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Argument Preview: Bell Atlantic Corp. v. Twombly on 11/27

The following argument preview was written by David Moskowitz, a student in the Stanford Supreme Court Litigation Clinic.

On Monday, November 27, the Supreme Court will hear oral argument in Bell Atlantic Corp. v. Twombly (No. 05-1126). The question presented is whether “a complaint states a claim under Section 1 of the Sherman Act, 15 U.S.C. § 1, if it alleges that the defendants engaged in parallel conduct and adds a bald assertion that the defendants were participants in a ‘conspiracy,’ without any allegations that, if later proved true, would establish the existence of a conspiracy under the applicable legal standard.”

Michael K. Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C. will argue on behalf of the petitioners. He will share his time with Assistant Attorney General Thomas O. Barnett, who will argue on behalf of the United States as amicus in support of the petitioners. J. Douglas Richards of Milberg Weiss Bershad & Schulman LLP will argue on behalf of the respondents. The briefs for the parties are available here.

This case arises out of the Telecommunications Act of 1996. Prior to the Act, each of the seven “Baby Bell” companies (predecessors to the four petitioner/defendant companies) operated a regional, government-sanctioned telephone monopoly. The Act opened up the regional monopolies to competition by requiring these incumbent local exchange carriers (ILECs) to provide new entrants (competitive local exchange carriers or CLECs) with access to the local telephone networks at low, cost-based rates. In return for opening up the local markets, the ILECs were permitted to offer long-distance service, which they had been prohibited from providing since the breakup of AT&T in 1982.

The plaintiff-respondents in this case, on behalf of all users of telephone and Internet services in the continental United States over the past decade, filed suit against the ILECs, alleging a conspiracy to keep the CLECs from successfully entering the respective local markets. They allege that the ILECs violated Section 1 of the Sherman Act—which prohibits “[e]very contract, combination . . ., or conspiracy, in restraint of trade or commerce”—in two ways: 1) by agreeing to not compete as CLECs in each others’ markets; and 2) by agreeing to engage in parallel patterns of behavior to keep CLECs from successfully entering their respective markets.

In support of these conspiracy claims, respondents allege that it would be anomalous in the absence of an agreement not to compete in each others’ markets because the ILEC service territories were not always contiguous, leading to “substantial competitive advantages” in certain contiguous areas and presenting “an especially attractive business opportunity.” They further point to a statement of an ILEC executive that competing as a CLEC in another’s territory “might be a good way to turn a quick dollar but that doesn’t make it right.” With respect to specific parallel behavior towards CLECs, respondents allege a common motive between the defendant-petitioners—that greater success of any CLEC in making competitive inroads into one defendant’s territory “would have enhanced the likelihood that such a CLEC might present a competitive threat in other Defendants’ territories as well.”

The district court granted the petitioners’ motion to dismiss for failure to state a claim. Drawing on the summary judgment standard in parallel conduct cases, the court concluded that respondents’ claim was insufficient because it failed to allege at least one “plus factor”—any factor tending to exclude independent self-interested conduct as an explanation for the parallel behavior. “[S]imply stating that defendants engaged in parallel conduct, and that this parallelism must have been due to an agreement,” the district court explained, “was equivalent to a conclusory, ‘bare bones’ allegation of conspiracy.”

The Second Circuit reversed. While acknowledging that a “bare bones” statement of conspiracy without supporting facts permits dismissal, the court concluded that the factual predicate need only include conspiracy “among the realm of possibilities.” Consequently, the court held that the appropriate standard for failure to state a claim is whether “a court would have to conclude 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.”

In their brief on the merits, petitioners contend that respondents have failed to state a claim because they merely make a conclusory assertion that a conspiracy existed, without providing any additional factual allegations to support that conclusion. They argue that the required specificity of a pleading depends on the substantive legal standard governing the claim. Here, the Second Circuit’s “realm of possibilities” standard is incorrect because it fails to take into account underlying antitrust standards. Specifically, the standard: 1) fails to recognize that in most circumstances parallel conduct does not support a conspiracy inference; and 2) does not require plaintiffs to allege facts tending to exclude the possibility that alleged conspirators acted independently, which must be established to survive summary judgment under a Section 1 claim. They assert that respondents’ claims should be dismissed because there can be no conspiracy inference where each company has independent self-interest reasons for acting in the manner alleged: 1) there is nothing suspicious about incumbents trying to keep CLECs from successfully entering their respective markets; and 2) given the background regulatory uncertainty, it makes perfect sense for each of the incumbents to decide to wait before competing as a CLEC.

The United States, as amicus on behalf of petitioners, makes similar arguments. It asserts that a complaint must allege a sufficient factual predicate to provide meaningful notice to the defendant, and that “fair notice” depends on the context and complexity of the case. Because parallel conduct is expected even in competitive markets, alleging parallel action (or inaction) alone with a conclusory statement regarding a conspiracy is not sufficient—which, according to the Solicitor General, is all the Second Circuit standard demands. Rather, the proper standard requires sufficient factual allegations to demonstrate “at least a reasonably grounded expectation that discovery will reveal evidence of an illegal agreement.” Otherwise, plaintiffs will be allowed to extract “societal costs” inherent in complex, groundless antitrust claims—that is, a chilling effect on economic activity and settlements for groundless claims because of “colossal” discovery expenses. Unlike petitioners, the United States concedes that the facts of this case pose a “close” question, but believes that respondents have failed to state a claim because their allegations are either consistent with individual economic self-interest or are mere conclusory assertions.

Respondents assert that petitioners are actually seeking a heightened pleading requirement for antitrust cases. Such a standard is impermissible because antitrust and conspiracy claims are not listed under Federal Rule of Civil Procedure 9(b), which details those claims that must be pled with specificity. They contend that conclusory allegations cannot simply be ignored, as suggested by petitioners and the United States, because the distinction between factual allegations and conclusions of the pleader was previously rejected by the Court in United States v. Employing Plasterers Ass’n. Respondents defend the Second Circuit standard as rooted in Conley v. Gibson, the seminal case holding that dismissal is appropriate only when the “plaintiff can prove no set of facts in support of his claim that would entitle him to relief,” and supported by Federal Rule of Civil Procedure 8(e)(1), which merely requires simple and concise pleadings. They argue it is a mischaracterization of the Second Circuit decision to say that parallel conduct is always enough; rather, courts must look at the particular parallel conduct to ascertain whether an alleged conspiracy is plausible. In addition, respondents deny that the groundless suit problem is supported by any evidence and assert that it is nonetheless protected against by the summary judgment standard in Matsushita Electric Industrial Co. v. Zenith Radio Corp. Finally, respondents contend that because they have actually alleged multiple “plus” factors and because complaints should be construed liberally to resolve “close questions” in favor of the plaintiff, their claims should survive under any standard.

This case has drawn considerable attention from various amici. On the petitioners’ side, amici include sixteen states, a group of economists (including two Nobel Prize winners), a group of legal scholars, the U.S. Chamber of Commerce, the American Petroleum Institute, and Visa and MasterCard. Not to worry, respondents are supported by their own group of legal scholars and the American Antitrust Institute. The ABA filed a brief that did not support either party but weighs in against the Second Circuit standard.