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Conspiracy Theory: High court holds parallel business conduct, alone, insufficient to state a claim
Posted in Litigation

The courthouse door became a little harder for antitrust plaintiffs to open last Supreme Court term, thanks to the decision in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007). The Supreme Court held that, notwithstanding the liberal notice pleading standards under the Federal Rules of Civil Procedure, plaintiffs claiming unlawful conspiracies in restraint of trade under Section 1 of the Sherman Act cannot merely allege anticompetitive parallel business conduct to survive a motion to dismiss. Such complaints must be dismissed when they fail to allege facts establishing an actual conspiracy, as opposed to merely parallel business conduct.

In Bell, subscribers of local telephone and high speed internet services brought a class action against local telephone service providers, known as incumbent local exchange carriers (“ILECs”) or in common parlance, the “Baby Bells”. The ILECs resulted from the 1984 court-ordered divestiture of the local telephone business of American Telephone & Telegraph Company (“AT&T”). In 1996, Congress enacted legislation to revamp the telecommunications industry and impose various duties on the ILECs to facilitate market entry of competitors. The plaintiffs claimed an unlawful conspiracy in restraint of trade under Sherman Act sec. 1 by virtue of the ILECs' (1) "inhibit[ing] the growth of upstart" competitors, and (2) "refrain[ing] from competing against one another.”

With respect to the first claim, the plaintiffs argued that the ILECs, in a consciously parallel fashion, attempted to impede the growth of start-up competitive local exchange carriers in the ILECs’ particular service areas. Regarding the latter charge, the plaintiffs claimed a conspiracy was afoot because of the “common failure” of the ILECs to engage in attractive business prospects in adjacent markets in which they had a considerable competitive advantage.

Underlying both claims was the allegation that the ILEC engaged in “conscious parallelism” – shorthand for uniform, “follow the leader” business conduct by competitors in a concentrated market driven by recognition that they have shared-economic interests and their interdependence can readily increase revenues of all involved.

The United States District Court for the Southern District of New York dismissed the plaintiffs’ complaint for failure to state a claim, finding that allegations of conscious parallelism alone, without an alleged factual basis to find a conspiracy, fails to meet the pleading requirements for Sherman Act § 1. The District Court held that the plaintiffs had to plead additional facts that would tend to exclude the possibility that the ILECs acted independently and in their own self-interest. The United States Court of Appeals for the Second Circuit disagreed, finding that charges of parallel anticompetitive business conduct alone can support a conspiracy claim because there are plausible instances where the challenged parallel conduct can be a “product of collusion rather than coincidence.”

The Supreme Court reversed, siding with the District Court over the Second Circuit. The Supreme Court held that an allegation of parallel business conduct, alone, is insufficient to survive a motion to dismiss under Section 1. To state a Sherman Act § 1 claim based on allegations of conscious parallelism, an antitrust plaintiff must plead facts tending to show the existence of an agreement between the alleged conspirators followed by conscious parallel business conduct.

Although the pleading rules require only “a short and plain statement of the claim” entitling a plaintiff to relief, the Supreme Court determined that a plaintiff’s charges must do more than state a speculative right to relief. Rather, the pleading rules require a specific factual “showing” of a plausible entitlement to the relief sought, not merely a “blanket assertion” of such right.

In reaching its decision, the Supreme Court took into account the steadily increasing expense of litigation and the fact that conscious parallelism, in and of itself, is not illegal. Because such conduct is the typical reaction of companies in concentrated markets, the plaintiffs must show some evidence which tends to exclude the possibility that the ILECs acted in their own independent self-interest.

Lessons to be learned from the decision are numerous. First, proof of conspiracy is undoubtedly still an element of a Section 1 claim. Second, conclusory assertions of parallel business conduct, standing alone, are not sufficient to supplant specific factual allegations of conspiracy. Finally, the liberal pleading standards require no less than a plausible entitlement to relief.

Bottom line: the Supreme Court has signaled lower courts to give a closer look to complaints charging antitrust conspiracies. A Sherman Act § 1 claim based simply on parallel conduct of competitors will not make it through the courthouse door unless it also contains particular allegations of facts supporting a finding of conspiratorial objective. As the Supreme Court put it, the complaint must state “enough factual matter (taken as true) to suggest that an agreement was made”, and not simply that there was parallel business conduct between competitors. 

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