In a decision important to the business community, the Supreme Court has made it more difficult for antitrust (and perhaps other) plaintiffs to avoid dismissal of conspiracy claims based on conclusory allegations. On May 21, the Court, by a 7-2 vote, reversed a decision by the Second Circuit Court of Appeals, and declared that a conspiracy complaint under 1 of the Sherman Act should be dismissed under Federal Rule 12(b)(6) when it alleges only parallel conduct, absent "factual context suggesting agreement." Bell Atlantic Corp. v. Twombly, No. 05-1126, slip op. at 1 (May 21, 2007). In an opinion by Justice Souter, the Court held that a complaint states a 1 claim only when there is enough "factual matter" to suggest than an agreement, rather than independent action, caused the purportedly anti-competitive effects alleged by a plaintiff. Id. at 9-10. The Twombly decision may also have consequences beyond antitrust, as it also "retired" an oft-cited phrase from a 50-year-old Supreme Court decision that many had read to require that claims must be allowed to proceed unless there was "no set of facts in support" of the claim that would entitle the plaintiff to relief. See id. at 14-17, clarifying Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
At issue in Twombly were the actions of the "Incumbent Local Exchange Carriers," or "ILECs," which arose after the breakup of AT&T's monopoly on local telephone service in 1984. Id. at 1. Between 1984 and 1996, the ILECs had monopolies on local telephone service within their respective regions. However, after the Telecommunications Act of 1996, the ILECs were required to share their respective networks with competitors ("CLECs") who wished to provide local telephone service. Id. at 1-2.
The plaintiffs represented a putative class consisting of all subscribers of local telephone and/or high speed Internet services since February 1996. Id. at 2. The plaintiffs alleged that the ILECs conspired to restrain trade and inflate prices on their services by (a) agreeing to engage in similar anticompetitive conduct in their respective service areas to inhibit the growth of upstart CLECs and (b) refraining from competition with one another within their respective regions. Id. at 3-4.
The Supreme Court held that to survive the defendants' motion to dismiss, the plaintiff's factual allegations must raise "above the speculative level" the expectation that discovery will reveal evidence of illegal agreement, thus moving a claim "across the line from conceivable to plausible." Id. at 24. The Court emphasized that this standard could help avoid the "potentially enormous expense of discovery" associated with groundless antitrust cases, observing that liberal discovery practice in federal courts rendered it unlikely that abuses could be effectively solved by measures during the discovery phase. Id. at 12-14. The foregoing implies that discovery on such claims should not proceed while a motion to dismiss is pending.
In holding that plaintiffs' allegations in the case before it should be dismissed under these principles, the Court stressed that there were independent reasons that ILECs might want to maintain their local dominance and not invest large sums of time and resources on a competitor's turf, especially in a concentrated market where interdependent conduct is consistent with rational and competitive business strategy. Id. at 18-22. Thus, the Court concluded, "[w]hen we look for plausibility in this complaint, we agree with the District Court that plaintiffs' claim of conspiracy in restraint of trade comes up short." Id. at 18.
Despite this antitrust-specific discussion, the Court's rejection of the "no set of facts" standard adopted in Conley may impact the de facto pleading requirements in federal suits in non-antitrust federal cases. It is this possibility that apparently provoked the passionate dissent of Justice Stevens, writing also on behalf of Justice Ginsburg. Much of the dissent consisted of a detailed discussion of the pleading standards under the Federal Rules of Civil Procedure, and the continued relevance of the Conley "no set of facts" standard. See Bell Atlantic Corp. v. Twombly, dissenting slip op. at 4-19 (May 21, 2007) (Stevens, J.). It seems clear that Justice Stevens believes the pleading model contemplated in the majority opinion may "inure to the benefit of all civil defendants." Id. at 27.
Helene D. Jaffe is Co-head of the Trade Practices and Regulatory Law Department and Irving Scher is Senior Counsel in Weil Gotshal's New York office. Steven A. Newborn is a Partner in the Antitrust/ Competition Practice and Litigation/Regulatory Practice in the Washington, DC office of Weil, Gotshal & Manges LLP.