As 2010 drew to a close, the U.S. Supreme Court’s decision in Bell Atlantic Corp. v. Twombly[1] -- the case that “retired” the pleading standard of Conley v. Gibson[2] (providing for dismissal only if “no set of facts” could be proven entitling the plaintiff to relief) in favor of a requirement that sufficient facts be alleged to make a plaintiff’s claim “plausible” -- had not only expressly been extended by the Court, in its 2009 Ashcroft v. Iqbal[3] decision, to non-antitrust cases, but also had been cited in over 100,000 cases, treatises and briefs (based on Westlaw’s count).  It thus might have been anticipated that there would be some consensus by now in the lower courts concerning what constitutes a “plausible” case, and some harmonization of the standards imposed on dispositive motions, at least in antitrust cases, at the pleading and summary judgment stages.

The reality, however, is that the practical application of these standards continues to evolve--and mystify.  Accordingly, several recent circuit court decisions merit review for insight into the types of alleged facts or record evidence found significant in consideration of motions to dismiss or for summary judgment in antitrust cases.

The Seventh Circuit and Circumstantial Evidence:  It Depends on the Circumstances

In decisions separated by less than two weeks, In re: Text Messaging Antitrust Litig.[4] and Omnicare, Inc. v. UnitedHealth Group, Inc.,[5] respectively, the Seventh Circuit found allegations of circumstantial evidence of price-fixing to be sufficient for plaintiffs’ putative class action complaint to survive a Twombly motion to dismiss and proceed to discovery, but insufficient to tend to exclude the possibility of independent action and defeat summary judgment under the Matsushita standard.[6]

The In re: Text Messaging ruling, authored by Judge Richard Posner and issued on December 29, 2010, involves a complaint alleging that leading telecommunications companies conspired to fix the prices of text messages.  Notably, the appeal was interlocutory: Judge Posner observed that the district court, pursuant to 28 U.S.C. § 1292(b), certified its decision to deny a motion to dismiss because it found that the contours of Twombly “remain unclear” even though the Seventh Circuit had issued “dozens” of decisions addressing Twombly’s application.  Judge Posner further stated that interlocutory review was appropriate because Twombly in particular was “designed to spare defendants the expense of responding to bulky, burdensome discovery” unless information alleged in the complaint warranted an inference that the case had sufficient merit to proceed. 

Judge Posner noted that the (second amended) complaint in In re Text Messaging alleged that the four defendants sold 90 percent of U.S. text messaging services, and therefore it would not be difficult for them to fix prices and detect cheating through simple means, and thus also evade detection by antitrust regulators.  Moreover, the complaint included several specific allegations pointing to more than mere parallel conduct, namely that the defendants: (i) exchanged price information directly at trade association meetings, (ii) increased prices in the face of steeply falling costs, and (iii) all suddenly changed to a uniform pricing structure from prior complex, heterogeneous pricing structures.  Taken together, this “parallel plus” behavior rendered the alleged conspiracy plausible.

Judge Posner acknowledged the absence of a “smoking gun” allegation involving direct evidence of a price-fixing agreement (e.g., an admission by an employee of one of the conspirators).  However, he also pointed to a long string of authority that circumstantial evidence can establish a conspiracy.  Accordingly, the district court’s denial of the motion to dismiss the complaint was affirmed. 

On January 10, 2011, however, the Seventh Circuit affirmed a district court’s entry of a defense summary judgment in the Omnicare case, also expressly noting the reliance solely upon circumstantial evidence and the absence of any direct-evidence “smoking gun” evidence.  Plaintiff Omnicare, a leading institutional pharmacy, claimed that UnitedHealth had conspired with another health insurer, PacifiCare (UnitedHealth’s prospective merger partner at the time), to depress Omnicare’s reimbursement rates.  Much of Omnicare’s theory was predicated on a flow of allegedly competitively sensitive information between the two insurers. 

Although the Seventh Circuit noted that “Omnicare’s richly detailed narrative” of circumstantial evidence was “complex and compelling,” it observed that the evidence purporting to show an improper information exchange amounted to “a circulation of generalized and averaged high-level pricing data, policed by outside counsel, that is more consistent with independent than collusive action.”  The appellate court ruled that as between the competing inferences that could be drawn from the circumstantial evidence-- conspiracy and independent action -- conspiracy was the less reasonable of the two.  Therefore, relying not only on Matsushita, but also on Twombly’s statement that “an offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently,” the Seventh Circuit declared that a defense summary judgment was appropriate. 

While the Text Messaging and Omnicare decisions produced different results and may seem contradictory in their treatment of circumstantial versus direct evidence, Judge Posner actually provided the means to reconcile them in Text Messaging, observing that: (i) it is not necessary to determine whether the circumstantial evidence alleged at the pleading stage “is sufficient to compel an inference of conspiracy” to establish an antitrust violation (or, by extension, whether that inference of conspiracy would be more likely at the summary judgment stage); and (ii) what is “plausible” at the pleading stage “has a moderately high likelihood of occurring,” but not “as great as such terms as ‘preponderance of the evidence’ connote.”  For motion to dismiss purposes, Judge Posner noted, plaintiffs had not yet had discovery, which could produce the “smoking gun” or additional circumstantial evidence that would tip the balance further -- presumably, as may be necessary to meet the Omnicare expectations at summary judgment.

The Third Circuit:  Antitrust Actions Are No Different

In its November 29, 2010 decision in West Penn Allegheny Health Sys., Inc. v. UPMC,[7] the Third Circuit reversed a dismissal of a complaint alleging that the University of Pittsburgh Medical Center (“UPMC”), an allegedly dominant hospital system, had violated sections 1 and 2 of the Sherman Act by entering into a conspiracy with a health insurer, Highmark, by which UPMC used its power in the provider market to insulate Highmark from competition.  In exchange, the plaintiff alleged, Highmark used its power in the insurance market to strengthen UPMC, which also allegedly attempted to monopolize the Pittsburgh-area market for specialized hospital services.

Before reviewing the complaint’s sufficiency, the Third Circuit expressly noted the district court’s opinion that judges must act as “gatekeepers” when presiding over antitrust and other complex cases -- and then rejected any implication of a heightened pleading standard in antitrust cases, notwithstanding Twombly’s acknowledgement that discovery in such cases can be expensive.  According to the Third Circuit, “Iqbal made clear that Rule 8’s pleading standard applies with the same level of rigor” regardless of the subject matter.  The court went on to say, however, that “judging the sufficiency of a complaint is a context-dependent exercise,” and that “[s]ome claims require more factual explication than others to state a plausible claim for relief.”

As a practical matter, then, the Third Circuit recognized that it may be necessary to plead more, or more particularized, facts in order to state an antitrust claim than one for, e.g., simple battery.  Turning to the alleged conspiracy in West Penn, however, the appellate court also emphasized the distinction between circumstantial and direct evidence at the pleading stage, holding that a plaintiff “may plead an agreement by alleging direct or circumstantial evidence, or a combination of the two. If a complaint includes nonconclusory allegations of direct evidence of an agreement [as the complaint in West Penn did], a court need go no further on the question whether an agreement has been adequately pled.”   

The Eleventh Circuit:  Twombly Prevails, But Not Without Dissent

In a December 2, 2010 opinion authored by the Eleventh Circuit’s antitrust scholar, Judge Gerald Tjoflat, the court affirmed a victory for the defendant -- the district court’s grant of a Twombly motion to dismiss and entry of final judgment -- in Jacobs v. Tempur-Pedic International, Inc.,[8] though with a vocal dissent by a district court judge sitting on the panel by designation.  In Jacobs, originally filed prior to the Supreme Court’s decision in Twombly and its rejection of the per se rule against vertical minimum resale price maintenance (“RPM”),[9] the plaintiff alleged that Tempur-Pedic enforced unlawful RPM agreements and also engaged in horizontal price fixing (in its dual distribution system) with distributors of its visco-elastic foam mattresses (a well-regarded and high-end “memory foam” product).

The district court had held in Jacobs that the plaintiff had failed to adequately plead a relevant product market (alleged to be visco-elastic foam mattresses sold by Tempur-Pedic, as opposed to a mattress market in general), and thus did not show actual harm to competition from the alleged conduct.  The Eleventh Circuit, applying Twombly to the complaint’s relevant market allegations, agreed.  In the appellate court’s view, the plaintiff’s allegations of a relevant market or submarket were “skimpy” and “conclusional” in nature: “[t]he complaint provides no factual allegations of the cross-elasticity of demand or other indications of price sensitivity that would indicate whether consumers treat visco-elastic foam mattresses differently than they do mattresses in general.”  While acknowledging that the plaintiff had not had the benefit of discovery, the appellate court stressed that the plaintiff was not absolved of “the obligation under Twombly to indicate that he could provide [demonstrable empirical] evidence plausibly suggesting the definition of the alleged submarket.

The Eleventh Circuit further held that the plaintiff had failed to satisfy Twombly and Iqbal in the allegations of competitive harm.  The court observed that a “bare legal conclusion” that the agreements would “eliminat[e] price competition” provided “no basis on which a court could determine how harm to competition results.” 

With respect to the plaintiff’s claim of horizontal price fixing, the Eleventh Circuit declared that it could be inferred to be in the independent economic self-interests of Tempur-Pedic and its distributors to set their prices at the minimum levels established by Tempur-Pedic -- a profit-maximizing level for the distributors that Tempur-Pedic unilaterally would not choose to undercut on its website (so as to ensure the existence of brick-and-mortar showrooms maintained by the distributors).  For this reason, the Eleventh Circuit ruled that it was incumbent on the plaintiff to present allegations tending to show that it would be more plausible to enter into an illegal price-fixing agreement (and incur attendant risks) to obtain the same benefits that it appeared would be realized through purely rational profit-maximizing behavior.  And, even if collusion would be the more plausible inference, the complaint would have to provide some factual allegations concerning how and when price signaling occurred.

In dissent, U.S. District Judge Kenneth Ryskamp (Southern District of Florida, sitting by designation) noted the absence of any discovery, and contended that the majority “carrie[d] Twombly too far” in its requirements for pleading the relevant market: “[n]o litigant could have any possibility of alleging a complaint under the majority’s ‘demonstrable empirical evidence’ standard.”  Judge Ryskamp also emphasized that he and the majority had reached different conclusions as to what was “plausible” with respect to the alleged horizontal price fixing, based on their own “judicial experience and common sense.” 

The dissenting judge then added a fitting summary of the current Twombly dilemma: “When plausibility is based on a judge’s common sense and experience, different judges will have different opinions as to what is plausible, resulting in a totally subjective standard for determining the sufficiency of a complaint.”[10]