Bell Atlantic Corp. v. Twombly

The Supreme Court must find the appropriate balance between two competing interests: 1) the need to filter frivolous lawsuits and 2) the desire to allow anti-trust plaintiffs with meritorious claims to obtain factual evidence through discovery.

Bell Atlantic argues that Twombly’s complaint fails to meet the pleading requirements under Rule 8 and was therefore properly dismissed. Brief for the Petitioner at 12. Bell Atlantic contends that Twombly’s allegation that Bell Atlantic engaged in parallel conduct does not, directly or through reasonable inference, support a "conspiracy" conclusion. Id. In response, Twombly urges affirmation of the 2nd Circuit’s decision and argues that the complaints meet the pleading requirements under Rule 8. Brief in Opposition at 7. Twombly contends there is not a heightened pleading requirement for antitrust cases and therefore all that is required in a complaint is a short and plain statement of the claim. Id.

Bell Atlantic argues that it is unreasonable to infer an anti-competitive conspiracy from the fact that each respective defendant was involved in parallel conduct. Parallel conduct occurs where competitors within a specific industry make similar business decisions, follow similar business models, and respond similarly to industry wide market forces. See generally Twombly, 425 F.3d 102. This position is supported by business organizations and economic theorist. Economists argue that parallel action is a common and often legitimate phenomenon because similar competitors with similar information and economic interests will often react similarly to similar market forces. Brief of Amici Curiae Economists in Support of Petitioner at 4-5 [hereinafter “Brief of Economists”]. For example, in highly regulated industries parallel conduct is common, because many companies react similarly to uniformly applied regulations. Brief of the Chamber of Commerce of the United States of America, CTIA - the Wireless Association, the Alliance of Automobile Manufacturers, Northwest Airlines, Inc., and United Air Lines, Inc., as Amici Curiae in Support of Petitioners at 7-8[hereinafter “Brief of the Chamber of Commerce”]. In the same manner, competing wheat farms will accept the same price for their product because they are all subject to the same supply and demand forces. Brief of Economists at 4-5. Logically, parallel conduct is just as indicative of innocent behavior as it is of a conspiratorial intent.

Consequently, by allowing the inference of a conspiracy based solely on parallel conduct, the 2nd Circuit’s decision will expose many innocent defendants to meritless and frivolous lawsuits. Due to a lowered standard to survive a 12(b)(6) motion, many unscrupulous plaintiff’s will go on fishing expeditions in order to force an evidentiary discovery process in the slight hope of obtaining incriminating evidence. Brief of the American Petroleum Institute as Amicus Curiae Supporting Petitioners at 7. Alternatively, in light of the 2nd Circuit’s decision, lawyer-driven class action suits will attempt to coerce “blackmail settlements” from innocent defendants who hope to avoid the asymmetrical and often massive cost of evidentiary discovery and litigation. Brief of the Chamber of Commerce at 7. Encouraged by the economic windfall of these settlements, plaintiffs will be given further incentive to bring less than meritorious suits, further straining judicial resources.

The collective cost of “blackmail settlements,” frivolous litigation, and needless evidentiary discovery will have additional indirect costs. Companies consider anticipated litigation and settlement costs when making business decisions. Brief of Economists at 6. The 2nd Circuit’s decision will increase a company’s potential exposure to litigation cost, creating a “tax” on their cost of operations. Id. This tax will prevent businesses from responding as efficiently to changes in market factors such as increased costs, changes in demand, or emerging technology. Id. This will in time result in reduced economic productivity and wealth. Id.

Supporters of Twombly’s position argue that the 2nd Circuit’s standard for pleading requirements is correct in light of the general nature of anti-trust litigation. Evidence of a “conspiracy” is inherently in the possession of the defendant. Brief of the American Antitrust Institute in Support of Respondents at 4-5 [hereinafter “AAI”]. Therefore, requiring complaints to plead facts indicative of an agreement would effectively block most meritorious anti-trust suits and would undermine essential private anti-trust enforcement. The Supreme Court has stated that the “purposes of the antitrust laws are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating business behavior in violation of the antitrust laws.” See Id. at 7 (citing Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 151 (1987)). Recognizing this purpose, the Supreme Court has acknowledged that it “should not add requirements to burden the private litigant beyond what is specifically set forth by Congress in [the antitrust] laws.” See Id. (citing Perma Life Mufflers, Inc. v. International parts Corp., 392 U.S. 134, 139 (1981))

The need for private enforcement, Twombly argues, is reinforced by the fact that anti-trust violators are massively under-deterred by government enforcement. Id. at 7-10. A recent study has shown that, as a result of conspiratorial activity, cartels have overcharged an average of 25% since 1990. See Id. (citing John M. Connor & Robert H. Lande, How High Do Cartels Raise Prices: Implications for Optimal Cartel Fines, 80 Tul.L.Rev. 513, 560-61 (2005)). Additionally, existing sanctions for anti-trust violations fall short of optimal deterrence. Id. at 9. An optimal government fine should equal the net harm caused by the anti-trust violations. Id. However, the detection rate for anti-trust violations is probably between 10% and 30%. See Id. (citing Peter G. Bryant & E. Woodrow Eckard, Price Fixing: The Probability of Getting Caught, 73 Rev. Econ. & Stat. 531, 535 (1991))Thus, potential anti-trust violators have a large economic incentive to enter conspiratorial agreements. Clearly, Congress intended private enforcement to fill this voId.

Additionally, supporters of the 2nd Circuit decision contend that concerns of increased frivolous litigation are unwarranted. The American Anti-Trust Institute contends that only 16% of judges consider groundless litigation to be a “large or very large” problem in federal courts. See Id. at 3 (citing John Shapard, et al., Federal Judicial Center, Report of a Survey Concerning Rule 11, Federal Rules of Civil Procedure 3 (1995)). Additionally, only 21% of Federal Judges surveyed in a Harris poll consider frivolous suits and defenses without merit to be a major cause of delays in litigation. See Id. at 3 (citing Judges’ Opinions On Procedural Issues: A Survey Of State And Federal Trial Judges Who Spend At Least Half Their Time on General Civil Cases, 69 B.U. L. Rev. 731, 734 (1989)). These survey results suggest that complaints do not require a “plus factor” to serve as an adequate gatekeeper to prevent waste of judicial resources.

Since the parties appear before the Supreme Court to determine whether Twombly’s claim should be dismissed, the Court’s decision will not decide the question of whether a conspiracy does, in fact, exist. Instead, this decision will only determine whether Twombly’s suit will survive Bell Atlantic’s motion to dismiss and proceed to the next step in litigation.

Bell Atlantic’s Argument

Bell Atlantic first argues that the 2nd Circuit incorrectly applied a “plausibility” standard in determining whether a complaint is sufficient to survive a Fed.R.Cir.P. 12(b)(6) motion to dismiss. Reply Brief for Petitioner at 1. In order to survive the “plausibility” standard, a complaint must contain a factual predicate which includes conspiracy among the “realm of plausible possibilities.” Brief for the Petitioner at 27. According to Bell Atlantic, claims alleging horizontal conspiracy under § 1 of the Sherman Act need to pass the “tend to exclude” standard articulated in Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). Reply Brief for Petitioner at 4. Under this standard, a plaintiff must present factual allegations that “tend to exclude” the possibility that the defendants acted independently. Brief for the Petitioner at 24. Although Bell Atlantic acknowledges that Matsushita was decided on summary judgment, Bell Atlantic contends that Matsushita’s application of the “tend to exclude” standard is not limited to summary judgment cases. Reply Brief for Petitioner at 5.

Bell Atlantic argues that the “plausibility” standard is against the principle that a pleading of conspiracy requires factual allegations that directly or through reasonable inference illustrate that the defendants conspired. Brief for the Petitioner at 23. Bell Atlantic contends that the “plausibility” standard will allow mere allegations of innocuous parallel conduct coupled with assertions of a conspiracy to survive a motion to dismiss. Reply Brief for Petitioner at 2. Bell Atlantic acknowledges that under the “plausibility” standard, a complaint will not be dismissed unless there are “no set of facts that would permit a plaintiff to demonstrate that the particular parallelism asserted was the product of collusion rather than coincidence.” Brief for the Petitioner at 27. However, Bell Atlantic argues that this is a moot requirement because no set of facts can completely eliminate the possibility that the defendants conspired. Id. at 27.

Bell Atlantic further argues that the “plausibility” standard incorrectly assumes that a plaintiff can prove facts not alleged in the complaint. Id. at 28. According to Bell Atlantic, the 2nd Circuit, in allowing the complaint to go forward, hypothesized the truth of facts that were not alleged in the complaint. Id. Bell Atlantic, however, fails to note that the 2nd Circuit listed many factual allegations that, if true, would demonstrate that the defendants participated in a conspiracy. Twombly, 425 F.3d 117-19. The 2nd Circuit further announced that these factual allegations were sufficient to give the defendants “fair notice” of the plaintiff’s claim. Id. at 118-19.

After dismissing the “plausibility” standard, Bell Atlantic contends that the plaintiff’s allegations are insufficient to support an inference of conspiracy under the “tend to exclude” standard. Brief for the Petitioner at 29. Bell Atlantic first argues that the plaintiff’s factual allegations do not exclude the possibility that each defendant acted in its own unilateral business interest. Id. at 30. In support of this argument, Bell Atlantic contends that the hypothesized economic advantages of an agreement to prevent successful CLEC competition can be easily obtained without an agreement between the defendants. Id. at 32. Bell Atlantic then argues that the lack of competition within a geographic region does not support an inference of conspiracy. Id. at 33. Bell Atlantic points to a variety of factors such as scarcity of resources and risks of new entry that may lead a business to forego a potentially profitable new entry. Id. at 33-34.

Twombly’s Argument

Twombly first contends that Bell Atlantic mischaracterizes the 2nd circuit’s opinion. Brief in Opposition at 1. Twombly asserts that the “plausibility” standard will not always allow mere allegations of “parallel conduct” to survive a motion to dismiss. Id. Under the plausibility standard, an inference of a conspiracy must be “plausible” from the facts pleaded. Id. Additionally, replying on In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370, in which the 2nd Circuit held that the inference of a conspiracy was not “plausible,” Twombly asserts that this requirement of “plausibility” is much more significant than Bell Atlantic contends. Id. Twombly further contends that the 2nd Circuit’s opinion differentiated between different kinds of “parallel conduct” and recognized that allegations of “parallel conduct” will not always satisfy the “plausibility” standard. Brief in Opposition at 2. Twombly asserts that the alleged “parallel conduct”, which is the defendant’s non-competition policy in each others markets, is a much more “plausible” indication of a conspiracy than other forms of “parallel conduct.” Id. As a threshold matter, the Supreme Court needs to determine if a plausibility standard even exists. According to Professor Kevin Clermont, the Supreme Court’s 1957 Conley decision, which set forth the pleading requirements and which the District Court cited, never articulated a test for the truthfulness of a factual allegation. Interview with Kevin Clermont, James & Mark Flanagan Professor of Law, Cornell Law School, in Ithaca., NY. (Oct. 31, 2006). The controversy should be over the level of detail required in the factual allegations and not the truthfulness of the allegations. Id.

Next, Twombly argues that applying Matsushita’s “tend to exclude” standard would be contrary to established law. Brief in Opposition at 2. Relying on Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002), Twombly asserts that applying this standard on a motion to dismiss would be an impermissible heightened pleading standard. Brief in Opposition at 3. The court in Swierkiewicz, stressed the importance of the “fair notice” pleading standard and stated that it would be “incongruous to require a plaintiff, in order to survive a motion to dismiss, to plead more facts than he may ultimately need to prove to succeed on the merits if direct evidence of discrimination is discovered.” Swierkiewicz, 534 U.S. at 511-12. Twombly contends that the “tend to exclude” standard which would require alleging “plus factors,” is exactly the kind of heightened standard that Swierkiewicz rejected. Brief in Opposition at 7.

Third, Twombly argues that even if Bell Atlantic’s proposal for a heightened pleading standard is to be considered at all, it should only be considered in rulemaking or legislation and not by the Court. Brief for Respondents at 5. In support of this position, Twombly relies on the Supreme Court’s previous decisions. Leatherman v. Tarrant County NICU, held that a requirement for a heightened pleading standard “must be obtained by the process of amending the Federal Rules of Civil Procedure, and not by judicial interpretation.” 507 U.S. 163, 168 (1993). Swierkiewicz reemphasized Leatherman’s position that heightened pleading standards should only apply to specific instances enumerated in the Federal Rules of Civil Procedure. Swierkiewicz, 534 U.S. at 513. Twombly further asserts that the general practice of courts is to apply heightened pleading requirements only to those instances explicitly announcegd by Rule 9(b) or by legislation. Brief for Respondents at 7.

Finally, Twombly asserts that the factual allegations in the complaint are sufficient to survive a motion to dismiss under the “plausibility,” “fair notice,” and “tend to exclude” standard. Brief for Respondents at 39. Twombly contends that the non-competition among the defendants is not the unilateral result of the defendants pursuing their individual financial interest. Brief in Opposition at 23. Twombly lists various other allegations, such as the public statement made by Richard Nobert, and asserts that these allegations sufficiently make an inference of conspiracy “plausible.” Id. at 23-24. Furthermore, Twombly asserts that the numerous allegations that the defendants agreed to prevent competition from CLECs, is sufficiently detailed to provide “fair notice” to the defendants. Id. at 28. Additionally, Twombly asserts that the allegations of defendants’ “parallel conduct” which was against their own economic interests constitute the “plus factors” required to satisfy heightened pleading standards. Id. at 26.