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April 14, 1972

Lee Vandervelde, L. Vandervelde & Co., Inc., and L. Vandervelde New York Corp.
Put and Call Brokers and Dealers Assn., Inc., Bache & Co., F.I. duPont & Co., Fahnestock & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., Walston & Co., Inc., Dean Witter & Co., Boris M. Balson, Henry Blair, A. A. Feder, Henry Blair & Co., Inc., Julius Brasz, Lawrence G. Botts, Philip D. Haab,* Thomas, Haab & Botts, Edward A. Daly, Joseph Ezra, Joseph Ezra & Co., Inc., Alvin V. Filer, Alvin V. Filer & Co., Inc., Herbert Filer, Filer, Schmidt & Co., William Freiman, Joseph I. Friedman, Berton W. Godnick, Godnick & Son, Inc., Samuel Gomperg, S. D. Harnden, Philip Ivers, Cohn, Ivers & Co., Inc., L. P. Kahn, Paul Karp, Irving E. Krinski, Irving E. Krinski & Co., Richard E. Linburn, Saul Lerner, Saul Lerner Co., Inc., Col. Homer D. Miller, Col. Homer E. Miller Co., Inc., Henry J. Vogel, and Vogel-Lorber, Inc.

Pollack, District Judge.

The opinion of the court was delivered by: POLLACK


POLLACK, District Judge


 This is a private antitrust action brought against the Put and Call Brokers and Dealers Association (the Association), a New York membership corporation, by one of its former members and the two wholly-owned corporations through which he conducted business. The complaint alleges that the Association unlawfully suspended Lee Vandervelde from membership, in violation of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and that the suspension caused the termination of the business of the two corporate plaintiffs. The Court's jurisdiction is based on § 4 of the Clayton Act, 15 U.S.C. § 15.

 Lee Vandervelde became a member of the Association in October, 1959. He was the President and sole shareholder of the corporate plaintiffs, L. Vandervelde & Co., Inc., a California corporation organized in 1959, and L. Vandervelde New York Corp., a New York corporation organized in 1961. The companies acted as dealers in and writers of puts and calls from November 1, 1959 and November, 1961, respectively, until early November, 1963. For convenience, Vandervelde and his enterprises will hereafter be referred to simply as "Vandervelde" unless otherwise indicated.

 The corporate plaintiffs seek damages for loss of income and the termination of their business activities and Vandervelde himself seeks to recover for loss of salary as an employee of the corporate plaintiffs.

 The defendants herein, in addition to the defendant Association, are 13 of its members and 8 put and call firms associated with Association members. *fn1"

 The plaintiffs also named as defendants six member firms of the New York Stock Exchange. The Court dismissed the action against these defendants at the close of the trial. *fn2"

 Summary Statement of the Action

 On August 27, 1963, Lee Vandervelde and Donald Cohen, the manager of Vandervelde's New York office, were each suspended from the Association for their failure to pay $125 fines levied on each of them by the Association's Board of Directors, upon recommendation by its Committee on Business Conduct. Two months earlier, the same Committee had ruled that Vandervelde and Cohen had engaged in improper business conduct by informing another put and call member firm that an option advertised by Vandervelde was no longer available for sale, which was untrue, and further that Vandervelde had refused in violation of an Association rule, to grant a discount or allowance to a co-member of the Association who desired to purchase an advertised option from Vandervelde. The Committee also found that Vandervelde unfairly discriminated against co-members of the Association by granting discounts to stock brokerage firms upon sale to or through them of advertised options, by accepting discounts from Association members, but refusing to grant discounts to other members.

 Plaintiffs contend that the discount rule of the Association, among others, is invalid as a restraint upon competition among option dealers, prohibited by § 1 of the Sherman Act, and that the suspension constituted an unlawful boycott of their business by the Association, also void under § 1. They make the additional claim that the suspension and ensuing boycott were part of an attempt by the Association and its members to monopolize trade in options, prohibited by § 2 of the Act. The suspension is claimed to have resulted in the loss of business from the six stock exchange firms mentioned above, depriving Vandervelde of his major source of options and customers, and rendering continuation of profitable operations impossible.

 The defendants contend that none of the rules of the Association which plaintiffs cite in their allegations is unlawful and that the suspension was a justified instance of a trade association's acting to insure the ethical conduct of its members. Moreover, they contend that issues of antitrust liability need not ever be reached in this action because the facts demonstrate that the business had previously lost significant amounts of its capital and was worthless as a going concern at the time of the suspension and that the termination of the Vandervelde business was a voluntary one prompted by economic failure.

 The resolution of the controversy between the parties requires a preliminary understanding of the nature of the option business and the organization and activities of the Association.

 Put and Call Options

 Put and call options are negotiable contracts in which the writer of the option, for a certain sum of money called the "premium", gives the buyer of the option the right to demand within a specified time the purchase or sale by the writer of a specified number of shares of a stock at a fixed price called the "contract price". A "put" gives the purchaser an option to sell, and commits the writer to buy, the shares covered by the option; a "call" gives the purchaser an option to buy, and commits the writer to sell, the subject shares. *fn3" Options are always written in 100 share units.

 The put and call broker-dealer firms are the intermediaries through whom trading in options is carried on. A person who wishes to sell or to purchase an option will utilize an option dealer to create the trade he seeks. *fn4"

 In June, 1959, the Securities and Exchange Commission conducted a statistical survey of the option business and ascertained that there were two types of option firms; those which performed only a brokerage function and those which traded in options, purchasing options from writers for inventory in the hope of arranging a later, profitable sale. Securities and Exchange Commission, Report on Put and Call Options 69 (1961) (hereinafter cited as SEC 1961 Report). The SEC found that the ten firms which acted solely as intermediaries for specific trades between buyers and sellers dealt almost exclusively through New York Stock Exchange member firms. SEC 1961 Report at 69.

 The report further showed that the great majority of options are written by persons who are not dealers in puts and calls, and that the put and call firms wrote less than 6.3% of the options outstanding at the time. SEC 1961 Report at 56, 55. It is not necessary to be a put and call dealer in order to write options.

 Dealing in put and call options is a highly speculative and volatile sector of the securities industry. These options have several potential uses for buyers *fn5" and present an opportunity for profit for option writers who feel that their judgment about the future course of activity in a security is correct. For both parties, the key factor on which an option trade is based is a competing prediction of market movement in a given security during a given period of time. However, the fact that an option's desirability is based on the fluctuation of stock prices creates a potential incentive for market manipulation and unscrupulous treatment of prospective option buyers. It was to prevent the development of such practices that self-regulation of the option business by the Association was initiated.

 The Association of Dealers

 The Association is composed entirely of individuals engaged in the put and call business. Any person may become a member of the Association if approved by the Board of Directors. The Board, with the assistance of the Committee on Admissions, considers the character and reputation of the applicant and also the applicant's knowledge of the put and call business and an affirmative vote of two-thirds of the Board is required for acceptance as a member. A corporation conducting a put and call business may have the benefit of the use of a membership held by an executive officer of such corporation and such firms are considered associated members. *fn6"

 The Association was formed in August, 1934. The impetus for its creation was provided by congressional hearings, prior to passage of the Securities Exchange Act, which contemplated abolition of all option trading. *fn7" After passage of the Exchange Act in 1934, which accepted regulation of option trading, 15 U.S.C. § 78i(b)(1971), as a substitute for prohibition of such trading altogether, the Association was formally organized. Fifty-five individuals became members of the Association at its first meeting. At the time Vandervelde joined the Association in 1959 there were 30 members, representing a somewhat smaller number of active put and call firms, and there are presently 30 members.

 The purposes of the Association are:

To foster the maintenance of high standards of integrity and honor in all business dealings by its members; to prevent any trade practices which may be or may tend to be unfair or inequitable; to establish trade practices which are conducive to harmonious relations among its members and to efficiency in the conduct of their business, and thus to enable them to better serve the persons with whom they deal, or on whose behalf they act; and to provide for the settlement by arbitration of all differences and disputes arising between members, and otherwise to promote their welfare.
Constitution and By-Laws of the Put and Call Brokers and Dealers Association, Inc., Art. II. (hereinafter cited as "Constitution").

 The SEC's Special Study of the Securities Markets, described the Association as "the most highly organized" of all the unofficial self-regulatory agencies in the securities industry. The Study continued: "In many respects the association is as highly institutionalized as an exchange and the business in which its members engage is as strictly controlled as are dealings in listed securities. . . . Although the PCBDA has no official standing, the association has assumed as firm control over its members and the put and call market as certain official self-regulatory bodies have over their members and members' activities." See 4 Report of Special Study of Securities Markets of the Securities and Exchange Commission, H.R. Doc. No. 95, 88th Cong., 1st Sess. Pt. 4 (1963) at 687, 690 (hereinafter cited as SEC Special Study). *fn8"

 The Association's most important achievement has been adoption of a standard form of option contract and creation of a mechanism by which the obligations of the writer of the option are guaranteed -- effectively rendering the option contract a negotiable instrument.

 The standard form of option contract specifically sets out the obligations of the writer and endorser of the option and informs the buyer of the precise life of the option he holds and the effect on the price he must pay or the shares he will receive of dividends, warrants, or splits during the option's life. Use of a standardized form contributes greatly to the stability of the option market by eliminating confusion and adding to the protection of the buyer.

 The Constitution of the Association states that members are to use only the official form of option obtainable from the Association, and only members may obtain such forms. Each contract contains the legend that it has been issued by a member of the Association and the equally important legend that the option contract is guaranteed by a member of the New York Stock Exchange.

 The endorsement of options by the stock brokerage firm of the option writer serves to insure the purchaser that the contract will be fulfilled if he chooses to exercise his contract right. The availability of this guarantee is felt to strengthen public confidence in option dealings by divorcing the fulfillment of any given contract, if necessary, from the financial ability of the option writer to meet his commitment. Options sold by Association members are required to have the endorsement of New York Stock Exchange member firms. *fn9" The Board of Directors may designate other exchanges as acceptable endorsers but it has never done so, although it has received inquiries from both the American Stock Exchange and the Toronto Stock Exchange in this regard. *fn10"

 In addition to these basic rules setting the parameters for the writing and selling of options, the Association has adopted a number of rules regulating the business conduct of its members and attempting to establish a set of uniform practices for firms dealing in options.

 Some of these rules concern record keeping and creation of usable data on the scope, volume and performance of the option market; members are required to report their transactions to the Association, a measure recommended by the SEC, and are also required to maintain their own records as to the details of each transaction they handle.

 A second set of rules concerns regulation of the terms on which members deal. Thus, no advertisement of any option at a price of less than $137.50 is permitted (it may be sold for less but not advertised for less), and no option may be offered by mail for less than 21 days or less than $100 premium. No option may be written or traded under any circumstances with a life of less than 21 days. As noted earlier, options must be traded in 100 share units, and to the extent that there is still commerce in options based on a "points away from the market" calculation, that option must be sold at the fixed premium of $137.50 per 100 shares. The "discount" rule, which is discussed below, also falls into this category.

 A third set of important rules governs the relationship of Association members with other securities firms. Members of the Association may not share commissions or profits with any non-members except those who are registered with the SEC, and the amount of the commission which may be paid is limited to a maximum of $6.25 for each 30-day option of a hundred shares. This rule was another of the recommendations made by the SEC in 1935. When an Association member cashes in a profitable option for a client, he must charge his customer the same commission and tax as would be charged by member firms of the New York Stock Exchange for the sale, transfer or exercise of options. *fn11"

 The Association regulates the methods by which its members seek to bring their operations or specific options to the attention of the public. Members must file any pamphlet, circular, advertisement or other literature with the Association's Committee on Publications, and approval before publication is required in many instances. All such materials must contain the legend that the advertising firm is a member of the Association, and the Constitution states that no matter in any such material "shall contravene the standards of business practices and ethics fostered by the Association." Constitution, Art. V, § 6.

 The Association's Committee on Business Conduct is empowered to consider matters relating to the practices of members or their firms and the observance of the Association's rules and regulations for the "fair and equitable transaction of business by members . . ." Constitution, Art. V, § 4. The Board of Directors is authorized to try charges against members for violation of the Constitution or rules, failure to comply with any order or decision of the Board or a standing committee, or acts "inconsistent with equitable, fair and honorable commercial dealings." Constitution, Art. IV, § 2(f). Penalties include fine, suspension or expulsion.

 Under Section 9(b) of the Securities Exchange Act, 15 U.S.C. § 78i(b), the SEC was granted jurisdiction to enact and enforce rules and regulations governing the put and call business and those engaged in the business as brokers and dealers. *fn12" Although recommended in 1935 by its staff, the SEC has never enacted any such rules, but it has followed the business closely and has conducted investigations and written reports relating to the commerce in puts and calls in 1934, 1939, 1944, 1945 and 1961. The SEC Special Study commented that "over the years the Commission and the PCBDA have had an informal working arrangement . . . and specific recommendations made by the Commission's staff have, on occasion, been adopted by the Association, including provisions bearing on members' conduct and business practices." SEC Special Study, Part 4 at 690. *fn13" Copies of the Association's Constitution and By-Laws and all amendments thereto, and all written rules of the Association have been regularly furnished to the Commission, and the Association regularly supplies the Commission with statistics on the volume of options traded. In addition, brokers and dealers in options must register with the Commission pursuant to § 15 of the Exchange Act, 15 U.S.C. § 78o.

 Thus, the Association has historically been the medium through which persons engaged in the buying and selling of options regulate their industry. Due to a combination of historical circumstances, the SEC's failure to enact a regulatory pattern of its own, the highly specialized nature of option trading, and the participation of all but a handful of persons in the option industry, the Association has effectively controlled the terms on which options are traded and option firms act. It has, in effect, created and regulated a specialized over-the-counter market for purchase and sale of options. During the period of Vandervelde's membership, there was only one option dealer who did not belong to the Association. That firm was Starr & Gelber, a West Coast house whose principal felt that membership would confer no additional benefit upon his operation.

 The Suspension of Vandervelde

 Article VIII, § 23 of the Association Constitution provides that:

Members accepting public print offers shall be entitled to a reasonable commission, discount or allowance.

 It was this provision which brought about Vandervelde's difficulties with the Association. Vandervelde engaged in advertising options and spent considerable sums on such advertising in each of the years of his business. He balked at being required to sell his advertised options to members of the Association at a discount according to the rule. He informed individual members of the Association that he would sell advertised options only as advertised (without discount), and followed this up on January 15, 1963, with a letter to the Association stating that Vandervelde would make it a practice to sell available special options to dealers at advertised prices (meaning, not at discounts therefrom). *fn14"

 The newspaper advertising of options for sale to the public was an important part of Vandervelde's business in puts and calls. Vandervelde often advertised options which had been purchased for inventory rather than for immediate resale and were attractive in price because of changed market conditions. Such advertising of options is used to attract customers and their brokerage firms and to induce them to begin a regular course of business with dealers engaged in such advertising. *fn15" Vandervelde, in order to be able to compete in price for customers, refused to sell his advertised options to other members of the Association at a discount. He believed, with some reason, that buyers interested in his advertised options would do initial and repeat business with him rather than through their accustomed dealers if the latter were not given any financial incentive to act as the middleman to acquire the advertised options for their customers. More importantly he hoped that brokerage houses which purchased attractive special options from him would develop or maintain a regular course of dealing with him in seeking bids for the purchase or sale of unadvertised options, the largest segment of an option dealer's business.

 Vandervelde's resistance to affording a discount to other members of the Association on advertised options came to a head in the summer of 1963. To chill the interest of Filer, Schmidt & Co., a member of the Association, in an option which Vandervelde had advertised, Cohen falsely stated upon inquiry by Filer for the option that it was no longer available; that it had been disposed of. The truth was discovered when Filer had a stock brokerage firm seek to buy the option for Filer's account and found it to be available for sale. Filer then made a formal complaint against Vandervelde for this business conduct. Vandervelde admitted the facts but responded that he had previously informed the Business Conduct Committee that his companies intended to sell to members at advertised prices with no discount, that the Association dealers were not interested in buying from Vandervelde on this basis and that the false statement had been made to avoid another long telephone dispute about the no-discount policy. In the light of past disputes, Vandervelde stated that he did not intend to reveal his position to dealers who wished to find out if an advertised option were "available", and he intended, on advice of counsel, to maintain his right to do business without granting special favors to his competitors.

 During the summer two similar complaints were made by other firms. The Committee submitted a written report to the Board of Directors concerning the Filer complaint in the course of which it reported

It must be obvious that it is contrary to any reasonable standards of proper business conduct for a broker or dealer to misrepresent or misstate facts to another broker or dealer. The statement here that the option was sold when in fact it was not is a clear violation of the rules of proper business conduct.

 Speaking of Vandervelde's justification of the deliberate misstatement by referring to the fact that he had announced that he would not sell options to dealers at a discount and that he did not intend to reveal his position to dealers who wanted to know whether an advertised option was "available", the Business Conduct Committee reported further that:

The asserted refusal by Mr. Vandervelde to allow any commission, discount or allowance to a member of the Association is a clear and unequivocal violation of this provision.
Moreover, Mr. Vandervelde's firm grants a discount to stock exchange firms and accepts discounts from other members of the Association. To the extent that he refuses to allow a member a discount at least equal to that allowed by him to a stock exchange firm, his conduct is discriminatory against a member. To the extent that though unwilling to grant a discount to other members he accepts a discount from a member granting it under the requirements of the above-quoted provision, his conduct, to say the least, is in disregard of the aims and objects of the Association, which are stated to be, in part,
". . . to prevent any trade practices which are not conducive to harmonious relations among its members. . . ."

 The Committee concluded that the misstatement as to the availability of the option was deliberate and in pursuance of a policy of refusing discounts to members of the Association and that

We believe that the misstatement and the policy violate the Constitution and By-Laws and the rules of business conduct established by the Association, and that Mr. Vandervelde and Mr. Cohen should be penalized for such violations in the sum of $125 each.

 The Board of Directors of the Association unanimously approved the recommendation of the Business Conduct Committee and levied the fines recommended. The Board held a hearing in connection with Vandervelde's response that it had not done so or heard his side of the matter before levying the sanction. After hearing Mr. Cohen, Vandervelde's representative, the Board reaffirmed its prior determination. The Association advised Vandervelde and Cohen that their memberships in the Association would be suspended unless the fines were paid by August 12, 1963. Vandervelde complained of this action both to the Association and to the Securities and Exchange Commission.

 The Commission responded on August 14, 1963, stating that the Association is not registered with the Commission in any capacity, that it has no official standing with the Commission and that the Commission was not authorized to review disciplinary actions by the Association against members. On August 16, 1963, the Association advised Vandervelde that it had received a copy of the Commission's letter of August 14, 1963, and unless the fines were paid by August 26, 1963, suspension would result. Vandervelde did not pay the $125 fine imposed by the Association and his membership was suspended for the reasons set forth in the report of the Business Conduct Committee. On August 27, 1963, Vandervelde was informed that until the suspension was lifted he was not entitled to exercise any of the rights and privileges of membership in the Association, including the use of the Association's contract forms. Each member of the Association was notified of the suspension and that Vandervelde was not permitted to use the form until the suspension was lifted.

 The Questioned Rules -- Injury Requirement

 Plaintiffs dispute the legality of a number of the Association rules. They challenge as violations of § 1 of the Sherman Act the rules that members may deal only in options written on the Association contract form, that only New York Stock Exchange member firms may endorse options, that commissions on cash-ins be the same as those charged by New York Stock Exchange member firms, that options advertised must have a minimum premium of $137.50, and that a discount be granted Association members purchasing an advertised option from another member. A challenge to a rule in a suit such as this falls to the ground unless injury has followed therefrom. Plaintiffs may recover damages only for violations of the antitrust laws by which they were injured, Molinas v. National Basketball Association, 190 F. Supp. 241, 243 (S.D.N.Y. 1961), cf. Salerno v. American League of Professional Baseball Clubs, 429 F.2d 1003, 1004 (2d Cir. 1970), cert. denied, 400 U.S. 1001, 91 S. Ct. 462, 27 L. Ed. 2d 452 (1971).

 The application of that standard to the proof received at trial limits the Vandervelde claims to the discount rule and the suspension which resulted from his refusal to observe it.

 With regard to his ancillary claims, Vandervelde's stance is similar to that of the plaintiff in Molinas, supra. There, a professional basketball player who had been suspended for life by the National Basketball Association for wagering on games in which he played, brought suit challenging not only his suspension but the legality of the league's reserve clause. This portion of the complaint was dismissed after trial on the ground that "no causal connection . . . had been established between the reserve clause and any damage which plaintiff may have sustained." 190 F. Supp. at 243. Cf. Industrial Building Materials, Inc. v. Interchemical Corp., 278 F. Supp. 938, 968 (C.D. Cal. 1967), rev'd on other grounds, 437 F.2d 1336 (9th Cir., 1970) (summary judgment granted for defendant as alternative to dismissal of action for failure to comply with Court's pretrial rulings; held, inter alia, that, assuming truth of facts alleged, fact that plaintiff's former supplier's prescription of dealers' territories may have been per se illegal under the holding of United States v. Arnold Schwinn & Co., 388 U.S. 365, 18 L. Ed. 2d 1249, 87 S. Ct. 1856 (1967), did not entitle plaintiff to recovery, since his claim was based entirely upon business lost when former customers turned to other distributors as a result of alleged conspiracy by supplier to monopolize trade in his product); Interphoto Corp. v. Minolta Corp., 295 F. Supp. 711, 721 (S.D.N.Y.), aff'd, 417 F.2d 621 (2d Cir. 1969) (motion for preliminary injunction); Lyons v. Westinghouse Electric Corp., 235 F. Supp. 526, 538-39 (S.D.N.Y. 1964) (McLean, J.).

 The Discount Rule -- A Violation

 The dispute between Vandervelde and the Association as to which injury may be said to have been demonstrated herein concerned the discount rule, the means by which Vandervelde claims he sought to avoid compliance with that rule, and the action taken by the Association in response. The issues of antitrust liability in this action rest upon that dispute.

 The record does not indicate when the discount rule was adopted in its present form, but the sharing of commissions and the trading of options among Association members on terms more favorable than those at which options were available to non-members was apparently contemplated from the earliest days of the organization. *fn16"

 The rule applies to public print or "special options", those which are advertised by put and call broker-dealers rather than purchased by a broker-dealer in response to a specific request from a potential buyer or buyer's brokerage house. The advertising of options held for speculation in this way by the dealers seems to have begun on a regular basis in the early 1950's. The amount of the discount or member's allowance was apparently subject to some negotiation in the course of each trade, but a range of standard discounts did develop. Dependent on ...

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