interlock involving Company C had been rendered moot.
Second, with respect to the alleged indirect interlock under the deputization theory, by the time of the DOJ’s lawsuit, Individual 2 had already retired as an employee of the defendant trust company. After retiring, Individual 2 spent a year as a “consultant” for the defendant. By the time of the court’s decision, however, Individual 2 no longer had any formal ties with that company. Given this timing, the court held that Individual 2 was no longer the defendant’s deputy:
It may well be that [Individual 2] remains tied to defendant through a deep sense of good feeling, and continues to retain close contact with many of defendant’s present personnel. Such informal links, however, are clearly not sufficient to demonstrate a continuing principal-agent relationship.
However, rather than find that the issue of the indirect interlock had been rendered moot with respect to Individual 2, the court instead considered more broadly whether the defendant corporation might remain in a position to violate Section 8 in the future. The court began by noting that the DOJ’s “deputization” claim presented a “novel theory” of law, which “apparently has never been decided by any court.” Rather than decide the validity of the deputization theory, however, the court instead held that “the issue of deputization is a question of fact to be settled case by case.”
In a telling passage, the court observed that the DOJ “is not arguing here that the mere fact that both [Individuals 1 and 2] were officers of defendant necessarily means that they were serving … as defendant’s ‘deputies’ or ‘agents.’” In other words, the DOJ believed that deputization would require a bona fide agent-principal relationship evidenced by case-specific facts, rather than applying per se whenever two individuals are officers of the same organization.
Square D Co. v. Schneider S.A.
Next, in Square D Co. v. Schneider S.A., a company (Square D) invoked Section 8 defensively in a proxy fight to try to prevent another company (Schneider) from placing its nominees on the Square D board. Square D sued under the antitrust laws to enjoin Schneider’s efforts, arguing that Schneider owned a subsidiary that competed with Square D. Schneider’s board nominees in the proxy fight were all employees, officers, or directors of Schneider. As a consequence, Square D argued, those employees were “agents” of Schneider and thus were barred from serving on the Square D board under Section 8.
Schneider moved to dismiss, arguing that Section 8 applies only to individual officers and directors, and not to corporate agents. The court began “by looking to the policies underlying § 8.” In the court’s view, Section 8 created a “prophylactic rule designed to avoid potential antitrust violations before they occur.” In light of this prophylactic purpose, the court “decline[d] to read [Section 8] as literally as the defendants suggest.” The court reasoned:
If such a literal reading were adopted, it would be easy for a company to interlock with a competitor and yet evade § 8 liability simply by calling its agents on the competitors’ board something other than either officers or directors. Such a result would exalt form over substance, contrary to the intent of Congress in enacting the antitrust laws.
Instead, the Court drew the following line:
[A] cause of action under § 8 is stated where a company attempts to place on the Board of a competitor individuals who are agents of, and have an employment or business relationship, with such company. . . . In the view of this Court, § 8 would not be implicated where a competitor seeks the election of an “agent” . . . who does not otherwise have a business relationship—such as that of officer, director or employee—with the firm promoting his election.
Importantly, as this decision arose on a motion to dismiss, the Court framed its opinion as tentative, being made for purposes of “this early procedural stage of the case.” Ultimately, the dispute between Square D and Schneider was resolved on non-Section 8 grounds, after Schneider dropped its proxy fight and acquired Square D through a negotiated agreement. Therefore, the court’s whole opinion on Section 8 is arguably dicta, which can be explained away based on the early posture of the case. But to the extent that Square D does lend weight to the deputization theory, at the very most, it stands for the proposition that Section 8 deputization can exist by appointing an individual who has “an employment or business relationship” with the appointing entity, but that deputization does not exist by appointing an individual who lacks such a relationship.
Reading International, Inc. v. Oaktree Capital Management LLC
Finally, in Reading International, Inc. v. Oaktree Capital Management LLC, the owner and operator of a New York City movie theater sued certain asset management companies that owned two competing movie theater chains, alleging that the defendants had conspired to monopolize the movie theater market in lower Manhattan to the injury of plaintiffs. Among other claims, the plaintiffs alleged that one particular defendant, Oaktree, had violated Section 8 by appointing two separate individuals—Oaktree’s President and a board member, respectively—to serve on the boards of the two competing movie theater chains. Oaktree argued that Section 8 could not reach such an indirect interlock because, in Oaktree’s view, the plain language of Section 8 speaks in terms of “serv[ing]” as an officer or director, which only a natural person can do.
In answer to this argument, the plaintiffs proposed a hypothetical that resonated with the court. The court’s description of the hypothetical bears repeating in full:
A powerful director of Corporation A—call him Gepetto—wishes to be a director of competing Corporation B, and is in a position to influence the election of directors. Mindful of section 8, however, he knows that he cannot openly take a seat on Corporation B’s board. Instead, he enlists a trusted associate—Pinocchio—and engineers his election as a director of Corporation B. It is expressly agreed that Pinocchio will vote as directed by Gepetto on all matters arising before the board; indeed, we can even imagine that Pinocchio will wear a secret radio device that will permit Gepetto to hear everything that goes on at Corporation B’s board meetings, and instantaneously transmit instructions to Pinocchio. In such a situation, plaintiffs ask, can it not be said that Gepetto actually “serves as a director” of both Corporation A and Corporation B, where he sits de facto in Pinocchio’s seat?
Based on this hypothetical, the court held that a corporation can “serve” as a de facto director for purposes of Section 8 where the corporation acts in that capacity through an “agent or deputy.” Reading International thus represents the only time a court has credited the deputization theory of Section 8 without qualification based on the procedural posture of the case.
Critically, and in tension with the line drawn in Square D, Reading International did not hold that an indirect interlock will be implied every time a corporation appoints individuals with business relationships to serve as directors of two competing companies. Instead, the line that Reading International drew was:
To establish their claim, plaintiffs will have to show not merely that [Oaktree’s President and director] both work for Oaktree, but that their service on the boards is not in their individual capacities, but as the deputies of Oaktree, acting as the puppets or instrumentalities of the corporation’s will, such that it can legitimately be said that it is Oaktree as an entity, and not [the President and director] as separate persons, which “serves as a director” of both [competing movie theater chains].
In other words, Reading International does not hold that Section 8 is violated anytime a corporation has two agents that serve as directors on two competing boards. Instead, Reading International requires that the appointing corporation must actually control the activities of those agents, to the point that the agents are merely serving as “puppets or instrumentalities” of the appointing corporation.
So, we can stipulate, in a true puppeteer-marionette scenario, the deputization theory might have a point. But in practice, this sets a rather high bar for Section 8 deputization. It is arguably only in extreme cases that a director can be said to singularly serve the interests of another principal—to the point that the director exercises no independent judgment and observes no fiduciary duties to any other stakeholders—such that it would be fair to call that director a “puppet or instrumentality.” Indeed, one might question whether the fiduciary duties that an officer or director owes to a corporation would even allow that person to simultaneously serve as the agent of some other master. This is a far different scenario than a direct interlock where the same individual serves on two different boards.
Practical Tips for Navigating the Deputization Theory of Section 8
As this article has shown, there are serious questions as to whether the deputization theory reflects a fair interpretation of Section 8. Nevertheless, the Agencies are actively investigating indirect interlocks and demanding resignations when they find them. Moreover, three district courts have credited aspects of the deputization theory in particular cases, although they have done so with qualifications and recognizing serious limitations on the breadth of the theory. With all of this in mind, here are several steps that companies can consider to lessen potential Section 8 risks.
At a Minimum, Avoid Direct Interlocks. At an absolute minimum, the Agencies’ reinvigoration of Section 8 should serve as a reminder to avoid direct interlocks, i.e., the same individuals simultaneously serving as officers or directors of competing corporations. For instance, before appointing an individual to serve as an officer or director, companies should consider screening candidates to understand any involvement they may have with outside companies. And even after officers and directors are appointed, companies should consider periodically reviewing its officer and director ranks to ensure that any outside businesses relationships do not run afoul of Section 8.
Consider Appointing Outsiders or Former Employees to Serve on Boards. Next, when naming individuals to serve as board representatives, deputization risks can be meaningfully reduced, if not eliminated entirely, by appointing outsiders instead of key current executives. Cleveland Trust and Square D both support this approach. In Cleveland Trust, the court squarely held that the appointment of the defendant’s former officer—even one who may “remain[ ] tied to defendant through a deep sense of good feeling, and continue[ ] to retain close contact with many of defendant’s present personnel”—was “clearly not sufficient to demonstrate a continuing principle-agent relationship.” Similarly, in Square D, the court noted in dicta that “§ 8 would not be implicated where a competitor seeks the election of an ‘agent’ . . . who does not otherwise have a business relationship—such as that of officer, director or employee—with the firm promoting his election.” Both of these precedents therefore support the argument that the deputization theory would not reach a scenario where an investment firm appoints a friendly third party, such as a retired employee, who does not otherwise maintain an active business relationship with the firm and who does not take any payment beyond the standard compensation paid to the rest of the board.
Observe Fiduciary Duties and Avoid Conflicts of Interest. Importantly, Reading International recognized the deputization theory to apply only where directors serve “not in their individual capacities, but as . . . puppets or instrumentalities of [another] corporation’s will.” Therefore, to rebut a deputization claim, it can be important to show that the director did not, in fact, act as a “puppet or instrumentality” of some other master, but instead acted in good faith as a true, independent director. When an investment firm appoints a director to the board of a company, the director should consistently act as a fiduciary to that company (and to all of that company’s investors), rather than acting single-mindedly as an agent to the investment firm. Additionally, to the extent that a director might face a conflict between two or more competing interests, the director should follow the company’s usual policies and procedures to determine whether disclosure, recusal, or some other actions are warranted.
Consider Reasonable Limitations on Board Appointment Rights. When negotiating business arrangements that could create indirect interlocks, it is worth considering whether alternative arrangements might be appropriate to lessen deputization risks. For instance, when making a minority investment in an operating company with a corresponding right to designate a director to the board, it is worth pausing to consider alternatives such as having the right to appoint a non-voting board observer; having a different, but philosophically aligned, investor appoint a representative to the board; or securing the right to nominate a director subject to other shareholders’ consent, rather than the right to appoint a director outright.
Adopt Safeguards to Avoid the Coordination of Competitive Business Decisions or the Sharing of Competitively Sensitive Information. Above all, remember that Section 8 ultimately serves the “prophylactic” purpose of preventing competitors from coordinating business decisions or sharing competitively sensitive information. Therefore, regardless of whether a business relationship might pose a technical Section 8 interlock or not, it is critical to adopt appropriate safeguards to ensure that the relationship does not lessen competition in some other way. For instance, an investment firm with interests in two separate competitors may need to designate two separate teams to support these two competitors, with clearly articulated compliance policies and information technology firewalls to ensure that competitively sensitive information is not exchanged between the two teams.