Antitrust Digest Developing Trends and Patterns in Federal Antitrust Cases After Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal APRIL 2010 Heather Lamberg Kafele Mario M. Meeks Shearman & Sterling LLP Washington, DC Antitrust Digest Developing Trends and Patterns in Federal Antitrust Cases After Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal APRIL 2010 This digest is intended only as a general discussion of these issues. It should not be regarded as legal advice. We would be pleased to provide additional details or advice about specific situations if desired. If you wish to receive more information on the topics covered in this digest, you may contact your regular Shearman & Sterling contact person or any of the following: Heather Lamberg Kafele Mario Meeks Washington, DC Washington, DC +1.202.508.8097 +1.202.508.8058 [email protected] [email protected] 801 PENNSYLVANIA AVENUE , NW | WASHINGTON, DC | 2004 | WWW.SHEARMAN.COM ©2010 Shearman & Sterling LLP. As used herein, "Shearman & Sterling" refers to Shearman & Sterling LLP, a limited liability partnership organized under the laws of the State of Delaware.(cid:13)(cid:10) Table of Contents Client Name Digest Overview 1 Twombly and Iqbal: The Genesis of the Plausibility Standard 4 A Statistical Snapshot of the Plausibility Standard by Circuit 7 Recent Trends and Patterns 10 Trend No. 1: Courts Are Still Applying Twombly to All Elements of a Complaint 11 Trend No. 2: The Emergence of Key Plus Factors 12 Trend No. 3: Defendants’ Reliance on Unchoreographed Free-market Behavior 13 Trend No. 4: Allowing Amendment 15 Trend No. 5: Plaintiffs’ Reliance on Government Investigations 15 Trend No. 6: Alleging Direct Evidence of an Agreement 17 Trend No. 7: Pending Congressional Action 18 Conclusion 19 Index of Cases 21 Digest Overview This digest examines how federal courts have been interpreting pleading requirements for antitrust claims alleging violations of either Section 11 or Section 22 of the Sherman Act after the Supreme Court’s pronouncement in Bell Atlantic Corp. v. Twombly.3 1 Section 1 of the Sherman Act states in pertinent part that: “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States . . . is declared to be illegal.” 15 U.S.C. § 1 (2009). 2 Section 2 of the Sherman Act states in pertinent part that: “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States . . . shall be deemed guilty of a felony, and, on conviction thereof shall be punished by fine not exceeding $100,000,000 if a corporation. . .” 15 U.S.C. § 2 (2009). 3 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007). 1 Digest Overview Antitrust Digest Like all federal civil actions, Rule 8(a) of the Federal Rules of Civil Procedure (“FRCP”) governs the pleading requirements for antitrust claims. Rule 8(a)(2) requires only a “short and plain statement of the claim showing that the pleader is entitled to relief.”4 This rule as interpreted by the Court in Conley v. Gibson meant 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.”5 Conley’s decree of Rule 8’s meaning commonly referred to as “notice pleading” had harsh ramifications for antitrust defendants. Under a strict reading of the rule, complaints filed pursuant to the FRCP alleging nothing more than general unlawful restraint of trade were sufficient to move beyond the pleading stage and into the liberal discovery phase of a proceeding.6 The desire to avoid burdensome discovery and litigation costs resulted in many antitrust defendants settling feeble or spurious claims at the outset of an action.7 But in Twombly, the Disposition % of All of Defendants' Motions Supreme Court Post-Twombly Before and After Iqbal explicitly rejected Conley’s prior interpretation of Rule 8. The Court stated that Granted Denied “after puzzling the Pre-Iqbal Pre-Iqbal profession for 50 years, this famous observation has earned its retirement” because Conley’s “[no set of Granted Denied facts] phrase is best Post-Iqbal Post-Iqbal forgotten as an incomplete, negative gloss on an accepted 0% 20% 40% 60% 80% 100% pleading standard.”8 Under the plausibility 4 Fed. R. Civ. P. 8(a)(2) (2009). 5 Conley, 355 U.S. 41, 45-46 (1957). 6 Rule 26 of the Federals Rule of Civil Procedure grants a party discovery on “any matter, not privileged, that is relevant to the claim or defense of any party.” Fed. R. Civ. P. 26 (2009) 7 See Twombly, 550 U.S. at 558-559. Underlying the decision in Twombly was an acknowledgement of the ubiquitous tension in antitrust law between plaintiffs’ need to gain access to and obtain discovery in federal court and defendants’ need to avoid unnecessarily lengthy and expensive litigation. 8 Twombly at 563 (“Conley then, described the breadth of opportunity to prove what an adequate complaint claims, not the minimum standard of adequate pleading to govern a complaint’s survival.”). 2 Digest Overview Antitrust Digest standard, the Court stated that for a § 1 conspiracy complaint to survive a motion to dismiss it must contain “enough factual matter (taken as true) to suggest that an agreement was made,” for only then is such a complaint “plausible on its face,” thereby raising “a reasonable expectation that discovery will reveal evidence of an illegal agreement.”9 The Court’s failure to give specific guidance on the application of this plausibility standard, however, resulted in far ranging applications as federal judges grappled with the proper legal analysis that Twombly required.10 At last, on May 18, 2009, the Supreme Court in Ashcroft v. Iqbal clarified that not only did Twombly’s plausibility standard apply to all federal pleadings brought under Rule 8 of the FRCP, but also detailed the appropriate analysis that a federal court should employ when applying this standard to a defendant’s motion to dismiss. Because the parameters of the plausibility standard are still being defined, the purpose of this digest is to examine almost 170 post-Twombly federal antitrust cases to reveal how federal courts have been applying the plausibility standard to motions to dismiss for failure to state a claim under § 1 or § 2 of the Sherman Act. With this specific purpose serving as a guidepost, this digest only examines cases that meet the following criteria (1) the case must have been decided by a federal court; (2) the complaint must have contained at least one federal antitrust claim or counterclaim brought under §§ 1 or 2 of the Sherman Act; (3) the decision must have been issued after Bell Atlantic v. Twombly; (4) the defendant or counterclaim defendant must have moved for the court to dismiss the claim prior to full discovery based on plaintiff’s failure to sufficiently plead a federal antitrust violation; and (5) the court must cite to at least Twombly11 when determining the applicable legal standard to adjudge defendant’s motion to dismiss. Since the digest focuses on sufficiently pleading a federal antitrust violation, it also excludes all cases and claims (1) where the antitrust violation arises out of fraud12; (2) where the motion to dismiss was granted based on a claim of privilege or immunity; and (3) where a party invoked the Noerr-Pennington doctrine.13 9 Id. at 557. 10 See, e.g., Iqbal v. Hasty, 490 F.3d 143 (2d Cir. 2007), overruled by Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) (Cabranes, J., concurring) (“[I]t is worth underscoring that some of [the Court’s] precedents are less than crystal clear and fully deserve reconsideration by the Supreme Court at the earliest opportunity; to say the least, the guidance they provide is not readily harmonized.”) (internal quotation marks omitted). 11 Cases decided after May 18, 2009 may also cite to Ashcroft v. Iqbal, the Supreme Court decision that clarified Twombly’s plausibility standard, but a case is not required to cite to both Iqbal and Twombly for inclusion in the digest. 12 Rule 9(b) of the Federal Rules of Civil Procedure governs the pleading of actions sounding in fraud or mistake and states in full: “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. Civ. P. 9(b) (2009). 13 The Noerr-Pennington doctrine protects parties from antitrust liability when they institute their own claims for relief. Under Noerr-Pennington, when a Plaintiff institutes its own suit for patent infringement, it cannot be sued for violating an antitrust provision by virtue of the lawsuit. This immunity, however, does not apply to plaintiffs who institute litigation that falls within the category of being a “sham.” See Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49, 60-61 (1993). 3 Digest Overview Antitrust Digest In sum, the information gathered from the relevant cases in this digest14 confirms that the plausibility standard has altered the landscape for sufficiently pleading a violation of the Sherman Act. In particular it shows that (1) the dismissal rate for plaintiffs’ complaints still equates to almost a 2:1 ratio (65%); (2) federal courts clearly have differing views as to what must be alleged to survive a motion; (3) circuit courts collectively affirmed lower courts’ granting of defendants’ motion to dismiss 86% of the time; (4) congressional action is being proposed to stem the general rising tide of dismissal rates in federal courts; and (5) the antitrust cases most likely at risk of dismissal are those filed with nothing more than bare allegations, including especially those cases filed on the heels of government investigations with little factual information. Twombly and Iqbal: The Genesis of the Plausibility Standard Summary of Twombly In Twombly, the Court held that stating a § 1 “claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made . . . [and] simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement.”15 The 1984 divestiture of the American Telephone & Telegraph Company’s local telephone business created a system of regional service monopolies, known as “Baby Bells” or Incumbent Local Exchange Carriers.16 The Baby Bells were excluded from the separate market for long-distance service providers.17 A decade later Congress withdrew approval of the Baby Bell monopolies and subjected them to a host of regulations intended to facilitate market entry for competitors.18 Subscribers of local telephone and high speed Internet services brought a federal antitrust class action alleging that the Baby Bells were conspiring to restrain competition in the local telephone and high-speed Internet market.19 Plaintiffs supported their claim with allegations of parallel conduct: that the Baby Bells remained in their own geographic areas despite being able to conveniently and cost effectively enter each other’s.20 The Second Circuit found the complaint sufficient under the Conley interpretation of Rule 8.21 The Supreme Court reversed.22 14 The digest only includes cases issued prior to January 14, 2010 retrievable from Westlaw, an online proprietary legal research database server. This digest also assumes the reader has some familiarity with the cases cited; further the summaries included should only be used to provide a brief recap of the federal antitrust issues involved. 15 Id. at 556. 16 Id. at 548. 17 Id. 18 Id. 19 Id. at 550. 20 See Id. at 564-68. 21 Twombly v. Bell Atl. Corp., 425 F.3d 99, 114 (2d Cir. 2005). 22 Twombly, 550 U.S. at 570. 4 Digest Overview Antitrust Digest In doing so, the Court gave substantial weight to the fact that defendants’ actions could be justified based on their prior existence as regulated monopolies after AT&T’s divestiture. Specifically, the Court noted that a “natural explanation for the noncompetition alleged [was] that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.”23 Finally, the Court held that survival of a motion to dismiss “d[id] not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that [wa]s plausible on its face . . . [but where] the plaintiffs . . . have not nudged their claims across the line from conceivable to plausible, their complaint must be dismissed.”24 The Court did not, however, explicitly state what additional facts plaintiffs needed to plead to avoid early dismissal, nor did the Court explain which facts were dispositive of whether plaintiffs had sufficiently pled a cognizable action pursuant to the Sherman Act. Thus following Twombly, district courts varied widely in their application of this new plausibility standard. Summary of Iqbal Consequently, in Ashcroft v. Iqbal,25 the Court took the opportunity to elaborate on how federal courts should be applying the plausibility standard. Although not an antitrust action, Iqbal is apposite because it explicitly articulates the desired analytical approach to assessing whether a complaint contains enough factual heft to survive a motion to dismiss. In Iqbal, Javaid Iqbal, a Muslim Pakistani filed a Cumulative Disposition Total of Bivens action against numerous federal officials, Defendants' Motions to Dismiss from including the Attorney General, John Ashcroft, and the Director of the FBI, Robert Mueller, for May 2007 - January 2010 various alleged constitutional deprivations following his arrest and detention in a New York maximum security prison following the 120 September 11, 2001 terrorists attacks.26 Specifically, Iqbal alleged that Ashcroft was the 100 “principal architect” of and Mueller was “instrumental in [the] adoption, promulgation, 80 and implementation” of an unconstitutional policy that subjected him to harsh conditions of 60 confinement on account of his race, religion, or 40 23 Id. at 568. 20 24 Id. at 570. 25 129 S. Ct. 1937 (2009). 026 Id. at 1942. Granted Denied 5 Digest Overview Antitrust Digest national origin.27 Ashcroft and Mueller moved to dismiss for failure to state a claim arguing that Iqbal’s complaint failed to sufficiently allege that they had a discriminatory purpose in adopting the policies at issue.28 The district court denied their motion, but while their appeal to the Second Circuit was pending, the Supreme Court issued Twombly.29 Nevertheless, the Second Circuit held that Twombly did not apply to this context and affirmed the lower court’s decision.30 Defendants sought and the Court granted certiorari to address the narrow question of whether the respondent pled enough factual matter that, if taken as, true stated a claim to relief.31 The Court reversed the Second Circuit in a 5-4 decision holding that Iqbal’s complaint failed to state a claim against Ashcroft and Mueller.32 The Court held that under the plausibility standard “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relieve that is plausible on its face.”33 Moreover, “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”34 Working Through Twombly’s Two Working Principles In Iqbal, faced with a similar scenario, factually and procedurally, as in Twombly, where the complaint relied on inferences to connect defendants conduct to plaintiff’s alleged injuries and the defendants moved to dismiss, the Court seized this opportunity to enunciate the following guidance for applying the plausibility standard. The Court declared that two working principles underlie its decision in Twombly: (1) “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions [because] [t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” and (2) “only a complaint that states a plausible claim for relief survives a motion to dismiss [and] [d]etermining whether a complaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”35 A parsing of the Court’s analyses in both Twombly and Iqbal reveals six key pillars underlying a proper application of the plausibility standard: (1) legal conclusions are not entitled to be taken as true; (2) only factual allegations are entitled to that tenet; (3) plaintiffs are required to provide factual allegations to 27 Id. at 1944. 28 Id. 29 Id. at 1944-45. 30 Id. at 1944. 31 Id. at 1945. 32 Id. 33 Id. at 1949 (citing Twombly, 550 U.S. at 570). 34 Id. 35 Id. at 1949-50 (internal citations and quotation marks omitted). 6 Digest Overview Antitrust Digest support each element of their claim; (4) legal conclusions are only acceptable to provide the legal framework for the claim; (5) judges should draw on their experience and common sense when determining whether plaintiffs have alleged sufficient facts that plausibly show plaintiffs are entitled to relief; and (6) plaintiffs are not entitled to discovery based on a deficient complaint because “Rule 8 . . . does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusion.”36 A Statistical Snapshot of the Plausibility Standard by Circuit In Iqbal, like Twombly, the plaintiff lacked factual allegations in support of an essential element of his claim. In Twombly, the plaintiff failed to allege factual allegations in support of the existence of an agreement; in Iqbal, the plaintiff failed to provide factual allegations to support an inference that two high ranking government officers had knowingly and willingly engaged in the alleged unconstitutional policies. These failures proved to be fatal. 36 Id. 7