In a decision likely to discourage antitrust conspiracy claims, the United States Supreme Court has held that a complaint fails to state a violation of Section 1 of the Sherman Act when it alleges merely similar actions by competitors, as opposed to facts suggestive of an express or tacit agreement among them. Bell Atlantic Corp. v. Twombly, No. 05-1126, 550 U.S. ___ (May 21, 2007).

In Twombly, the Court fashioned a new standard for antitrust pleadings and held that plaintiffs must allege “plausible grounds to infer an agreement” in order to state a claim under Section 1 of the Sherman Act. The Court’s opinion focused on the “costs of modern federal antitrust litigation” and the benefits of insisting on “some specificity” in the pleadings “before allowing a potentially massive factual controversy to proceed.”

Challenged Conduct and Case History

Twombly was brought as a putative class action on behalf of plaintiff consumers against telecommunications carriers Bell Atlantic, BellSouth, Qwest and Verizon—known as “Incumbent Local Exchange Carriers” (“ILECs”). The complaint alleged defendants violated Section 1 of the Sherman Act through a pattern of parallel behavior that inhibited competition and resulted in inflated prices for local telephone and high-speed Internet services to consumers.

Specifically, plaintiffs alleged the ILECs conspired to exclude competitors from and not to compete against one another in their respective geographic markets. Plaintiffs’ complaint did not allege facts demonstrating that defendants entered into an unlawful agreement to restrain trade. Nor did plaintiffs allege any “plus factors,” such as a motive to conspire, parallel acts contrary to defendants’ self-interest, or inter-firm communications, from which evidence of a conspiracy could be inferred. Instead, plaintiffs alleged only that defendants behaved in a similar fashion and that their “parallel conduct” “would be anomalous in the absence of an agreement . . . not to compete.”

The United States District Court for the Southern District of New York dismissed the complaint on the grounds that allegations of parallel conduct alone were insufficient to state a claim of violating the Sherman Act. The U.S. Court of Appeals for the Second Circuit reversed the district court’s decision, and held that plaintiffs’ allegations of conscious parallelism satisfied the pleading requirements of Rule 8(a) of the Federal Rules of Civil Procedure.

The Supreme Court’s Opinion

In a 7-2 opinion authored by Justice Souter that cited sources as diverse as Adam Smith and Charles Dickens, the Supreme Court reversed the Second Circuit. The Court held that “stating a claim [under § 1 of the Sherman Act] requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made . . . . [A]n allegation of parallel conduct and a bare assertion of conspiracy will not suffice.” Instead, the Court held, a plaintiff must allege “plausible grounds to infer an agreement . . . .”

The Court rejected plaintiffs’ argument that the “plausibility” standard would “impose a probability requirement at the pleading stage . . . .” Rather, “it simply calls for enough fact [sic] to raise a reasonable expectation that discovery will reveal evidence of illegal agreement."

In so holding, the Court resolved what plaintiffs argued was a conflict between the “plausibility” standard and its prior construction of the pleading requirements contained in Rule 8 of the Federal Rules of Civil Procedure. Namely, in Conley v. Gibson, 355 U.S. 41, 45-46 (1957), the Court held that “a complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Noting that Conley’s “no set of facts” test has been questioned and criticized by lower courts at length, the Court stated that “[the] famous observation has earned its retirement.”

The “plausibility” standard, on the other hand, the Court said, "reflects the threshold requirement of Rule 8(a)(2) that the ‘plain statement’ possess enough heft to ‘sho[w] that the pleader is entitled to relief.’ " Without additional evidence "pointing toward a meeting of the minds," Justice Souter reasoned, "an account of a defendant’s commercial efforts stays in neutral territory" and "stops short of the line between possibility and plausibility."

Under the “plausibility” standard, the Court concluded, plaintiffs’ "claim of conspiracy in restraint of trade comes up short." Plaintiffs’ complaint rested solely on allegations of parallel conduct and unilateral behavior, "not on any independent allegation of actual agreement" among the ILECs. Specifically, “nothing in the complaint intimates that resisting the upstarts was anything more than the natural, unilateral reaction of each ILEC intent on preserving its regional dominance." Indeed, each ILEC would have tried to resist new market entrants, "regardless of the other ILECs’ actions."

Additionally, the Court held, the ILECs’ reluctance to compete with each other by entering each others’ territories, did not suggest a conspiracy, but was reflective of the nature of the industry. The ILECs, “former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same." Twombly is as much a procedural decision as it is an antitrust decision. With the “no set of facts test” decisively laid to rest, courts will be better equipped to weed out meritless cases in all contexts at the motion to dismiss stage. Antitrust defendants will reap particular benefits from the decision, which will obviate the need for expensive and time-consuming discovery absent specific allegations tending to show a conspiracy. Plaintiffs will no longer be able to make vague conspiracy claims and use those claims as a ticket to discovery on the mere hope of Dickens’ Mr. Micawber—referenced in the Court’s opinion—that something will turn up.