No Conspiracy on Prime Rate, Federal Judge Rules : Verdict Against Oregon Bank Is Overturned
A federal judge has overturned a jury’s verdict and ruled in favor of an Oregon bank in an antitrust lawsuit that claimed the bank acted improperly in setting its prime lending rate.
First Interstate Bank of Oregon sets its prime rate to remain competitive with other banks, not by conspiring with them to overcharge customers, U.S. District Judge James A. Redden ruled.
An attorney for one of the four groups of plaintiffs said Wednesday that Redden’s ruling would be appealed. “We intend to do it promptly,” Henry A. Carey said.
Jurors Favored Plaintiffs Jurors last May awarded $1.5 million in damages to the plaintiffs, who contended First Interstate conspired with other banks to fix the prime rate. Lawyers specializing in bank litigation said the lawsuit was the first of its kind to go to trial in federal court.
The bank filed a motion in December asking the verdict be overturned. Redden did so in an order filed Monday, saying the jury’s verdict was “not supported by substantial evidence.”
“We are delighted at the verdict and feel vindicated,” said Keith T. Borman, deputy general counsel for the bank.
The prime rate is a benchmark charge against which banks measure rates on short-term loans to businesses. At one time, it was the most favorable interest rate available to a bank’s most credit-worthy commercial borrowers, but today banks frequently loan to some business borrowers at below the prime rate.
Although the prime rate is not directly tied to consumer loan rates, it serves as an indicator of which way rates on debts such as automobile loans and home mortgages are headed.
‘Parallel Conduct’ “There was ample testimony from all expert witnesses at the trial that defendants’ ‘prime rate’ is a national prime rate imposed by national economic conditions,” Redden said. “The testimony of the experts clearly established that the prime rates used by banks are set to reflect market demands and individual self-interest in attracting new and retaining old customers.”
The four plaintiffs said First Interstate’s practice of waiting until four of seven specific West Coast banks changed their prime before it changed its own constituted “parallel conduct” under which the bank violated the Sherman Antitrust Act. But Redden said that so-called count-to-four method merely allows First Interstate to take the prices charged by its competitors into account.
The seven banks used by First Interstate make their prime-rate decisions based on rate changes announced by East Coast banks, testimony indicated.
“Invariably, the rate adjustments start with the larger East Coast banks early in the banking day,” Redden said. “The adjustments roll across the country as does the sun, and virtually every bank in the nation responds. This does not prove an illegal conspiracy between First Interstate and the specified West Coast banks.
“Banks have been following Eastern pacesetters for years regularly and openly,” he added.
Redden also rejected arguments that some loans made at rates lower than the prime were evidence that the prime itself was set improperly. Such loans are made only to low-risk borrowers, not the “middle market” type of borrower who usually receives the prime rate, he said.
“The alternate-rate loans were made to a relatively few low-risk borrowers in extremely large amounts, at a fixed rate of interest, for a fixed period of time, without a right of prepayment and for a relatively short period,” Redden said.
The plaintiffs include the Wilcox Development Co., an Oregon real estate development company; James K. Kunkle, a Nevada businessman who borrowed $2.5 million to build an air cargo building at Portland International Airport; Mid-Willamette Village Oregon Ltd., a limited partnership that borrowed $2.5 million to build a residential planned unit development in Wilsonville, and Michael F. and Rosemary Montgomery of Beaverton.
The plaintiffs made 20 other claims in the four cases, all of which were decided in favor of the bank.
