/>iAdmonishing that motions to dismiss for failure to state a claim must be decided based on whethera plaintiff's complaint is plausible rather than how plausible it is, which was the district's view in granting a dismissal motion, the Second Circuit, in Anderson News, L.L.C. v. American Media, Inc.,[1] declared improper the district court's denial of leave to file a proposed amended complaint and vacated the dismissal.
Prior to its bankruptcy, Anderson News was the second largest wholesaler of magazines to newsstands and bookstores in the United States. Anderson alleged in a lawsuit against its major publisher suppliers that in response to a magazine distribution surcharge that Anderson another wholesaler (Source) had announced, the publishers conspired with Anderson's competitors and distribution service companies to refuse to deal with the two wholesalers in order to drive them out of business Anderson claimed that the group boycott resulted in its loss of access to 80 percent of the magazines it distributed.
The District Court Decision
Judge Paul A. Crotty of the Southern District of New York dismissed Anderson's original complaint under Fed. R. Civ. P. 12(b)(6), denied reconsideration, and refused leave to file a proposed amended complaint, finding the alleged conspiracy to be facially implausible under the Twombly-Iqbalstandard,[2] and the original pleading's defects incurable.[3] Among other things, Judge Crotty commented that eliminating Anderson and Source would have left 90 percent of the wholesale market share in the hands of two competitors. Because publishers and distributors have an economic self-interest in having more, not fewer, wholesalers (since that yields greater competition, which is good for suppliers), Judge Crotty concluded that the conspiracy's alleged goal was implausible. By contrast, he believed that parallel, but unilateral, conduct was "completely plausible" under the circumstances. Specifically, the defendants initially had different reactions to the surcharge; there was no direct evidence of conspiracy alleged in the original complaint; and the defendants' decisions to not pay the surcharge and instead stop shipping to Anderson were "in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market."[4]
The district court concluded that Anderson's allegations presented only "an economically implausible antitrust conspiracy" that was "based on sparse parallel conduct allegations" and lacked "a context suggesting a preceding agreement."[5] The district court further stated that while it was compelled to take "all factual allegations as true on a motion to dismiss, . . . factual inferences are not entitled to the same benefit."[6]
The Court of Appeals Decision
The Second Circuit reversed. While acknowledging that Twombly required "some factual context suggesting [that the parties] reached an agreement, not facts that would be merely consistent with an agreement,"[7] the appellate court declared that it was not necessary for the plaintiff to show "that its allegations suggesting an agreement are more likely than not true or that they rule out the possibility of independent action, as would be required at later litigation stages such as a defense motion for summary judgment or a trial."[8] The Second Circuit emphasized that "a given set of actions may well be subject to diverging interpretations, each of which is plausible," but the choice between such interpretations was for the fact-finder, not for the court to make on a Rule 12(b)(6) motion, "even if it strikes a savvy judge that actual proof of the facts alleged is improbable, and that a recovery is very remote and unlikely."[9] Unlike the Twombly complaint, however, Anderson's proposed amended complaint did not rely solely on allegations of parallel conduct that was explicable as natural, unilateral reactions, but did, in fact, allege actual agreement -- identifying dates, executives, and statements that could plausibly be interpreted as such. Ruling that these amendments would have stated a claim, the Second Circuit stressed that "[t]he plausibility standard is lower than a probability standard, and there may therefore be more than one plausible interpretation of a defendant's words, gestures, or conduct."[10] In such circumstances, taking all facts as true and making all reasonable inferences, "on a Rule 12(b)(6) motion it is not the province of the court to dismiss the complaint on the basis of the court's choice among plausible alternatives."[11]
Should We Discern A Trend?
In another recent Twombly-Iqbal decision, Liu v. AMERCO,[12] the First Circuit was similarly permissive in applying the plausibility test, this time with respect to the required element of damages in a claim under the Massachusetts unfair trade practices statute ("Chapter 93A"). The plaintiff in Liu had brought a class action against the U-Haul truck rental companies premised upon a recent Federal Trade Commission investigation and consent order concerning an alleged invitation to collude by U-Haul to its major competitors (which as an attempt to conspire would not be actionable under Section 1 of the Sherman Act, but could be challenged under Section 5 of the FTC Act and,could potentially provide a basis for a claim, under Massachusetts' Chapter 93A).
Although the plaintiff claimed to have undertaken two U-Haul rentals in or to Massachusetts, she did not plead specific facts concerning those transactions, such as what she paid or what competitors' rates were at the time. The district court dismissed her complaint, explaining that basic facts about her individual transactions where necessary to judge whether she had overpaid, and whether such overpayment was caused by U-Haul's unconsummated conspiracy attempt. The First Circuit, in an opinion by Judge Michael Boudin, disagreed, finding sufficient the plaintiff's reliance, inter alia, upon the FTC complaint's allegations (including references to specific documents) that U-Haul had raisedits own prices as an essential element of its effort to collude. Although the appellate court noted that "U-Haul's brief raises fair questions about the power of the analysis,"[13] it held, not unlike the Second Circuit in Anderson News, that "[t]he place to test factual assertions for deficiencies and against conflicting evidence is at summary judgment or trial."[14] Again, although the First Circuit appeared skeptical of the claim, it required that the complaint set forth "only enough facts to make the claim plausible, and at this stage reasonable inferences are taken in favor of the pleader."[15]
Author's note: Several years ago, while participating on a panel not long after the Supreme Court decided Twombly, I was greeted with skepticism (to put it politely) when arguing that it would not be an extraordinary extension of the then-new pleading standard to require that a complaint alleging an agreement in restraint of trade set forth facts that, if true and allowing for all reasonable inferences in the plaintiff's favor, stated a claim that was more plausibly consistent with conspiracy than with competition. After all, that would be a logical application of the summary judgment standard of Matsushita[16] -- a decision that likewise is framed around notions of plausibility and economically rational behavior -- in the pleading context: i.e., if the record were to develop consistent with plaintiff's pleading, would it "tend to exclude the possibility" of independent, non-collusive action?[17] It would also respond to concerns expressed by the Supreme Court that even under the old Conley v. Gibson[18] "plaintiff can prove no set of facts" pleading standard in itsAssociated General Contractors[19] decision, a district court served an important gatekeeping role at the pleading stage in antitrust cases due to the significant expense of discovery.[20] From the perspective of this (principally defense) antitrust litigator, Judge Crotty's approach in Anderson Newswas not unwelcome. For the time being, though, at least in the Second Circuit, it is not the law.
[1] ___ F.3d ___ (2d Cir. April 3, 2012). The decision is available on Westlaw at 2012 WL 1085948.
[2] See Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).
[3] Anderson News, L.L.C. v. Am. Media, Inc., 732 F. Supp. 2d 389 (S.D.N.Y. 2010).
[4] Id. at 397-99.
[5] Id. at 402.
[6] Id. (emphasis added).
[7] Anderson, 2012 WL 1085948, at *18 (internal quotations omitted).
[8] Id.
[9] Id. at *18-19 (internal quotation marks and citations omitted).
[10] Id. at *24.
[11] Id.
[12] F.3d ___ (1st Cir. May 4, 2012) (Boudin, J.). The decision is available on Westlaw at 2012 WL 1560170.
[13] Id. at *6.
[14] Id.
[15] Id. (citing SEC v. Tambone, 597 F.3d 436, 441 (1st Cir. 2010)).
[16] Matsushita Elec .Indus. Co. v. Zenith Radio, 475 U.S. 574 (1986).
[17] See id. at 588 (internal quotations omitted).
[18] 355 U.S. 41 (1957).
[19] Assoc. Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519 (1983).
[20] See id. at 528 n.17 ("a district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed").
