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Supreme Court Decision Raises Standard for Pleading Conspiracy Cases Under Section 1 of the Sherman Act

May 22, 2007

Yesterday, the Supreme Court handed down a key antitrust decision that will make it more difficult to bring conspiracy cases under Section 1 of the Sherman Act. In its much anticipated opinion in Bell Atlantic Corp. v. Twombly, the Court adopted a pleading standard that considerably raises the bar for plaintiffs in antitrust (and possibly other) cases. The ruling will make many more antitrust complaints subject to dismissal at the pre-discovery stage.

In Twombly, a putative class of local telephone and/or high-speed internet subscribers sued the four incumbent local exchange carriers (“ILECs”) for allegedly engaging in a conspiracy to restrain trade in the market for local telephone and high-speed internet services in violation of Section 1 of the Sherman Act.

The issue before the Supreme Court was whether the plaintiffs’ conspiracy allegations were sufficient to permit the case to go forward, and allow discovery on their claims. The complaint primarily consisted of general allegations claiming that the ILECs had engaged in the conspiracy, along with supporting allegations that the ILECs had “engaged in parallel conduct” to inhibit the growth of CLECs, and that the ILECs had failed to meaningfully pursue business outside of their home service areas against other ILECs.

The Supreme Court held these allegations insufficient to state an antitrust claim. It determined that “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, . . . a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” The Court added, “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.” As applied to Section 1 Sherman Act conspiracy cases, the Supreme Court held that a complaint must contain “enough factual matter (taken as true) to suggest that an agreement was made” to create “a reasonable expectation that discovery will reveal evidence of illegal agreement.”

The Supreme Court’s decision focused on the plaintiffs’ allegations of “parallel conduct." It determined that these allegations did not “suggest conspiracy,” but were only “consistent with” an agreement. It held that “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.” In addition, the Court rejected plaintiffs’ “naked” allegation of the existence of a conspiracy, finding that it “gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of ‘entitle[ment] to relief.’” Thus, the Supreme Court dismissed the complaint because the plaintiffs’ conspiracy allegations failed to “nudge their claims across the line from conceivable to plausible.”

The Twombly decision will have a significant impact on antitrust pleading practice. It resolves the dispute among the lower federal courts as to whether allegations of parallel conduct by competitors are sufficient to withstand a motion to dismiss in a Sherman Act conspiracy case, finding in the negative unless the complaint contains additional allegations that demonstrate the existence of a conspiracy. But more generally, the Twombly decision seeks to clarify the pleading standard under the Federal Rules, by rejecting the use of “wholly conclusory” allegations and unequivocally requiring a complaint to allege some modicum of factual detail. Indeed, one can expect this decision to be cited in every motion to dismiss in antitrust – and probably other – cases, and courts and parties will wrangle over the precise line between “conceivable” and “plausible” allegations for years to come.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Kent A. Gardiner
Partner – Washington, D.C.
Phone: +1.202.624.2578