K&LNG
NOVEMBER 2006
Alert
Antitrust & Competition
U. S. Supreme Court To Decide Pleading Standards
For Sherman Act Section 1 Conspiracies
In a case that could significantly alter the course
of antitrust litigation for both plaintiffs and
defendants, the U.S. Supreme Court is set to
decide the pleading requirements a Sherman Act
section 1 conspiracy claim must satisfy to survive
a motion to dismiss. In Bell Atlantic Corp. v.
Twombly, 126 S. Ct. 2965 (U.S. Jun. 26, 2006), the
Court granted certiorari to decide whether, to
survive a motion to dismiss for a section 1
conspiracy claim, a plaintiff is required only to
plead parallel conduct by defendants and a
“plausible” conspiracy, or whether the plaintiff
also must plead additional facts that, if proven,
would be sufficient to “exclude the possibility”
of independent conduct, thereby adhering to the
more stringent standard applied to section 1
summary judgment motions. To resolve this
issue, the Court must reconcile the tension
between the liberal notice-pleading standards
of the Federal Rules of Civil Procedure and the
need to protect defendants from the burden of
defending meritless lawsuits. This tension is
heightened in antitrust litigation because of the
complexity of the legal and evidentiary issues and
the substantial cost of discovery to antitrust
defendants.
The Supreme Court’s ruling is expected to
have a significant practical impact on both
antitrust defendants and plaintiffs. The pleading
requirements for section 1 claims determine
what claims get to discovery, and consequently
determine the litigation and settlement strategies
for these claims. As the defendant-respondents
frame the issue, if parallel conduct plus mere
conclusory assertions of conspiracy are alone
enough to subject defendants to the costs and
uncertainty of discovery, the antitrust litigation
risk could become a significant factor in business
decisions, discouraging pro-competitive parallel
conduct. Conversely, plaintiff-petitioners argue
that a heightened standard requiring “plus
factors” may serve to shield illegal horizontal
conspiracies from liability by limiting access to
critical discovery documents.
The Department of Justice (“DOJ”) filed an
amicus curiae brief supporting the Petitioners.
The DOJ argued that a complaint must, at
minimum, allege a “sufficient factual predicate”
to “provide meaningful notice to the defendant”
and to “demonstrate a reasonable basis for
inferring that the alleged conduct may be
wrongful.” According to the brief, the complaint
at issue does not meet this minimal standard.
The Challenged Complaint
The present case arises out of the deregulation of
the telecommunications industry pursuant to the
Telecommunications Act of 1996 (the “Act”).
Under the Act, the defendants, “incumbent local
exchange carriers” (“ILECs”) (formerly the
“Baby Bell” regional monopolies), are required
to open their local telephone monopolies to
competition from “competitive local exchange
carriers” (“CLECs”) by making their networks
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available to the CLECs for “just, reasonable, and
nondiscriminatory” rates. The CLECs are then
able to use the ILECs’ network to compete
against the ILECs for local telephone customers.
The plaintiffs, local telephone consumers, sued
the ILECs in the Southern District of New York,
alleging violations of section 1 of the Sherman
Act for conspiring to thwart CLEC competition
provided for under the Act. Specifically, the
plaintiffs alleged that the defendants violated
section 1 by conspiring to allocate markets among
existing ILECs and to prevent new CLECs from
entering any local markets by uniformly
negotiating unfair deals and providing poor
service to those CLECs using their networks.
To support an inference of conspiracy, the
plaintiffs additionally alleged: (1) that the
defendants refrained from entering markets even
where they would have had a competitive
advantage (e.g., geographic proximity); (2) that
Qwest CEO Richard Noteabart made a statement
that competing as a CLEC would “turn a quick
dollar,” but that “doesn’t make it right,” which
was cited as evidence that defendants were acting
against their economic interests; (3) that several
U.S. Congressmen raised questions about the
Baby Bells’ “non-competition policy,” requesting
an investigation by the Department of Justice;
and (4) that the defendants had frequent
opportunities to communicate and facilitate
collusion through various trade organizations.
The plaintiffs also cited a consumer group’s
report that accused the defendants of refusing to
open their markets.
The Lower Courts’ Rulings
The District Court applied the summary
judgment “plus factors” standard to the motion
to dismiss, holding that allegations of “conscious
parallelism,” by themselves, are not sufficiently
probative of conspiracy to survive a motion to
dismiss. Twombly v. Bell Atlantic Corp., 313 F.
2
Supp. 2d 174, 179-82, 184, 189 (S.D.N.Y. 2003).
In the summary judgment context, the “plus
factors” test requires that a plaintiff produce
evidence of parallel conduct plus evidence of
additional factors that “tends to exclude
independent self-interested conduct as an
explanation for the defendants’ parallel
behavior.” Id. at 179. The plus factors include
evidence that the parallel conduct is against the
defendants’ individual economic interests and
evidence that the defendants “possessed a strong
motive to conspire.” Id. The Court applied this
same test as the pleading standard for a motion to
dismiss. Id. at 179-82. The Court examined the
plaintiff’s additional evidence and concluded
that none of the facts were “suspicious enough to
suggest that defendants are acting pursuant to a
mutual agreement rather than their own
individual self-interest.” Id. at 182, 189.
Accordingly, the District Court granted the
defendants’ motion to dismiss. Id. at 189.
On appeal, the U.S. Court of Appeals for the
Second Circuit reversed, holding that the District
Court erred in applying the heightened “plus
factors” standard to a motion to dismiss. Twombly
v. Bell Atlantic Corp., 425 F.3d 99, 106 (2d Cir.
2005). As a general principle, the Court noted
that “we have consistently rejected the argument
. . . that antitrust complaints merit a more rigorous
pleading standard…” Id. at 108. Antitrust claims
are subject only to the standard notice pleading
requirements. Id. at 112-13. According to the
Second Circuit, to survive a motion to dismiss, a
plaintiff is required only to plead “the existence
of a conspiracy” and a “sufficient factual predicate
on which that allegation is based.” Id. at 114. To
establish the “factual predicate,” the facts need
only show that a horizontal conspiracy is a
plausible possibility. Id. Under this more lenient
standard, parallel conduct alone can “suffice to
state a plausible claim of conspiracy.” Id. Thus,
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a defendant would have to show that “there is
no set of facts that would permit a plaintiff to
demonstrate that the particular parallelism
asserted was the product of collusion rather than
coincidence.” Id. While pleading “plus factors”
may strengthen the plausibility of the conspiracy
pleading, these “plus factors” are not required for
a pleading to survive a motion to dismiss. Id. The
Second Circuit reasoned that a plaintiff should not
be required to plead “plus factors” when those
factors may not be required to be proven at trial,
as when discovery yields direct evidence of a
conspiracy. Id. The Court concluded that,
accepting all facts alleged as true and “drawing all
inferences in favor of the plaintiffs,” the plaintiffs
had “satisfied their burden at the pleading stage.”
Id. at 117. Because the Court held that “plus
factors” were not required, it did not address the
District Court’s holding concerning the additional
factors alleged by the plaintiff. Id. at 106.
The defendants subsequently appealed to the
Supreme Court. The Court granted certiorari on
June 26, 2006.
Oral argument in Bell Atlantic Corp. v. Twombly is
scheduled for Monday, November 27, 2006.
Ryan D. DeMotte
rdemotte@klng.com
412.355.6440
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