Twombly

Of the Roberts Court’s procedural antitrust decisions, the one most strongly perceived to be probusiness, anticonsumer, and radical is Bell Atlantic Corp. v. Twombly.42 But, putting aside Twombly’s effect on pleading standards generally and focusing solely on the decision’s implications for antitrust lawsuits, the decision appears to have been largely motivated by, and is wholly consistent with, principles of decision theory.

The narrow issue in Twombly was whether a plaintiff adequately pleads the agreement element of a Sherman Act Section 1 claim merely by alleging parallel conduct and asserting that a conspiracy existed. The plaintiffs in the case, consumers of local telecommunications services, sued the defendants, regional telephone companies known as Incumbent Local Exchange Carriers (iLECs), for allegedly entering two competition-limiting agreements: (l) to impede efforts by Competitive Local Exchange Carriers (CLECs) to enter the ILECs’ markets; and (2) to refrain from entering each other’s markets. In attempting to allege these two agreements, the plaintiffs averred that the defendants had uniformly followed the same patterns of opposing CLECs and failing to enter other ILECs’ markets. The plaintiffs then stated (baldly) that defendants, having engaged in such parallel conduct, had entered into a contract, combination, or conspiracy. The problem was that the parallel conduct alleged was as consistent with unilateral conduct as with an agreement: each ILEC had an independent incentive to oppose CLECs’ entrance into its market, and each also had an incentive not to disrupt the traditional (pre-1996 Telecommunications Act) market divisions by entering others’ markets.

Plaintiffs understood that mere parallel conduct and an assertion of conspiracy would not enable them to survive a motion for summary judgment. At a minimum, they would have to produce evidence tending to exclude unilateral, self-interested conduct as a basis for the ILEC’s parallel conduct.[1] They maintained, though, that they need not set forth facts tending to exclude noncollusive explanations for parallel conduct at the pleading stage. In support of that position, they cited the Supreme Court’s statement in Conley v. Gibson[2] that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" Conceding that a literal reading of this statement from Conley would prevent dismissal of plaintiffs’ complaint (because they could later prove some set of undisclosed facts that would tend to exclude unilateral action as the explanation for the defendants’ parallel conduct), the Court abrogated Conley’s “no set of facts” standard and held that a Sherman Act Section 1 complaint should be dismissed if all it alleges is parallel conduct coupled with a bald assertion of conspiracy.

Twombly’s holding on Section 1 pleading standards comports with decision theory’s overarching prescription to minimize the sum of error and decision costs. In terms of error costs, permitting plaintiffs’ complaint (and others like it) to proceed to discovery would have been disastrous. Both the likelihood and magnitude of errors would have been high because the precedent would have encouraged plaintiffs’ lawyers—who are well aware that antitrust discovery can impose huge costs and induce settlement—to search out parallel business conduct involving a failure to pursue some business opportunity, baldly assert that there was an “agreement” to engage in such conduct, prepare onerous discovery requests, and hope to extract a settlement. Decision costs also would have been high because unfounded antitrust conspiracy claims would have to be dealt with in costly summary judgment proceedings rather than through relatively cheap motions to dismiss.

Compared to the error and decision costs that would have resulted had the Twombly plaintiffs been allowed to proceed with their claim, the error and decision costs created by the Court’s holding are likely to be lower. Any errors resulting from the Court’s holding will consist of false negatives—improper dismissals of meritorious conspiracy claims. Because plaintiffs can avoid dismissal under Twombly if they allege either an actual agreement or consciously parallel business behavior coupled with facts suggesting that the parallel conduct is more likely a product of agreement than unilateral action, the only antitrust conspiracy claims likely to be significantly impeded by Twombly’s pleading requirements are those that involve no known agreement and no known “plus factors” suggesting a collusive explanation for parallel conduct. While this is not necessarily an insignificant set of potential collusion claims, it seems likely that precomplaint investigation of legitimate claims would usually reveal either sufficient facts to allege an actual agreement or economic factors tending to exclude the possibility that the parallel conduct resulted from independent, unilateral action. Moreover, any judgment that a complaint was inadequate under Twombly would likely be entered without prejudice, so plaintiffs (and others similarly situated) could still file suit if and when they uncovered facts suggesting an actual agreement or establishing plus factors. Given that cartels are fragile and generally require some policing efforts, it is likely that plaintiffs monitoring genuine collusion would eventually discover facts that, when pled, would allow meritorious claims to proceed.

Thus, the error costs resulting from Twombly’s holding, while perhaps not insignificant, are likely less than those that would have resulted had the Supreme Court held as plaintiffs desired. Moreover, the decision costs associated with the Twombly rule are likely less than those that would have been imposed under the alternative holding: while Twombly may have the effect of forcing multiple complaints and motions to dismiss, it avoids the far greater costs associated with protracted discovery and expensive summary judgment proceedings to dispose of meritless collusion claims based solely on consciously parallel conduct and conclusory conspiracy allegations.

  • [1] See Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537 (1954); MatsushitaElec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986).
  • [2] 355 U.S. 41 (1957).
 
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