Court Rejects Traditional "No Set of Facts" Formulation of Conley v. Gibson

On May 21, in a closely watched antitrust case, the Supreme Court raised the bar for plaintiffs alleging an antitrust conspiracy—and possibly for plaintiffs in all federal cases.

In Bell Atlantic Corp. v. Twombly, No. 05-1126, the Court specifically addressed the proper standard for pleading an antitrust conspiracy under Section 1 of the Sherman Act, 15 U.S.C. § 1, with allegations of conspiracy evidenced by parallel conduct. The Court, in a 7–2 decision, held that "an allegation of parallel conduct and a bare assertion of conspiracy" does not survive a motion to dismiss. Instead, allegations of parallel conduct "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 doing so, the Court explicitly rejected the common formulation of the standard for a motion to dismiss set forth in Conley v. Gibson, 355 U.S. 41, 45-46 (1957)—"the accepted rule that a complaint should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief" (emphasis added). From now on, in antitrust cases if not in all cases, a complaint will be tested on the basis of facts actually alleged—not facts that might possibly be alleged and that might be consistent with the allegations of the complaint. Twombly will therefore hold plaintiffs to more rigorous pleading standards than older precedents might have been seen to require.

The Case

In Twombly, plaintiffs alleged that incumbent telephone service providers "engaged in parallel conduct" to inhibit the growth of upstart service providers and conspired to prevent competitive entry in their markets and not to compete with one another. The Court characterized plaintiffs’ allegations as resting on "descriptions of parallel conduct" and "legal conclusions" of an agreement and held that such allegations were insufficient.

Under settled antitrust law, parallel conduct—even consciously parallel conduct—is insufficient to prove that defendants entered into a "contract, combination or conspiracy" in violation of Section 1. Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537, 540-41 (1954). More must be shown—but, at the same time, a conspiracy can be proven by circumstantial evidence, if that evidence would tend to exclude the possibility of independent action. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).

Matsushita was decided on summary judgment, and therefore did not answer the question of what is the plaintiff’s burden of pleading in a claim alleging an antitrust conspiracy. Twombly answers that question— "stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement."

The district court in Twombly had dismissed the complaint for failure to state a claim, acknowledging that allegations of parallel business conduct, taken alone, do not state a claim under Section 1 and holding that plaintiffs must allege additional facts that tend to exclude independent self-interested conduct as an explanation for defendants’ parallel behavior. 313 F. Supp. 2d 174, 179-80 (S.D.N.Y. 2003). Relying on the language in Conley, the Court of Appeals reversed and held that "to rule that allegations of parallel anticompetitive conduct fail to support a plausible conspiracy claim, a court would have to conclude that there is no set of facts that would permit a plaintiff to demonstrate that the particular parallelism asserted was the product of collusion rather than coincidence." 425 F.3d 99, 114 (2d Cir. 2005). The Second Circuit thus held that a plaintiff could survive a motion to dismiss a complaint alleging only parallel conduct; it found no requirement to plead the circumstantial evidence that would satisfy Matsushita’s burdens of production and proof.

The Supreme Court rejected the Second Circuit’s proposition that plaintiffs could survive a motion to dismiss a complaint that alleged only lawful parallel conduct and added a conclusory allegation that "they must have conspired." Instead, the Court held that in addition to alleging parallel conduct, a plaintiff must plead enough factual matter to "suggest that an agreement was made." In other words, a plaintiff must allege facts "plausibly suggesting," and not merely consistent with, an agreement.

The Court supported the increased pleading standard by recognizing what antitrust defendants have frequently experienced—expensive and protracted discovery. The Court noted that "the threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching those proceedings." Thus, the Court stated that "it is only by taking care to require allegations that reach the level suggesting conspiracy that we can hope to avoid the potentially enormous expense of discovery in cases with no reasonably founded hope that the discovery process will reveal relevant evidence to support a [Section 1] claim" (internal quotations omitted).

In reaching its holding, the Court rejected the formula in Justice Black’s opinion in Conley, which stated that a "complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Explaining that this passage should be understood in light of the opinion’s preceding summary of the complaint’s concrete allegations, the Court held that the "no set of facts" language from Conley "has earned its retirement" and is "best forgotten as an incomplete, negative gloss on an accepted pleading standard: once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint."

As pointed out by Justice Stevens in dissent, "[p]etitioners have not requested that the Conley formulation be retired, nor have any of the six amici who filed briefs in support of petitioners." One of those amici was the Solicitor General, who argued that Conley "cannot mean … that a complaint is sufficient as long as the allegations in the complaint do not themselves foreclose relief. … Instead, the ‘set of facts’ that might be proved must actually be alleged in the complaint, or at least be fairly inferred from the facts so alleged." U.S. amicus brief, p. 18. The majority in Twombly agreed, and now requires plaintiff to allege "enough factual matter (taken as true) to suggest that an agreement was made," or "plausible grounds to infer an agreement." The Court apparently believed that Conley needed to be limited to reconcile its holding that enough facts to show a "plausible" agreement must be pled. However, the Court did not restrict its holding to antitrust cases, and thus defendants will now likely cite Twombly outside of the antitrust context to argue that pleading standards have been raised elsewhere.

Likely Impact of Twombly

In antitrust cases, a complaint pleading parallel conduct with a conclusory allegation that defendants "conspired" is not sufficient to state a claim. Plaintiffs must plead some facts that, if taken as true, make a conspiracy or agreement plausible. Presumably a plaintiff may still prove a conspiracy by circumstantial evidence, and thus, the facts pled can likely still be circumstantial. However, a plaintiff must have some evidence of an agreement before a complaint can be filed, and courts might now be more skeptical of complaints alleging only lawful acts. Allegations that defendants acted in parallel, participated in trade associations, and one of their executives said something suggestive of conspiracy were all present in Twombly—and were all rejected by the Court.

Twombly likely will not affect the government, which can use compulsory process in pre-complaint investigations to obtain its evidence. Plaintiffs following on government enforcement will continue to rely on the allegations and evidence in the government’s case. But more entrepreneurial plaintiffs, seeking to allege new conspiracies (and who often have no direct evidence of a conspiracy, but hope to flush out that evidence in discovery) will have a more difficult time getting past the pleading stage.

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