Supreme Court's Twombly Decision Should Benefit Defendants In Many Commercial Cases

Sunday, July 1, 2007 - 01:00

Having to spend time and money in discovery and additional motion practice on a meritless case because the judge felt bound to allow plaintiff to develop its case in discovery should be much less likely following the Supreme Court's watershed decision in Bell Atlantic Corp. v. Twombly.1 Expressing concern for the plight of corporate defendants faced with expensive litigation based upon ambiguous evidence, the Court used an antitrust conspiracy case as a vehicle for what could be a radical readjustment of civil pleading standards. The Court expressed hope that its decision would help "to avoid the potentially enormous expense of discovery in cases with no reasonably founded hope that the discovery process will reveal relevant evidence."

The Claims In Twombly

Plaintiffs in Twombly alleged that Bell Atlantic (now Verizon) and three other regional "Baby Bell" companies conspired to restrain trade: (1) by engaging in parallel conduct in their respective service areas to inhibit growth of competitive carriers, and (2) by agreeing to refrain from competing against one another in or outside of each other's territory.

It has long been the law in antitrust conspiracy cases that evidence of parallel business behavior is admissible but not sufficient to prove the element of agreement. Competitors may act in parallel because they agreed to do so, but also because each one reacted rationally and independently to the same market forces. What was not so clear, however, was what a plaintiff needed to allege in such a case in order to survive a motion to dismiss and try to develop its case in discovery.

The district court granted defendants' motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted, because plaintiffs did not allege at least one "plus factor" (something to suggest collusion rather than coincidence), such as evidence that the parallel behavior would have been against individual defendants' economic interests, or that defendants possessed a strong common motive to conspire. The Second Circuit reversed, holding that "plus factors" need not be pleaded to permit an antitrust claim based on parallel conduct to survive a motion to dismiss. The court of appeals relied on the Supreme Court's 1957 opinion in Conley v. Gibson (a labor case), in ruling that to dismiss such a 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 Standard For Pleading In Federal Court

The plaintiffs in Twombly argued that under Fed.R.Civ.P. 8(a)(2) only "a short and plain statement of the claim showing that the pleader is entitled to relief" is necessary in order to "give the defendants fair notice of what the claim is and the grounds upon which it rests." Justice Souter took some care to reconcile the Court's holding with that provision in Rule 8. First, he observed that it " requires a 'showing,' rather than a blanket assertion, of entitlement to relief." Next he opined that "a plaintiff's obligation to provide the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." The "plain statement" required by Rule 8 must "possess enough heft to show that the pleader is entitled to relief," which means that "factual allegations must be enough to raise a right to relief above the speculative level."

As Justice Souter summarized the Court's holding, "we do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face." He also contrasted the need for the complaint " in toto to render plaintiffs' entitlement to relief plausible" with the requirement of Rule 9 that certain allegations be particularized.

Conley v. Gibson Put To Rest

Paying lip service to its oft-cited statement in Poller v. Columbia Broadcasting System from 1962, the Court stated that "it is one thing to be cautious before dismissing an antitrust complaint in advance of discovery but quite another to forget that proceeding to antitrust discovery can be expensive." Indeed, Justice Souter noted, "the threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching [discovery or summary judgment]." Businesses will be glad to hear that the Supreme Court feels their pain. Interestingly, the Court dismissed the argument of the dissent that questionable claims could be weeded out through careful case management, noting the courts' lack of success in checking discovery abuse.

With that set-up, in the most far-reaching aspect of the Twombly opinion, the Court then laid to rest the famous Conley v. Gibson pleading standard. The "no set of facts" language from Conley has been cited in literally hundreds of court opinions and even more plaintiffs' briefs, not just in the federal courts but, as the dissent pointed out, in 26 states and the District of Columbia. The Court declared that "after puzzling the profession for 50 years, this famous observation has earned its retirement." It is not enough that a claim be "conceivable," it must be "plausible."

The Court's reasoning concerning the pleading standards under Rule 8 was not limited to antitrust conspiracy actions. Justice Stevens acknowledged this in his dissent: "whether [the Court's] test for the sufficiency of a complaint will inure to the benefit of all civil defendants, is a question that the future will answer." In the few weeks since Twombly came down, over 100 courts have already cited it, many in cases not involving antitrust, which is some indication of the impact it may have. Judge Kearse, writing for the Second Circuit, for example, quoted this excerpt to support dismissal of a shareholder derivative suit: "[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, this basic deficiency should be exposed at the point of minimum expenditure of time and money by the parties and the court."2 Another court observed that "other district courts have not sought to confine Twombly's teachings to their original context."3

Pleading An Antitrust Agreement

A claim under section 1 of the Sherman Act requires a tacit, if not express, agreement or meeting of the minds. Applying the general points reviewed above, the Court held that a complaint must have "enough factual matter (taken as true) to suggest that an agreement was made" or "enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal agreement." There must be "plausible" grounds to infer an agreement, though not a probability.

The Court concluded that the claim alleged there was not based on "any independent allegation of actual agreement among the [defendants]." Several references to an agreement were dismissed as "stray statements" and mere "legal conclusions resting on the prior allegations." In a footnote, the Court explained that "the pleadings mentioned no specific time, place, or person involved in the alleged conspiracies," so a defendant "would have little idea where to begin" to respond.

The Court then declared that "it is time to take a fresh look at adequacy of pleading when a claim rests on parallel action." First it noted that parallel conduct without more is "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." Therefore, to make out a section 1 claim, such allegations "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 Court seemed almost deliberately vague as to what additional facts or circumstances might be enough to point towards a "meeting of the minds." It did refer to parallel behavior "that would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence unaided by advance understanding among the parties."

The majority concluded that nothing in the Twombly complaint "invests either the action or inaction alleged with a plausible suggestion of conspiracy" (a conclusion the dissent described as "mind-boggling"). It reasoned that the resistance of the incumbent carriers to the "upstarts" was nothing more than "routine market conduct" and that "there is no reason to infer that the companies had agreed among themselves to do what was only natural anyway." Turning to the allegation that the incumbent carriers agreed not to compete with each other or enter each other's territories, the Court readily adopted the "natural explanation for the non-competition" that the "former government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing."

Ramifications For The Future

Twombly should encourage judges in antitrust and other commercial cases to be less willing to give a plaintiff the benefit of the doubt that discovery will reveal evidence of a claim. Twombly 's explication of what Rule 8 requires, combined with its express concern that plaintiffs not be allowed to engage in legal extortion, should change what has been the prevailing judicial attitude. It certainly gives defendants a powerful weapon to attack weak pleadings.

In claims involving antitrust, RICO, or other civil conspiracies, for example, it should no longer be enough for plaintiffs to allege that "the defendants agreed" to do X, Y, or Z. They must allege facts that plausibly relate which defendants agreed to what and when, preferably naming the specific employees who participated.

Twombly reinvigorates the district court's role as a gatekeeper of a more basic sort, encouraging the judge to scrutinize claims more closely before defendants incur the costs of discovery and further proceedings. Before discovery should be allowed, a plaintiff must plead facts that raise at least a reasonable expectation that it will be able to prove its claim after discovery. Surely the decision will prompt more motions to dismiss, inviting creative lawyering as to why a claim is or is not plausible. In the bigger picture of civil litigation, Twombly will infuse with further momentum the retreat from liberal notice pleading and unfettered discovery. Over time, its revised approach to pleading is likely to work its way through many state courts as well. 1 __ U.S. __ , 2007 WL 1461066 (May 21, 2007).

2 Roth v. Jennings, __F.3d__, 2007 WL 1629889 (2d Cir. June 6, 2007), quoting Twombl y, 2007 WL 1461066 at *9.

3 Aktieselskabet AF 21 v. Fame Jeans, Inc., __ F.Supp. 3d __, 2007 WL 1655877 (D.D.C. June 7, 2007); see Rodriguez - Ortiz v. Margo Caribe, Inc . , ___ F.3d ___, 2007 WL 1732883 *2 (1st Cir. June 18, 2007).

Richard E. Donovan is co-head of the Commercial Litigation and Antitrust Practice Groups at Kelley Drye.

Please email the author at rdonovan@kelleydrye.com with questions about this article.