Utah Bar Journal

The specific issue before the Supreme Court in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955, was whether a plaintiff has stated a claim for conspiracy under Section 1 of the Sherman Act, 15 U.S.C. §1, if the plaintiff alleges parallel conduct without any additional factual allegations that, if later proved true, would establish the existence of a conspiracy. The Supreme Court said no, reversing the Second Circuit. Allegations of parallel conduct alone are not enough to state an antitrust conspiracy claim. In reaching this conclusion, the Supreme Court discussed some more general issues of what a plaintiff must allege in order to state a claim under the Federal Rules and the relation of pleading to discovery. Both the direct holding of Twombly and the more general issues deserve discussion.

It is well established that, when challenged on summary judgment, a plaintiff may not rest on the allegations of the complaint, no matter how detailed, but must advance admissible evidence sufficient for a reasonable jury to find for the plaintiff. In the context of a Section 1 conspiracy claim, this standard entails that the plaintiff must come forward with evidence which tends to exclude the possibility of a non-conspiratorial explanation for the defendants’ conduct, i.e., the plaintiff must identify evidence which tends to show that there is not a legitimate or permissible business purpose for the defendants’ parallel conduct. Under Conley v. Gibson, 355 U.S. 41 (1957) and related cases, it appeared that a plaintiff could overcome a Rule 12 motion with relatively bare-boned allegations. Indeed, read in a literal fashion, Conley suggested that a bare allegation of parallel conduct would support a conspiracy claim and should be ample to overcome a Rule 12 motion. Often, Conley was cited (and read by lower courts) to establish that a plaintiff did not need to plead much beyond the bare claims. In the context of antitrust claims, however, Twombly now makes clear that a good deal more is required of a plaintiff: the plaintiff must now plead facts with an eye to the standard for summary judgment.

Background
Twombly is one of a series of class actions arising from telecommunications deregulation over the last fifteen years. The Telecommunications Act of 1996 (the Act) repealed the local service monopolies of the “Incumbent Local Exchange Carriers” (often called “Baby Bells,” herein “Incumbents”). Under the Act, Incumbents lost their monopolies and were required to provide access on favorable terms to “Competitive Local Exchange Carriers” (Competitors). Much of the structure of access has now fallen by the wayside. See, e.g., Verizon Commc’n, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004). In Twombly, the alleged class consisted of purchasers of local telephone and high-speed internet services. The plaintiffs alleged that the defendant Incumbents had (1) agreed not to compete against one another and (2) acted in parallel to prevent Competitors from entering the market by, for example, making unfair agreements with Competitors for network access, providing inferior networks, and overcharging Competitors. Based on the parallel conduct (of mistreating Competitors and not competing against other Incumbents), plaintiffs alleged a conspiracy “on information and belief.”

The district court held that the plaintiff must do more than allege parallel conduct and assert such conduct was evidence of conspiracy. Twombly v. Bell Atl. Corp., 313 F. Supp. 2d 174, 179 (S.D.N.Y. 2003). The plaintiff must also allege facts which would be sufficient, if proven, to establish at least some of the “plus factors” (which will be necessary to overcome a motion for summary judgment). Plus factors are factual elements, beyond a bare allegation of conspiracy, which tend to exclude unilateral or legal conduct. The plaintiff must allege facts which tend to exclude legitimate business explanations for the defendants’ parallel conduct. If the conduct alleged does not tend to exclude explanation by ordinary independent self-interested conduct, then the complaint must fail. In this instance, the district court found that the conduct of the Incumbents could be explained by independent decisions governed by self-interest. See Id. at 183.

The Second Circuit reversed, holding that plaintiffs were only required to plead facts consistent with conspiracy. In other words, so long as the plaintiffs pleaded facts which included an inference of conspiracy as “among the realm of ‘plausible’ possibilities,” the complaint should withstand a motion to dismiss. Twombly v. Bell Atl. Corp., 425 F.3d 99, 114 (2d Cir. 2005). Because there was “some set of facts” which could be proven by the plaintiff (consistent with the complaint) which would demonstrate that the parallelism was the product of collusion, the complaint alleged all that was necessary.

The Supreme Court’s Opinion: Antitrust Conspiracy
In a 7-to-2 decision opinion by Justice Souter, the Supreme Court reversed the Second Circuit, holding that to state a claim for conspiracy “requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made.” Twombly, 127 S. Ct. at 1965. Specifically, an allegation of parallel conduct “without some further factual enhancement . . . stops short of the line between possibility and plausibility.” Id. at 1966. “Hence, when allegations of parallel conduct are set out in order to make a Section 1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action.” Id. at 1965. In reviewing the complaint before it, the Court found nothing that provided a “plausible suggestion of conspiracy” where defendants each, Id. at 1971, had strong economic incentives to resist competition from new entrants and where a “natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.” Id. at 1972. In the Court’s view, “asking for plausible grounds to infer an agreement” does not require fact allegations making recovery probable, but does require “enough fact to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement.” Id. at 1965.

Justice Souter noted that the plaintiffs had offered something more than a bare allegation of “parallel conduct therefore conspiracy.” The complaint also includes an allegation that the CEO of Qwest, one of the defendant Incumbents, had stated that competing in the territory of other Incumbents “might be a good way to turn a quick dollar but doesn’t make it right.” Id. at 1972 n.13. But Justice Souter also noted that the entire statement by the CEO put things in a different light, and that the district court properly attended to the entire statement. See Id. In context, this is one part of an extended discussion of the allegations of the complaint aimed at determining whether the allegations, alone or jointly, provide factual allegations which, if proven, would tend to exclude a legitimate explanation for the parallel conduct. The detail of the examination, in addition to its very presence, suggests that district courts too must now examine the factual allegations of an antitrust conspiracy with some care. The possibility of a conspiracy will not do, nor will the bare possibility of an economically plausible story later developing prevent dismissal.

The Supreme Court Opinion: Wider Implications
In revisiting the pleading standard, the Twombly Court disapproved of its earlier standard in Conley v. Gibson, 355 U.S. 41 (1957), which permitted dismissal only when it appears beyond doubt that the plaintiff can prove no set of facts entitling it to relief. The Supreme Court now characterizes the “no set of facts” test as “best forgotten as an incomplete, negative gloss on an accepted pleading standard.” 127 S. Ct. at 1969. Indeed, Justice Souter spends a large portion of his opinion in discussion of Conley and whether Twombly marks a significant shift in the jurisprudence of pleading. Justice Souter thinks not. Some commentators see things otherwise, and believe that Twombly marks a dramatic change in standards for pleading. For example, Alston + Bird advises its clients that “the new pleading standard applies to all civil litigation.” Akin Gump Strauss Hauer & Feld draws conclusions almost as sweeping, advising that Twombly holds “substantial implications for pleadings and motion practice in federal district courts.” Interpretations of the sort advanced by Alston + Bird will be challenged by plaintiffs and their counsel. But one does not need a plaintiffs’ practice to see difficulties for efforts to read Twombly as changing the pleading standards outside of the antitrust context. Only a week after Twombly was handed down, the Supreme Court, in a per curiam decision, held that Rule 8’s “short and plain statement” did not require allegation of specific facts. Erickson v. Pardus, 127 S. Ct. 2197, (2007). A claim need not state specific facts, but will withstand a Rule 12 motion if it gives the defendant fair notice about what the claim is and the grounds on which it rests. The issue in Pardus was whether a prisoner had stated a claim when he alleged that a liver condition resulting from hepatitis C required a treatment program commenced by prison officials and that the program had been wrongfully terminated with life-threatening consequences. The District Court dismissed the complaint, finding the allegations conclusory. The Tenth Circuit affirmed. The Supreme Court thought the allegations sufficient, and cited Twombly in support of the conclusion. See Id. at 2200.

What this suggests is that Twombly does not mark a sea-change in pleading standards for civil litigation generally. At least for the foreseeable future, its effects are likely to be confined to antitrust litigation. That result makes some sense – Justice Souter’s concern with the tremendous costs of antitrust litigation and the difficulties district courts have in controlling antitrust litigation is the point of engagement with the dissent in Twombly. It may be then that Twombly will aid defendants in antitrust cases, but also provide an incentive for district courts to become more engaged in managing discovery in large cases.

How these issues turn out will not be known for several years as the lower courts proceed to apply Twombly. Nevertheless, it is important to attend to the care expended by the Court in tying its decision in this case with a line of cases all of which fall well short of imposing a high pleading standard.

The discussion of discovery burdens played a significant role in Justice Souter’s opinion. As anyone involved in private antitrust litigation knows, discovery in such cases is usually quite expensive, very burdensome, and terribly distracting for management. Antitrust discovery is often vastly broader, deeper, and correspondingly more expensive than in other types of cases. Discovery costs in antitrust cases run into the millions of dollars for document collection alone. Those costs are so high that nuisance settlement amounts for antitrust cases run into the millions of dollars, amounts which are often still less than discovery costs.

Antitrust cases are also particularly hard for judges to manage or control. Because the heart of any antitrust case is evidence about relevant markets, antitrust discovery easily turns into production of all business planning, marketing, and pricing documents, followed by depositions of the entire management of a company. The burdens are immense. That this was a concern for the Supreme Court may make it more likely that district courts will become receptive to exercising control over discovery.

Predictions
Twombly can be seen as a victory for antitrust defendants, imposing a heavier burden on plaintiffs to allege facts sufficient to state a plausible antitrust conspiracy. There will be, and already are, a flurry of motions requesting district courts to give closer scrutiny to Section 1 complaints. There will be more dismissals of complaints which would otherwise survive to discovery, at least in the short term. The toughened pleading standard is also likely to mean that a higher portion of conspiracy claims which survive Rule 12 challenges will also surmount summary judgment and head to trial.