A Tale of Two Circuits
On August 28, in In re Musical Instruments & Equipment Antitrust Litigation, a divided Ninth Circuit panel affirmed the dismissal of a consumer class action claiming that five guitar manufacturers violated Section 1 of the Sherman Act and the California and Tennessee antitrust statutes, by conspiring secretly at trade associations to adopt minimum advertised price (“MAP”) policies that allegedly fixed the lowest price at which any retailer could advertise the manufacturers’ “high end” guitars and guitar amplifiers. The majority concluded that the complaint failed to pass the “plausibility” standard adopted by the Supreme Court in Bell Atlantic Corp. v. Twombly.
Less than three weeks later, on September 15, in SD3, LLC v. Black & Decker (U.S.) Inc. (“SD3”), a divided Fourth Circuit panel reversed the dismissal of a complaint alleging a group boycott of table saw safety technology by 22 competitors, an agreement allegedly reached during a trade association breakout meeting.
Both the Ninth and Fourth Circuit majorities, just as the Second Circuit did three years ago, recognized that the Supreme Court’s Twombly pleading standard requires only that a complaint’s allegations of an antitrust violation be plausible, not that they be probable or even the more plausible of alternative explanations. Indeed, as originally put in Twombly and quoted by the Fourth Circuit majority, “a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.” Nevertheless, the two circuits reached 2-1 decisions with opposite results—affirmance of the complaint’s dismissal in the Ninth Circuit and reversal of the dismissal in the Fourth Circuit. We examine below the facts involved in the two cases, and the views of the respective courts.
The Ninth Circuit Musical Instruments Decision
In 2007, the Federal Trade Commission (“FTC”) entered a consent order against the National Association of Music Merchants (“ NAMM”), which the FTC had charged had organized meetings at which “competitors discussed the adoption, implementation, and enforcement of MAP policies; the details and workings of such policies; appropriate and optimal retail margins; and other competitively sensitive issues.”
Consumer class actions followed, alleging that the five manufacturers had entered into an agreement among themselves, along with NAMM and a major retailer, to fix minimum advertised prices, in violation of Section 1 of the Sherman Act and the two pleaded state antitrust statutes.
The district court dismissed the Complaint under Rule 12(b)(6), declaring that it failed to allege who conspired with whom, what was agreed, and how the conspiracy was organized and carried out. However, in a relatively unusual move, the plaintiffs were granted the right to have discovery prior to filing an amended complaint – limited to who attended or participated in the applicable trade association meetings, and what was said or agreed to at such meetings.
Document discovery and depositions of a number of employees of the defendants were taken, after which a new complaint was filed, containing allegations of a per se horizontal agreement among the manufacturers to fix minimum advertised prices, based on parallel conduct and six “plus factors” that allegedly were contrary to the independent interests of the five manufacturers. The district court dismissed again, and an appeal to the Ninth Circuit followed.
The Panel Majority Opinion
Acknowledging that the Twombly pleading standard requires denial of the dismissal motion if the plaintiff has pleaded sufficient facts that, if “plausible” on their face, support the claim, the Ninth Circuit panel affirmed dismissal in a 2-1 ruling. The panel majority reasoned that the six “plus factors” beyond consciously parallel advertised pricing programs--either considered alone or together--were insufficient to cross the “plausibility” threshold. The majority viewed the six factors in context as follows:
- The manufacturers shared a common motive to conspire. This merely showed lawful interdependence in a concentrated market; it is commonplace for suppliers in such a market to follow the independent pricing decisions of competitors.
- The manufacturers acted against their self-interest by placing a minimum on retailer advertised pricing. Here, too, such conduct can be expected in a concentrated industry as a matter of lawful interdependence.
- The manufacturers “simultaneously” had adopted their MAP policies. In fact, the complaint alleged that the policies were adopted “over a period of several years, not simultaneously.”
- The FTC’s 2007 investigation of NAMM suggests an agreement was made. The FTC complaint only charged a violation of Section 5 of the FTC Act, which “does not require allegations or proof” of collusion, and collusion was not claimed by the FTC.
- The major retailer had advocated adoption of anticompetitive MAP policies at NAMM meetings. To the majority, “[g]athering information about pricing and competition in the industry is standard fare for trade associations.”
- Average retail prices for guitars and guitar amplifiers rose during the class period as the total number of units sold fell. The complaint addressed only “High-end Guitars and Guitar-Amplifiers,” and average prices for all of the industry’s products said nothing about what happened in the high-end price segment of the industry.
According to the Panel majority, the allegations indicated no more than each manufacturer had adopted its MAP policy “in its own interest.” Such conduct might be anticompetitive, “but it does not suggest the manufacturers illegally agreed among themselves to restrain competition.”
The dissenting judge believed that the majority only considered each plus factor separately, but that if considered together, the allegations of a horizontal agreement crossed the line from conceivable to plausible under Twombly. He stressed in particular that the FTC’s claim that the NAMM meetings “had the purpose and tendency to facilitate collusion” made conspiracy more plausible, and that pricing discussions at NAMM meetings, followed by the adoption of similar MAP policies “pointed toward a meeting of the minds.” Additionally, he contended that the allegations that average industry prices rose despite falling demand “demonstrates that it is plausible that something outside normal market conditions were at work: in this case, collusion.” He concluded: “I simply cannot agree with the majority opinion that the plaintiffs’ inference of an agreement is implausible, especially where the litigation is at the motion to dismiss stage, not the summary judgment stage.”
The Fourth Circuit SD3 Table Saw Decision
In SD3, plaintiff SawStop LLC’s founder developed a table saw safety feature in the 1990s – a form of “active injury mitigation technology” or “AIMT”– to retract a saw blade upon detection of contact with a person, such that a user suffers only a nick rather than a serious injury. SawStop demonstrated the technology to a number of leading table saw manufacturers, seeking license agreements. According to SawStop’s complaint, several manufacturers were interested, although some had concerns about potential product liability exposure for non-adopters of AIMT if other manufacturers incorporated the safety feature into their saws. Ultimately, the licensing discussions did not produce any immediate results.
According to SawStop’s complaint, in October 2001, numerous table-saw manufacturers met at the annual meeting of the Power Tool Institute industry trade association, and “decide[d] how to respond, as an industry” to SawStop’s AIMT. From this meeting, SawStop alleged, a group boycott was formed: the manufacturers secretly determined that none of them would license AIMT. According to SawStop’s complaint, within months, all licensing discussions ended. SawStop also alleged that its subsequent attempt to advance AIMT by modification of safety standards through Underwriters Laboratories, Inc. (“UL”) failed as a consequence of a second conspiracy among the manufacturer-defendants, and that the manufacturers also hatched a third conspiracy to develop their own safety standards and foreclose wide adoption of AIMT.
The District Court concluded that SawStop had failed adequately to plead facts alleging an unlawful agreement, and dismissed the complaint in its entirety.
The Panel Majority Opinion
While the Ninth Circuit panel agreed that facts were lacking to implicate certain defendants and that the complaint failed adequately to plead the two collateral conspiracies to manipulate safety standards, two of the judges concluded that there was an adequately pleaded group boycott claim against the principal defendants – enough, at least, to survive a motion to dismiss. As the majority noted, “it is not our task at the motion-to-dismiss stage to determine ‘whether a lawful alternative explanation appear[s] more likely’ from the facts of the complaint.” To do so, the majority stressed, would be improperly to import the Matsushita summary judgment standard -- requiring evidence tending to exclude the possibility of independent action, pushing the likelihood past equipoise -- into the “plausibly suggesting” pleading inquiry applied to a dismissal motion at the pleading stage.
The appellate majority ruled that the District Court, had relied erroneously on the Matsushita summary judgment “tends to exclude” standard, and had “adopt[ed] defendants’ characterizations of the licensing negotiation, and then [drew] unsurprisingly adverse inferences against SawStop based on them.” The majority stressed that SawStop had alleged even the “why” – the motivation to conspire and act in unison out of common fear of product-liability exposure – as well as the “who, what, when, and where” of the conspiracy, and SawStop supported the theory with specific statements from the manufacturers concerning the exposure risk. Further, according to the majority, the complaint described facilitating practices (phone calls, meetings, and discussions among competitors) that, while not illegal in themselves, evidenced the opportunity to conspire. Notably, although not deciding the issue, the majority also discerned a “facial appeal” to the argument that the alleged group boycott could be evaluated under the per se rule of illegality because it “comes close” to the paradigm of a group boycott by separate manufacturers taking collective action that “may inhibit the competitive vitality of rivals (here, SawStop).”[29
Consequently, the majority concluded that SawStop’s complaint, unlike the one struck down in Twombly, in fact alleged “an actual agreement to boycott in detail” rather than parallel conduct alone.
The dissenting member of the Fourth Circuit panel saw the complaint differently. While declaring faithfulness to the Twombly “plausibility” standard, the dissenting Judge characterized the complaint’s allegations as containing mere “conclusory assertions,” adding that the majority “drape[d] innocent commercial activity in sinister garb,” reasoning that the complaint “hardly bespeaks a collective agreement not to deal.” In response to the allegation that the conspiracy was reached at a “secret meeting,” the dissenter declared: [t]hese days secrets are harder to keep. A secret is something that is held by only one. Or maybe two. But twenty two?” In his view, the complaint was properly dismissed because “it was consistent with each manufacturer’s best interest to reject an expensive, unproven, undeveloped, and possibly unsafe technology. Each defendant could easily have arrived at this business decision on its own.”
It can be argued that the Ninth Circuit Musical Instrument majority imposed a heightened standard of review at the pleading stage that was more appropriate for summary judgment. As the dissenting judge observed, rather than considering the plaintiffs’ six “plus factors” collectively, and construing the factual allegations in a light favorable to the plaintiffs, the majority deconstructed the melody of those factors into individual notes and composed a lawful alternative explanation for each factor. Even viewed in that light, the likelihood of conspiracy is not rendered implausible, but at most fails to be more probable than not – a requirement that does not exist at the pleading stage.
That said, in Musical Instruments, the district court’s allowance of pre-amendment discovery relating to the alleged conspiratorial trade association meetings is an unusual factor. A failure to uncover sufficient specific facts to place Guitar Center at the hub of a conspiracy, despite that accommodation, may well have weighed in the court’s analysis. Nonetheless, the allegations that prices were discussed at the NAMM meetings, and that all of the five manufacturers did adopt anticompetitive MAP policies (even if not “simultaneously), coupled with allegations that industry prices went up while demand went down, should have been sufficient to render the claim “plausible” – even though it might have been more probable that there was no horizontal conspiracy.
By contrast, the panel majority in SD3 seems to have gotten it right. In fact, in response to the dissenting judge’s characterization of the allegations as “conclusory assertions,” the concurring judge quoted extensive portions of the complaint to illustrate that the plaintiff had specifically alleged the “who, what, where, and when” the claimed conspiracy took place. The dissent may have been correct that the conduct at issue could be viewed as “innocent commercial activity,” but the majority’s response was the proper one: that was a matter for discovery and, perhaps, an evaluation whether a genuine factual dispute ultimately exists for the fact-finder, not one for the court as gatekeeper for the pleadings.