Pleading an Antitrust Conspiracy in a Post-twombly World

• Publication year: 2015
• Author: By Joshua Stokes and Jordan Ludwig

PLEADING AN ANTITRUST CONSPIRACY IN A POST-TWOMBLY WORLD

By Joshua Stokes and Jordan Ludwig¹

I. INTRODUCTION

Bell Atlantic Corp. v. Twombly is one of the most important cases to ever be decided interpreting the Federal Rules of Civil Procedure.² At its core, Twombly clarified what Federal Rule of Civil Procedure 8(a)(2) means when it asks for a "short and plain statement of the claim showing that the pleader is entitled to relief" and how a complaint survives a motion to dismiss for failure to state a claim upon which relief can be granted brought under Rule 12(b)(6). The Court's new interpretation of these rules—described in detail below—abrogated its prior decision in Conley v. Gibson,³ which merely required the plaintiff to provide fair notice of the claim to the defendant.

Twombly's significance is undeniable. According to Westlaw, as of July 31, 2015, it has been cited in a breathtaking 118,866 judicial opinions. But despite its near universal relevance, Twombly is of special import in antitrust cases—and, more specifically, conspiracy cases under Section 1 of the Sherman Act.⁴ Twombly itself was a Section 1 conspiracy case alleging an agreement between telephone companies to thwart competition by preventing upstart companies from expanding in the market and by agreeing not to compete with one another.⁵ The Court's holding in Twombly was grounded largely in antitrust principles—so much so that it led some lower courts to initially conclude that the rule in Twombly applied only in conspiracy cases.⁶ The Supreme Court clarified Twombly's broader application two years later in Ashcroft v. Iqbal—notably, over the dissent of Justice Souter, Twombly's author.⁷

This article highlights principal decisions, circuit by circuit, discussing the standards for pleading an antitrust conspiracy under Twombly. Although some familiarity with Twombly is assumed, Section II contains a refresher of Twombly's facts and holding. The heart of the article, Section III, discusses the various approaches the circuit courts have taken with regard to Twombly. Specifically, this section is broken down into conspiracies that are pleaded based on direct evidence (Section III.A) and—much more significantly— conspiracies that are pleaded based on circumstantial evidence (Section III.B). Given that the majority of antitrust conspiracies are pleaded with circumstantial evidence, the latter category is of distinct consequence. In this section, we strive to provide a survey of the most important cases from each circuit to assist practitioners trying to navigate this murky intersection between antitrust law and civil procedure. Finally, Section IV contains our concluding remarks on the subject and ties together the key areas of divergence that have emerged from this body of case law.

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II. A BRIEF TWOMBLY CRASH COURSE

Although most readers of this article have almost certainly studied Twombly at one point, this section provides a review of Twombly's facts and holding.

A. The Facts

Following the 1984 divestiture of AT&T's local telephone business, a system of regional local monopolies known as—among other things—Incumbent Local Exchange Carriers (ILECs) or "Baby Bells" was established.⁸ For a time, the ILECs maintained their regional monopolies for local telephone service but were excluded from the competitive market for long-distance services.⁹ This changed when the Telecommunications Act of 1996 ("the 1996 Act") was passed. Among other things, the 1996 Act was meant to engender competition and "'facilitate market entry'" into the local telephone service markets.¹⁰ It attempted to accomplish this goal by requiring each ILEC to share its network with competitors—known as Competitive Local Exchange Carriers (CLECs).¹¹To compensate the ILECs for this, the 1996 Act provided a path for the ILECs to enter the competitive long-distance market.¹²

In 2002, William Twombly and Lawrence Marcus filed a class-action complaint against a group of ILECs under Section 1 of the Sherman Act.¹³ The complaint alleged that the ILECs conspired to restrain trade in two ways: (1) by "engaging in parallel conduct" to thwart the upstart CLECs' growth; and (2) by refraining from competing against each other.¹⁴ More specifically, as to the first alleged restraint of trade, the plaintiffs claimed that the ILECs suppressed competition by making unfair agreements with the CLECs to access ILEC networks, providing the CLECs with inferior connections to the ILEC networks, overcharging the CLECs, and billing the CLECs in a manner intended to sabotage their customer relationships.¹⁵ As to the second alleged restraint of trade, the plaintiffs alleged that the ILECs failed to pursue "attractive business opportunities" in each other's markets. In support, the plaintiffs referred to a public statement made by the CEO of one ILEC noting that competing in another ILEC's territory "might be a good way to turn a quick dollar but that doesn't make it right."¹⁶ In summary, the complaint alleged that because there was no "meaningful competition" between the ILECs in each other's markets and because of the "parallel course of conduct that each engaged in to prevent competition from CLECs within their respective" markets, the defendants had entered into a conspiracy to restrain trade.¹⁷

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A district judge in the Southern District of New York dismissed the complaint under Rule 12(b)(6) for failing to state a claim.¹⁸ The district court held that consciously parallel conduct, without more, did not state a claim under Section 1.¹⁹ The court also noted that the alleged behavior of the ILECs in resisting emerging competition was "fully explained" by each ILEC's economic self-interest in defending its territory.²⁰ The Second Circuit reversed. It held that the district court applied the incorrect standard for evaluating a motion to dismiss.²¹ The reversal was guided by the Second Circuit's view that a plaintiff need not plead "plus factors" in a complaint to support a conspiracy premised on parallel conduct.²² While the court noted that on summary judgment a plaintiff is required to come forward with such plus factors, at the pleading stage, "we are concerned only with whether the defendants have 'fair notice' of the claim, and the conspiracy that is alleged as part of the claim, against them."²³ The Supreme Court granted certiorari to review the Second Circuit's decision.

B. The Holding

The Court reversed the Second Circuit's ruling. It began by noting that "[t]his case presents the antecedent question of what a plaintiff must plead in order to state a claim under § 1 of the Sherman Act."²⁴ The Court proceeded to discuss what Rule 8 requires a complaint to contain to survive a motion to dismiss. In a now oft-quoted portion interpreting Rules 8 and 12, the Court wrote, "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations . . . a plaintiff's obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. . . . Factual allegations must be enough to raise a right to relief above the speculative level, on the assumption that all the allegations in the complaint are true (even if doubtful in fact)."²⁵ Under these general principles, the Court held that to successfully plead a Section 1 claim, a complaint must contain "enough factual matter (taken as true) to suggest that an agreement [to restrain trade] was made."²⁶ This standard, according to the Court, did not "impose a probability requirement at the pleading stage"; rather, the allegations must "plausibly suggest[]" that an agreement was made and not be "merely consistent with" an agreement.²⁷ In the context of agreements pleaded on the basis of parallel conduct, the Court forcefully stated that "an allegation of parallel conduct and a bare assertion of conspiracy will not suffice. Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality."²⁸ Instead, the Court held that the allegations of parallel conduct "need[] some setting" or "further factual enhancement" to cross the line from possible to plausible.²⁹ The Court noted in a footnote, however, that it was not applying any heightened pleading standard or attempting to broaden the scope of Federal Rule of Civil Procedure 9 to antitrust cases or otherwise.³⁰

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In reaching this conclusion, the Court abrogated its prior holding in Conley v. Gibson. In particular, the Court took issue with the language in Conley stating 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."³¹ In Twombly, the Court discussed a history of misinterpreting this phrase as literal, which according to the Court would allow any conclusory statement of a claim to survive a motion to dismiss so long as the complaint left open any possibility of recovery.³² The Court was unwilling to accept this interpretation of Conley. Consequently, it held that this language from Conley was "best forgotten as an incomplete, negative gloss on an accepted pleading standard" and "earned its retirement."³³

The Court then proceeded to apply these principles to the allegations in the plaintiffs' complaint. At the very outset, the Court noted that this was a conspiracy pleaded on parallel conduct and not on allegations of direct agreement among the ILECs.³⁴ It acknowledged that there were a few "stray" references to a direct agreement, but dismissed these allegations as mere legal conclusions that need not be accepted as true by the Court.³⁵ Instead, the "nub" of the complaint as read by the Court was that the ILECs' "parallel behavior, consisting of steps to keep the CLECs out and manifest...