Supreme Court Rules in Bell Atlantic v. Twombly

May 21, 2007. The Supreme Court of the U.S. issued its opinion [56 pages in PDF] in Bell Atlantic v. Twombly, reversing the judgment of the U.S. Court of Appeals (2ndCir). This is a victory for Verizon (successor of Bell Atlantic) and other incumbent local exchange carriers (ILECs).

Justice Souter wrote the opinion of the Court. He summarized the issue and the holding as follows: "Liability under §1 of the Sherman Act, 15 U. S. C. §1, requires a ``contract, combination . . . , or conspiracy, in restraint of trade or commerce.´´ The question in this putative class action is whether a §1 complaint can survive a motion to dismiss when it alleges that major telecommunications providers engaged in certain parallel conduct unfavorable to competition, absent some factual context suggesting agreement, as distinct from identical, independent action. We hold that such a complaint should be dismissed."

This case was brought by the class action law firm of Milberg Weiss Bershad & Schulman. Nominally, the lead plaintiff is William Twombly. Milberg Weiss seeks to represent all subscribers of local telephone and/or high speed internet services since 1996. It has a history of troubled client relations. See, 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, filed in the U.S. District Court (SDNY), alleged violation of Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1. It provides in relevant 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 complaint alleges that Bell Atlantic and other incumbent local exchange carriers (ILECs) 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. However, 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.

The District Court held that parallel conduct alone does not constitute a violation of Section 1 of the Sherman Act. Therefore, it dismissed the complaint for failure to state a claim upon which relief can be granted.

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

The Supreme Court granted certiorari on June 26, 2006. See, story titled "Supreme Court Grants Cert in Bell Atlantic v. Twombly" in TLJ Daily E-Mail Alert No. 1,399, June 26, 2006.

Justice Souter wrote that "The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market."

The Court held, in the context of a motion to dismiss for failure to state a claim, that "stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement. And, of course, a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, ..." (Footnote omitted. Parentheses in original.)

Furthermore, "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. Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action."

The opinion of the Court then compares historically competitive markets to the phone and broadband markets. "In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation. In the decade preceding the 1996 Act and well before that, monopoly was the norm in telecommunications, not the exception." It continues that "The ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword. Hence, a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing."

It adds that the "Congress may have expected some ILECs to become CLECs in the legacy territories of other ILECs, but the disappointment does not make conspiracy plausible."

The Supreme Court reversed the Court of Appeals, and remanded, with six other Justices joining in the opinion of the Court. Justice Stevens dissented. Justice Ginsburg joined in most of his opinion.

This case attracted numerous amicus curiae briefs.

John Thorne, Deputy General Counsel of Verizon, stated in a release that "The Supreme Court's decision embraces an important principle about protecting the freedom of firms to make unilateral decisions on what markets to enter or not enter. Today's decision is the fifth in a series of Supreme Court decisions establishing that firms will not be challenged under antitrust for making independent choices that benefit consumers."

He continued that "The court's decision in Brooke Group affirmed the freedom to lower prices. The court's decision in Discon (in which Verizon's predecessor NYNEX was the petitioner) affirmed the freedom to choose suppliers. The court's decision in Trinko (in which Verizon was the petitioner) affirmed the freedom to invest. The court's decision in Weyerhauser affirmed the freedom to expand output. Today's decision affirms the freedom to decide when and how to enter new markets." (Parentheses in original.)

"Consumers benefit when companies of every size have the right to lower prices, choose suppliers, invest, expand output, and enter new markets freely."

This case is Bell Atlantic Corporation, et al. v. William Twombly, et al., Supreme Court of the U.S., 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. See also, Supreme Court docket.