Author: Luis Blanquez
As a long-standing antitrust attorney in Europe, making the decision to move from Madrid to San Diego a few years ago to practice law in the U.S. has been a life-changing experience. Both personally and professionally. Learning from other cultures, colleagues, and languages is something I strongly recommend to everyone. It opens your mind and provides you with a different perspective about the world and yourself. And of course, that also applies to the practice of law.
Indeed, when you move to a new jurisdiction you basically become a “newborn” attorney, but with all your past experience in the backpack. That puts you in the best position to approach everything with a “fresh pair of eyes”, which in turn allows you to add value to your team and cases in a unique way.
In that respect, something I noticed during these first years of practicing antitrust law in the U.S. is how district courts, in deciding motions to dismiss cases, disagree on the applicable standard when analyzing antitrust conspiracies. Some apply the summary-judgment or trial-like standard to conspiracy allegations, particularly when confronted with “non-parallel-conduct” cases, despite the fact that a complaint at that stage is constructed without the benefits of discovery. Others misunderstand the language in Twombly about “ruling out the possibility of independent action,”—which is specific to conscious parallelism cases—and they incorrectly add it to the list of pleading requirements.
TWOMBLY AND THE PLAUSIBILITY STANDARD
For those not familiar with antitrust law, Bell Atlantic Corp. v. Twombly changed the antitrust pleading standards in federal court from one of “extreme permissibility” to the current “plausibility” standard. And that was a big deal because it basically re-defined what Federal Rule of Civil Procedure 8(a)(2) requires for a complaint to survive a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6) FRCP.
In antitrust cases, a claim under Section 1 of the Sherman Act requires (i) a contract, combination, or conspiracy; (ii) an unreasonable restraint of trade in the relevant market; (iii) and antitrust injury.
For the first prong, there are two ways to prove a “contract, combination, or conspiracy”: (i) by direct evidence that shows the existence of an agreement; or (ii) through a combination of parallel conduct and “plus factors,” i.e., “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.” In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015).
Last, in order to survive a motion to dismiss, a complaint also requires antitrust injury. An antitrust plaintiff must show both constitutional standing and antitrust standing. If you want to know more about antitrust injury, we have written extensively on the subject.
Here I will just focus on the two ways courts may prove a “contract, combination, or conspiracy”: (i) direct evidence, (ii) or circumstantial evidence and “plus factors”. This is the prong where district courts have been struggling when ruling on their motions to dismiss, mainly because Justice Souter’s opinion in Twombly included some language from the landmark summary-judgment decision (Matsushita) that the Court used to explain why in conscious parallelism cases, plaintiffs’ “offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently.”
Direct evidence in a Section 1 antitrust conspiracy means evidence that is explicit and requires no inferences to establish the conclusion that an agreement exists. In plain English, a “smoking gun” in the form of documents, meetings or defendants’ testimony.
Federal courts around the country have agreed––with very limited exceptions––that whenever a complaint includes such non-conclusory allegations of direct evidence of an agreement, there is no need to go any further on the question of whether such an agreement has been adequately pled. And this is important because it means that allegations of direct evidence of an agreement––if sufficiently detailed––are independently adequate and sufficient alone.
Bottom line, in direct evidence scenarios, there is no need to even carry out the Twombly “plausibility” analysis in the first place. To meet the direct evidence standard the evidence must explicitly support the asserted proposition without requiring any inference. In re Citric Acid Litig., 191 F.3d 1090, 1093 (9th Cir. 1999) (“Citric Acid”)
This is the only threshold that a plaintiff should meet in order to survive a 12(b)(6) motion to dismiss when providing direct evidence.
CIRCUMSTANTIAL EVIDENCE, PARALLEL CONDUCT AND “PLUS FACTORS”
But like everything meaningful in life, things are rarely that straightforward in antitrust law. Thus, in alleging a conspiracy, a plaintiff may present either direct evidence (or if that’s not possible), circumstantial evidence of defendants’ conscious commitment to a common scheme designed to achieve an unlawful objective. This is a mouthful, so let’s try to bring some light to it.
District courts have the power to insist on some degree of specificity in pleading before allowing an antitrust complaint relying on allegations of circumstantial evidence of agreement to proceed. That’s why the Supreme Court in Twombly offered some guidance as to how to properly plead an agreement in parallel conduct cases:
“A conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality . . . . [W]hen 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 preceding agreement, not merely parallel conduct that could just as well be independent action.” (emphasis added).
In other words, a plaintiff needs additional factual allegations pointing towards a “meeting of the minds,” outlining at the same time the “general contours” of such an existing agreement, supporting those allegations with a “context that tends to make said agreement plausible”. Eventually, all such factual allegations will become evidence of the conspiracy, but only after discovery, at the summary-judgment stage. Additionally, such allegations of parallel conduct may be accompanied by allegations of so-called “plus factors,” which the Supreme Court has defined as “anything that tends to exclude independent action.”
“[A] complaint may, alternatively, present circumstantial facts supporting the inference that a conspiracy existed.” Citigroup, 709 F.3d at 136. “[A] horizontal agreement, [ ], may be inferred on the basis of conscious parallelism, when such interdependent conduct is accompanied by circumstantial evidence and plus factors.” Id. “These plus factors may include: a common motive to conspire, evidence that shows that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators, and evidence of a high level of interfirm communications.”
Indeed, after Twombly, courts have been analyzing the line between alleging mere parallel conduct vs. a plausible anticompetitive agreement on a case-by-case basis. And this is precisely why there is such a debate among district courts––and even circuit appellate courts–– as to how much context is necessary to prove an agreement, and what a claim based on circumstantial evidence requires to be plausible, in the absence of direct evidence.
First, once a claim is “plausible”, a court has to stop balancing whether the facts provided by the plaintiff increase the chances of discovery revealing further evidence of an agreement
“[A]t the motion-to-dismiss stage, appellants must only put forth sufficient factual matter to plausibly suggest an inference of conspiracy, even if the facts are susceptible to an equally likely interpretation.” Gelboim v. Bank of Am. Corp., 823 F.3d 759, 782 (2d Cir. 2016). “Skepticism of a conspiracy’s existence is insufficient to warrant dismissal; ‘a well- pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.’” Id. at 781 (quoting Twombly, 550 U.S. at 556).
Second, courts should not question whether there are other plausible, or even more plausible, alternatives to plaintiffs’ theories
What does this mean? Basically, at a motion to dismiss stage, a court must first determine the existence of parallel conduct by analyzing the facts presented by a plaintiff. Second, if the plaintiff’s alleged facts “conceivably” support such allegations, then the court may balance them to determine whether there is a “plausible” claim that the parallel conduct is due to collusive rather than unilateral conduct. For instance, by looking for “plus factors” and/or a “meeting of the minds.”
And once a court finds the plaintiff has sufficiently pled parallel conduct with plus factors, and that a conspiracy is “plausible,” the analysis stops there. In other words, when there are sufficient factual allegations to make the plaintiff’s claim “plausible,” the court may neither make factual findings at a pleading stage nor choose among competing plausible alternatives from defendants. Furthermore, a plaintiff need not prove that their theory is more plausible than the defendant’s theory in order to sufficiently plead its case. In other words, a defendant should not be allowed––at a motion to dismiss stage––to show that plaintiff’s theory does not “tend to exclude independent action.”
As the Second Circuit has systematically explained, the court on a Rule 12(b)(6) motion rejects invitations to weigh competing inferences from facts in the complaint. Anderson News, LLC v. American Media, Inc., 680 F.3d 162 (2d. Cir. 2012). (“The question is not whether there is a plausible alternative to the plaintiff’s theory [but] whether there are sufficient factual allegations to make the complaint’s claim plausible.” “To present a plausible claim at the pleading stage, the plaintiff need not 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”). Gelboim v. Bank of Am. Corp., 823 F.3d 759, 781 (2d. Cir. 2016) (“The choice between two plausible inferences that may be drawn from factual allegations is not a choice to be made by the court on a Rule 12(b)(6) motion.”). In re SSA Bonds Antitrust Litig., 2020 U.S. Dist. LEXIS 54000 (2d. Cir. 2020). (“[T]he purpose of Federal Rule of Civil Procedure 12(b)(6) is to test, in a streamlined fashion, the formal sufficiency of the plaintiff’s statement of a claim for relief without resolving a contest regarding its substantive merits or “weigh[ing] the evidence that might be offered to support”).
The Ninth Circuit seems to be on the same page as the Second Circuit on these issues. Persian Gulf Inc. v. BP W. Coast Prods. LLC, 324 F. Supp. 3d 1142, 1154 (S.D. Cal. 2018) (“Plaintiff is not required to disprove all possible alternative explanations to survive a motion to dismiss.”). In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, (9th Cir. 2015). (“Whereas parallel conduct is as consistent with independent action as with conspiracy, plus factors are economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action. If pleaded, they can place parallel conduct “in a context that raises a suggestion of preceding agreement”).
Third, the level of “factual specificity” required
The Ninth and Second Circuits agree that the Supreme Court’s Twombly pleading standard requires only that a complaint’s allegations of an antitrust violation be plausible, not that they be “probable” or even the “more plausible” of alternative explanations. But there seems to be some debate about the level of factual specificity that a claim requires to become “plausible,” especially in the Ninth Circuit.
The Supreme Court in Twombly first required plaintiffs trying to establish a conspiracy claim to deliberately avoid the use of conclusory and non-factual allegations, but instead identify “a specific time, place, or person involved in the alleged conspiracy,” Id. 550 U.S. at 565 n.10. Then, later, it required that a “complaint must contain sufficient factual matter, accepted as true, to state a claim that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Since Twombly, certain courts in the Ninth Circuit have held that in order to avoid a Rule 12(b)(6) dismissal, plaintiffs who allege a Sherman Act Section 1 claim must also plead facts sufficient to establish a conspiracy, including “who, did what, to whom (or with whom), where, and when,” Kendall v. VISA U.S.A., Inc., 518 F.3d 1042, 1047-48 (9th Cir. 2008). Plaintiffs may meet this standard by pleading “facts such as a ‘specific time, place or person involved in the alleged conspiracies’ [intended] to give a defendant seeking to respond to allegations of conspiracy an idea of where to begin.” Id. at 1047.
In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015) the Ninth Circuit held again that in order to state a claim for antitrust conspiracy, plaintiffs must allege “who, did what, to whom (or with whom), where, and when?”. In addition, the panel majority, rather than considering the plaintiffs’ “plus factors” collectively, and construing the factual allegations in a light favorable to the plaintiffs, analyzed them separately and concluded they were individually insufficient to cross the “plausibility” threshold, providing at the same time, a lawful alternative explanation for each factor.
Even more recently, in Frost v. LG Elecs., Inc., 801 F. App’x 496, 497 (9th Cir. 2020), the Ninth Circuit once again relied on Kendall and concluded that Plaintiffs did not allege parallel conduct in conjunction with “plus factors” tending to show agreement, because each of those statements required inferences in order to support the existence of a conspiracy and when considered collectively, did not establish “who, did what, to whom (or with whom), where, and when?”
Do you think this is confusing? Then stay with me a bit longer because it gets even more interesting.
First, several lower courts in the Ninth Circuit have already refused to impose a heightened pleading requirement for antitrust conspiracies that requires showing every specific detail of who, what, when, where, why, and how. In re Fresh & Process Potatoes Antitrust Litig., 834 F. Supp. 2d 1141, 1163 (D. Id. 2011) the court rejected defendants’ reliance on Kendall and stated that “[m]any courts have rejected such arguments (including district courts within the Ninth Circuit), concluding that the Supreme Court did not impose the elaborate ‘who-what-where-when’ pleading requirement defendants insisted upon”).
We can also find the same argument in the Second Circuit. Starr v. Sony BMG Music Entm’t, 592 F.3d 314, 325 (2d Cir. 2010) (“Defendants next argue that Twombly requires that a plaintiff identify the specific time, place, or person related to each conspiracy allegation. This is also incorrect.”).
Second, the dissenting judge In re Musical Instruments concluded that the majority opinion in the case only considered each “plus factor” separately, but that if considered together, the allegations of a horizontal agreement crossed the line from “conceivable” to “plausible” under Twombly. And something similar happened in Frost. One concurring judge was not convinced that Kendall should be the proper application of the pleading standard in Twombly (although as binding law in the Ninth Circuit, it compelled the result in that case). And one dissenting judge held that even though plaintiffs’ statements did not reflect the precise temporal or geographical scope of the alleged unlawful agreement, they were still enough to “plausibly” suggest that an agreement was made. And more importantly, “if Kendall is read to require dismissal of plaintiffs’ complaint, it is inconsistent with the Supreme Court’s decision in Twombly”.
First, congratulations if you made it until here because this is a complex and thorny topic.
Second, the only argument where appellate circuits seem to agree on is the fact that whenever a complaint includes non-conclusory allegations of direct evidence of an agreement––the so called “smoking gun” ––, there is no need to carry out the Twombly “plausibility” analysis. Those allegations are independently adequate and sufficient alone. At least for now!
Third, there is a lot of controversy between courts as to what is required to plead a “plausible” antitrust conspiracy. Even within the Ninth Circuit alone, judges disagree on the necessary level of specificity when providing “plus factors” under the Twombly standard. In this article, we only analyze recent case law from the Second and Ninth Circuit, where at least they seem to concur on the fact that––at a motion to dismiss state–– once a court finds the plaintiff has sufficiently pled parallel conduct with “plus factors”, and that a conspiracy is “plausible,” that same court shouldn’t make factual findings at a pleading stage nor choose among competing plausible inferences from defendants.
But this is not the case all over the country. And if you don’t believe me, as an example of many others out there, check these two decisions: Evergreen Partnering Group, Inc. v. Pactiv Corp 720 F.3d 33 (1st Cir. 2013) and In re Insurance Brokerage Antitrust Litigation 618 F.3d 300 (3d Cir. 2010). After you read them, most likely you will agree with me that the issue of what is required to plead a “plausible” antitrust conspiracy is definitely ripe for certiorari at the Supreme Court.