In the decade since the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, courts have struggled with how to deal with horizontal conspiracy allegations in antitrust cases in the absence of evidence of an explicit agreement among competitors--evidence that may be hard to come by without formal discovery. In examining this issue, the Eleventh Circuit recently reversed a district court dismissal order, ruling 2-1 that the allegations contained within the four corners of the complaint were sufficient to allege an antitrust conspiracy, even in the absence of explicit evidence of an agreement.
The Alleged Conspiracy: Horizontal Price Fixing and Group Boycott.
In In re Auto Body Shop Antitrust Litigation, the Eleventh Circuit considered a lawsuit brought by auto body shops against insurance companies who allegedly had engaged in two tactics to depress the body shops’ rates for automobile repair. The first set of tactics involved a “market rate” established for repairs that was untethered to actual market forces, and instead assertedly designed to benefit the insurance companies. In practice, the market rate consisted of the market labor rate plus the market cost of materials, both of which were selected by the insurance companies. Rather than offering competitive market rates, the insurance companies all adopted State Farm’s market labor rate (which itself was established by State Farm, and claimed not to have been verified). The plaintiffs also claimed that the insurance companies had lowered market material costs by pressuring body shops into using inferior parts, and forcing them to offer discounts and concessions. Through these practices, the insurance companies allegedly were able conspiratorially to ensure a low market rate not tied to actual market conditions, thereby reducing the amounts they credited to their insured for repair costs.
To enforce the market rate, the insurance companies allegedly conspired to adopt a second set of tactics to steer insureds away from any non-compliant shops charging more than the market rate. For example, if a body shop did not offer the set market rate, the insurance company would tell insureds that the insurer could not guarantee the shop’s work—this, despite the fact that insurance companies do not guarantee the work of any body shop. The insurance companies would also tell insureds that the quality of work at a non-compliant body shop was poor, without ascertaining the truth of those statements and intending to disparage the non-compliant body shops.
Together, this two-pronged scheme allegedly depressed the payments that insurance companies had to make to auto body shops for car repairs. Two antitrust violations were claimed: horizontal price fixing, supported by allegations of parallel conduct plus other factors, and a group boycott through false and misleading statements to drive insureds away from non-compliant auto body shows.
The district court dismissed the antitrust claims under Federal Rule 12(b)(6), finding that the complaint alleged only evidence of lawful conscious parallelism and insufficient factual allegations of concerted action. Plaintiffs appealed to the Eleventh Circuit.
The Alleged Plus Factors.
In examining the horizontal price fixing claims, the Eleventh Circuit majority noted that “in the absence of direct evidence of an agreement,” an antitrust claimant must show both parallel conduct plus further factual enhancement. The court declared that the body shops had alleged two “plus factors” supporting an agreement. First, the insurance companies had “adopt[ed] a uniform price despite variables that would ordinarily result in divergent prices.” It was unnatural, the majority declared, for the insurance companies to avoid distinguishing themselves from one another as would be expected in a competitive environment, such as by offering higher-quality parts or highly skilled labor.This “unnatural parallelism” trended towards existence of an agreement. Second, the court determined that the complaint adequately alleged that the insurance companies had engaged in “uniform practices”, namely requiring use of inferior parts and engaging in the same types of misleading and false statements to enforce the “market rate”. Taken together, the panel majority concluded that the complaint adequately inferred the existence of an illegal agreement.
The majority also credited the body shops’ allegations that the insurance companies targeted shops that refused to use the “market rate” by making false or misleading statements to drive insureds away. The court noted that these tactics were virtually identical, and specifically that the uniform use of the same type of false or misleading statements about the body shops’ quality and business integrity supported the existence of an agreement.
In sum, the Eleventh Circuit majority concluded that the complaint complied with the Twombly requirements: allegations of a plausible conspiracy along with sufficient factual allegations supporting such a plausible claim.
The Dissent’s Reliance on Outside Experience.
In a lengthy dissent, Judge Anderson disagreed with the majority’s antitrust findings, stressing that even if all of the allegations were taken as true, the auto body shops had simply alleged standard (if unsavory) business practices and not actual actionable conduct. First, Judge Anderson argued that there was no explanation of why one would expect market rates to diverge, despite the body shops’ allegations concerning differing labor rates and the possibility of using higher quality parts instead of cheaper replacement parts. As to auto parts specifically, Judge Anderson noted that many parts are “ubiquitous, interchangeable, and standardly priced”—a supposed fact not found in the complaint.
Second, the dissent pointed out that the uniformity of tactics could just as plausibly be explained by a company’s desire to increase its profits, noting that installing lower quality parts and requiring discounts were “time-worn methods of increasing corporate profits in any industry, let alone in an industry where parts and labor reimbursements are the primary business expenditures.” Finally, with respect to the boycott claims, Judge Anderson declared that even if all of the insurance companies used the same steering tactics, they could have done so independently, and indeed the reasons given—that the body shop takes long, or does poor quality work—“would seem obvious reasons an insurance company would not want its insureds to use that body shop.”
The majority addressed all of the dissent’s reasoning, noting that Judge Anderson impermissibly relied on his own experience and facts outside of the complaint rather than relying on the body shops’ well-pled allegations. For the horizontal price-fixing claims, the majority faulted Judge Anderson’s reliance on his own understanding of auto parts and business practices to determine that the insurance companies’ practices were not the subject of an agreement. This “substitution based on external knowledge” ran contrary to the central tenet of judgments on the pleadings, that the complaint’s allegations are to be taken as true. As to the boycott claims, the majority noted that the fact that all of the insurance companies employed a practice of making demonstrably false and misleading statements created an “idiosyncrasy” supporting inference of an agreement.
Conclusion: Plus Factors Can Support the Inference of an Agreement.
The Eleventh Circuit’s In re Auto Body Shop Antitrust Litigation decision properly reaffirms a long-settled central tenet of pleading, even after Twombly—that courts must rely on the well-pled and plausible allegations in the four corners of the complaint, even if the judges’ own experience may run contrary to those allegations. In the absence of direct evidence of an agreement, something that may be difficult to come by at the pleading stage, the Eleventh Circuit panel majority correctly adopted a qualitative use of plus factors, taking a holistic view of how allegations, taken together, can support an inference of an agreement. In re Auto Body Shop Antitrust Litigation makes clear that antitrust plaintiffs can plead an agreement through plus factors: in this instance, allegations of “unnatural” parallel conduct, and conduct that creates an “idiosyncrasy” inferring concerted action.