This week, the United States Supreme Court issued its decision in Bell Atlantic Corp. v. Twombly, which addresses the pleading requirements for alleging an antitrust conspiracy claim based on parallel conduct. The Court held that a plaintiff in an antitrust conspiracy case cannot survive a motion to dismiss merely by alleging parallel conduct among alleged co-conspirators coupled with a bare bones allegation of conspiracy. This decision will make it more difficult for plaintiffs to maintain antitrust claims for unreasonable restraints of trade under Section 1 of the Sherman Act, which requires concerted action as an essential element. The decision also will have broader implications affecting how courts interpret the notice pleading standard under Rule 8 of the Federal Rules of Civil Procedure (“FRCP”).
Conscious Parallelism, Section 1, and Notice Pleading
Section 1 of the Sherman Act prohibits any contract, combination, or conspiracy, i.e., concerted action, that unreasonably restraints trade. Unilateral actions cannot give rise to a Section 1 claim even if the conduct has anticompetitive effects. Parallel conduct, if undertaken unilaterally, cannot trigger Section 1 liability. Under a theory referred to as “conscious parallelism,” however, parallel conduct can serve as circumstantial evidence of a tacit agreement under certain circumstances. Drawing the distinction between tacit collusion and unilateral-but-parallel behavior can be difficult
This difficulty, coupled with the liberal rules of notice pleading under FRCP 8, which only requires a “a short and plain statement of the claim showing that the pleader is entitled to relief,” has made it difficult at times for courts to decide whether antitrust plaintiffs have adequately alleged a viable conspiracy sufficient to withstand a motion to dismiss under FRCP 12(b)(6). The Court in Twombly squarely addresses this problem and provides guidance on the proper standards for evaluating allegations as antitrust conspiracy and, also more generally, the minimal pleading thresholds required by FRCP 8
The Twombly Case
In Twombly, a putative class of subscribers to telephone and/or high speed Internet service providers brought a Section 1 claim against the Regional Bell Operating Companies (“RBOCs”), which largely maintain distinct territories for local telecommunications services. Under the Telecommunications Act of 1996, the RBOCs, as Incumbent Local Exchange Carriers (“ILECs”), were forced to share their networks with competitive local exchange carriers (“CLECs”). The 1996 Act aims to foster competition in local telecommunications markets. The plaintiffs alleged that the RBOCs engaged in two types of parallel conduct, which support the notion that the RBOCs participated in an anticompetitive conspiracy: 1) the RBOCs each took steps to make it difficult for CLECs to enter the RBOC’s respective territories, for instance by allegedly providing poor access to their networks and providing poor service to CLECs and their customers, and 2) the RBOCs refrained from competing against each other outside of their traditional geographic territories. According to the complaint, these two allegations served as the primary bases for plaintiffs’ conspiracy allegations.
The U.S. District Court for the Southern District of New York dismissed the claim, finding that “‘conscious parallelism’ has not yet read conspiracy out of the Sherman Act entirely.” The district court held that, to state a claim, plaintiffs must allege additional facts that exclude independent self-interested conduct as an explanation for the parallel behavior – so-called “plus factors.” The United States Court of Appeals for the Second Circuit reversed, holding that “plus factors” need not be pleaded in addition to parallel conduct to satisfy the concerted action pleading requirement. The Second Circuit noted that to dismiss the complaint for failure to satisfy this pleading requirement, a court would have to find that no set of facts exists that would enable plaintiff to prove the parallel conduct was the product of collusion, as opposed to each defendant’s independent decisions.
The Court’s Decision
In a 7 to 2 opinion written by Justice Souter, the Supreme Court reversed the Second Circuit. The Court reasoned that because parallel conduct can be equally consistent with either unilateral or concerted behavior, a complaint alleging parallel conduct and a bare assertion of conspiracy will not suffice under FRCP 8 and consequently, cannot withstand a motion to dismiss. Instead, the Court required some factual allegations sufficient to suggest that it is at least plausible that the parallel conduct resulted from conspiracy:
In applying these general standards to a [Sherman Act] § 1 claim, we hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of [an] illegal agreement.
The Court affirms that, even under FRCP 8’s liberal standards of notice pleading, plaintiffs cannot formulaically recite the elements of a cause of action in order to state a claim. Instead, plaintiffs must provide “enough heft” at the pleading stage to set out the grounds upon which the claim is based and, if the facts alleged are ultimately proven, that plaintiff would be entitled to relief.
The plaintiffs and the Second Circuit had relied heavily on the Court’s 1957 decision in Conley v. Gibson, particularly the well-known passage that "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." This passage, as the plaintiffs argued and the Second Circuit found, would seem to require discovery to determine whether any such set of facts exists. The Supreme Court roundly rejected this statement from Conley, stating that the "phrase is best forgotten as an incomplete, negative gloss on an accepted pleading standard" and concluding that “[a]fter puzzling the profession for 50 years, this famous observation has earned its retirement.” The Court emphasized that its ruling interprets FRCP 8 and does not "require a heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face."
Because parallel conduct by itself would not be sufficient to establish an unlawful conspiracy, the Court held that, under the circumstances, allegations of parallel conduct coupled merely with conclusory allegations that the defendants had conspired and failed to meet the minimal pleading requirements under FRCP 8. Indeed, the Court states:
Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement of some unidentified point does not supply facts adequate to show illegality. Hence, when allegations of parallel conduct are set out in order to make a § 1 claim they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that just as well could be independent action.
According to the Court, the Twombly defendants acted consistent with their independent self interests. The Court reasoned that the RBOCs needed no collective encouragement to resist assisting CLECs, even if such obligations were imposed by the 1996 Act. Inasmuch as resisting competitive encroachment is a natural reaction by incumbent firms, each RBOC had a legitimate, independent reason for not cooperating with the CLECs. And the complaint itself, particularly allegations that CLECs faced nearly insurmountable barriers to profitability due to the ILEC’s fierce resistance, provided ample reasons why the RBOCs would independently decide to keep to their “old turf.” The legitimate reasons for the allegedly improper conduct undercut the inference that the parallel actions somehow suggest an illicit conspiracy. In the end, "because plaintiffs here nave not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.”
The severe burden that antitrust discovery places on litigants and the courts clearly affected the Court’s opinion. As the Court notes, “it is one thing to be cautious before dismissing an antitrust complaint in advance of discovery, but quite another to forget that proceeding to antitrust discovery can be expensive.” The Court seemed troubled by the prospect that the threat of over-bearing discovery, even in “anemic cases,” could force cost-conscious defendants to settle without putting up a fight. Twombly rejects the suggestion that lower courts can effectively protect the defendants from discovery and litigation abuses through such tools as careful case management, close scrutiny at the summary judgment phase, and lucid jury instructions. Before a plaintiff will have an opportunity to engage in discovery, the complaint must provide “a reasonably founded hope that the [discovery] process will reveal relevant evidence.”
Twombly is significant not only for antitrust practitioners, but for all federal civil litigators. From an antitrust perspective, the opinion raises the bar for claimants who want to bring a Section 1 complaint premised on conscious parallelism. Twombly confirms, as many lower courts have suggested, that a conclusory allegation of conspiracy, without more, will not suffice to survive a motion to dismiss and that conduct equally consistent with independent conduct will not provide adequate support to sustain a Sherman Act Section 1 claim at the pleading stage. Twombly provides a buffer for defendants to spare them the threat of treble damages and costly and prolonged discovery that could enable feeble allegations to coerce settlement.
Moreover, the Court’s analysis of notice pleading requirements of FRCP 8 extends beyond the antitrust arena and will have broader implications in federal civil litigation generally. Most importantly for defendants, the Court roundly rejected the Conley v. Gibson adage that a motion to dismiss should be granted only if there is no doubt that a plaintiff can prove no set of facts in support of his claim. Consequently, plaintiffs will have to engage in more fact gathering pre-discovery to even bring a claim, and the facts they gather will have to support the plausibility of an actual claim in order to survive a motion to dismiss.