Supreme Court Grants Cert in Bell Atlantic v. Twombly

June 26, 2006. The Supreme Court granted certiorari in Bell Atlantic v. Twombly, a case involving the pleading requirements for an action under Section 1 of the Sherman Act against regional bell operating companies (RBOCs). See, Order List [13 pages in PDF] at page 3.

Introduction. The legal is issue is whether a complaint that alleges parallel or similar behavior, and conspiracy to limit competition, but includes no allegations in support other than the similar or parallel conduct, is sufficient to survive a motion to dismiss.

This is a class action antitrust suit against the RBOCs alleging conspiracy to exclude competitors from, and not to compete against one another in, their respective geographic markets for local telephone and high speed internet services.

However, the Supreme Court's opinion will affect proceedings in a variety of other communications and information technology sectors, as well as non-tech industries.

The U.S. District Court (SDNY) dismissed the complaint for failure to state a claim. The U.S. Court of Appeals (2ndCir) vacated and remanded. See, October 3, 2005, opinion [43 pages in PDF]. And now, the Supreme Court has agreed to hear the case.

Proceedings Below. The class action law firm of Milberg Weiss Bershad & Schulman filed the complaint. The lead named plaintiff is Twombly. See also, story titled "Milberg Weiss Indicted for Paying Illegal Kickbacks to Class Action Plaintiffs" in TLJ Daily E-Mail Alert No. 1,375, May 22, 2006.

The complaint alleges violation of Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1. The plaintiffs seek treble damages pursuant to Sections 4 and 16 of the Clayton Act, which are codified at 15 U.S.C. §§ 15(a) and 26.

The complaint alleges that the RBOCs conspired with one another to keep competitive local exchange carriers (CLECs) from competing successfully in their respective territories. It also alleges that there is an agreement among the defendants not to compete with each other.

The complaint does not allege that there is any document that constitutes or memorializes any such agreements. Rather, it makes assertions regarding the motives and parallel conduct of the defendants.

Section 1 of the Sherman Act provides, in part, that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished ..."

The District Court dismissed for failure to state a claim upon which relief can be granted, pursuant to Rule 12(b)(6), Federal Rules of Civil Procedure. It held that parallel conduct does not amount to conspiracy under federal antitrust law. See, opinion reported at 313 F. Supp. 2d 174.

The Court of Appeals vacated the District Court's dismissal. See, story titled "2nd Circuit Vacates in Twombly v. Bell Atlantic" in TLJ Daily E-Mail Alert No. 1,226, October 4, 2005.

It wrote that "We are reviewing the grant of a motion to dismiss, not the grant of a motion for summary judgment, however. To survive a motion to dismiss ... an antitrust claimant must allege only the existence of a conspiracy and a sufficient supporting factual predicate on which that allegation is based." It added that "to rule that allegations of parallel anticompetitive conduct fail to support a plausible conspiracy claim, 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."

The Court continued that "if a plaintiff can plead facts in addition to parallelism to support an inference of collusion -- what we have referred to above as ``plus factors´´ at the summary judgment stage -- that only strengthens the plausibility of the conspiracy pleading. But plus factors are not required to be pleaded to permit an antitrust claim based on parallel conduct to survive dismissal."

The Court acknowledged that such a principle will "likely lead defendants to pay plaintiffs to settle what would ultimately be shown to be meritless claims", and that "the success of such meritless claims encourages others to be brought". Yet, it offered the rationale that "in a regime that contemplates the enforcement of antitrust laws in large measure by private litigants, although litigation to summary judgment and beyond may place substantial financial and other burdens on the defendants, neither the Federal Rules nor the Supreme Court has placed on plaintiffs the requirement that they plead with special particularity the details of the conspiracies whose existence they allege."

Following denial of rehearing by the Court of Appeals, the RBOCs petitioned the Supreme Court for writ of certiorari.

Amicus Briefs. This case has attracted numerous amicus briefs.

The U.S. Chamber of Commerce, CTIA, Alliance of Automobile Manufacturers, Northwest Airlines, and United Airlines argued in a joint amicus brief [25 pages in PDF] that the Supreme Court should grant certiorari and reverse the Court of Appeals.

They argued that the "plaintiffs' counsel are engaged in opportunistic behavior in the hope of extorting a settlement". They wrote that this is a "gargantuan" case brought on behalf of "virtually every business in the continental United States and every human being who has set foot in the continental United States over a multi-year period. Even more remarkably, this case is one in which the defendants are facilities based local telephone service providers that serve the overwhelming majority of all consumers in the continental United States, and in which the allegation is that, but for a vaguely pleaded ``conspiracy,´´ the entire industry structure would have been different, with each defendant entering markets it has chosen not to enter."

They argued that this case presents the Supreme Court an excellent opportunity to apply to massive antitrust class actions the principle "that pleadings shall be so construed as to do substantial justice".

William Baumol and 24 other economists and scholars submitted a brief [30 pages in PDF] that provides an economic analysis of the 2nd Circuit's opinion. Hewitt Pate, a former Assistant Attorney General in charge of the Antitrust Division, and now at the law firm of Hunton & Williams, and Paul Hayes, are the attorneys of record.

Baumol is an economist, and author of the book titled The Free-Market Innovation Machine [Amazon]. The other amici include Robert Crandall (Brookings) and Gerald Faulhaber (Wharton), both of whom write and speak frequently on the economics of the communications industry.

The economist amici argue that "the Second Circuit has taken antitrust enforcement in a misguided direction by adopting its ``parallel behavior is enough´´ standard and in failing to require that a complaint contain facts sufficient to support an inference of conspiracy."

They continue that "the ``parallel behavior is enough´´ standard would impose direct costs on business firms (in the form of diverted management time) and deadweight costs on the economy (through resources used up in rent-seeking litigation). More significantly, in our view, pricing, entry, marketing, and other business decisions would be colored by a dismissal rule that, in effect, opens U.S. businesses to unsubstantiated allegations of conspiracy to restrain trade." (Parentheses in original.)

"Parallel behavior is a common feature of the dynamic competitive market processes." They add that parallel behavior might be construed to include innocent and efficient types conduct, such as adopting the same technology, or failing to adopt a new technology. Hence, failure to overturn the 2nd Circuit could cause companies to engage in inefficient behavior, which in turn, would harm consumers.

Other trade groups representing also filed amicus briefs, including the American Petroleum Institute, and Pharmaceutical Research and Manufacturers of America.

Timothy Muris, a former Chairman of the Federal Trade Commission (FTC), and now at O'Melveny & Myers, filed an amicus brief on behalf of Mastercard International Inc. and Visa Inc.

This case is This case is Bell Atlantic Corporation, et al. v. William Twombly, et al., Sup. Ct. No. 05-1126, a petition for writ of certiorari to the U.S. Court of Appeals for the 2nd Circuit, App. Ct. No. 03-9213. Judge Sack wrote the opinion of the Court of Appeals, in which Judges Raggi and Hall joined. The Court of Appeals heard an appeal from the U.S. District Court for the Southern District of New York, Judge Gerald Lynch presiding.