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No.

10-1172

IN THE
Supreme Court of the United States
IN RE TEXT MESSAGING ANTITRUST LITIGATION

CELLCO PARTNERSHIP D/B/A VERIZON WIRELESS,


AT&T MOBILITY LLC, SPRINT NEXTEL CORP.,
and T-MOBILE USA,,
Petitioners,
v.
JIM MORRIS, et al., on Behalf of Themselves
and All Others Similarly Situated,
Respondents.

On Petition for Writ of Certiorari


To the United States Court of Appeals
For the Seventh Circuit
__________
MOTION FOR LEAVE TO FILE BRIEF AND
BRIEF OF WASHINGTON LEGAL FOUNDATION
AS AMICUS CURIAE IN SUPPORT OF PETITIONERS
__________
Daniel J. Popeo
Richard A. Samp
(Counsel of Record)
Washington Legal Foundation
2009 Massachusetts Ave., NW
Washington, DC 20036
(202) 588-0302
rsamp@wlf.org
Date: April 22, 2011
MOTION OF WASHINGTON LEGAL FOUNDATION,
FOR LEAVE TO FILE BRIEF AS
AMICUS CURIAE IN SUPPORT OF PETITIONERS

Pursuant to Rule 37.2 of the Rules of this Court,


the Washington Legal Foundation (WLF) respectfully
moves for leave to file the attached brief as amicus
curiae in support of Petitioners. Counsel for Petitioners
has consented to the filing of this brief. Counsel for
WLF wrote to counsel for Respondents by letter dated
April 4, 2011 (and sent her an email the same day) to
request consent, but did not receive a response to the
request. Accordingly, this motion for leave to file is
necessary.

The Washington Legal Foundation (WLF) is a


non-profit public interest law and policy center with
supporters in all 50 States. WLF devotes a substantial
portion of its resources to defending free-enterprise,
individual rights, and a limited and accountable
government. To that end, WLF has frequently appeared
as amicus curiae in this and other federal courts to
address the proper scope of the antitrust laws. See, e.g.,
Pacific Bell Telephone Co. v. linkLine Communications,
Inc., 555 U.S. 438 (2009).

WLF also has regularly appeared in cases that


address the pleadings standards of Fed.R.Civ.P. 8(a),
which requires all federal complaints to include a
“showing that the pleader is entitled to relief.” See, e.g.,
Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009); Bell Atlantic
Corp. v. Twombly, 550 U.S. 544 (2007). WLF is
concerned that unless courts are willing to dismiss
complaints that fail to make such a showing, the high
costs of litigation will drive many defendants to pay
substantial sums to settle even the most insubstantial
of federal lawsuits.

WLF has no direct interest, financial or


otherwise, in the outcome of this lawsuit. Because it
lacks a direct interest, WLF believes that it can provide
the Court with a perspective that is distinct from the
views of any party.

For the foregoing reasons, the Washington Legal


Foundation respectfully requests that it be allowed to
participate in this case by filing the attached brief.

Respectfully submitted,

DANIEL J. POPEO
RICHARD A. SAMP
WASHINGTON LEGAL FOUNDATION
2009 Massachusetts Ave., NW
Washington, DC 20036
202-588-0302
rsamp@wlf.org

Dated: April 22, 2011


QUESTION PRESENTED

Amicus curiae addresses the following issue only:

Whether allegations that rival firms in a


concentrated industry, while members of the same trade
association, engaged in follow-the-leader pricing state a
claim under Section 1 of the Sherman Act and this
Court’s decision in Bell Atlantic Corp. v. Twombly, 550
U.S. 544 (2007), without regard to whether the
complaint’s factual allegations, considered as a whole,
make an inference of conspiracy plausible.
iii

TABLE OF CONTENTS
Page

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . v

INTERESTS OF AMICUS CURIAE . . . . . . . . . . . . . 1

STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . 2

REASONS FOR GRANTING THE PETITION . . . . 5

I. THE SEVENTH CIRCUIT’S


PLEADINGS STANDARD CONFLICTS
WITH TWOMBLY AND OTHER
APPEALS COURT DECISIONS . . . . . . . . . . . 8

A. Twombly Tightened the Pleading


Standards for Plaintiffs Alleging
Section 1 Violations . . . . . . . . . . . . . . . . 8

B. Under the 7th Circuit’s Standard,


Allegations Are Accepted as
Circumstantial Evidence of
Conspiracy, Without First
Examining Whether Apparently
“Anomalous” Conduct Has an
Innocent Explanation. . . . . . . . . . . . . . 12

C. In Conflict with the 7th Circuit,


Other Appeals Courts Require
Close Examination of Alleged
Circumstantial Evidence to
Determine Whether Conspiracy Is
the Most Plausible Interpretation . . . 16
iv

Page

II. REVIEW IS WARRANTED TO ENSURE


THAT PLEADING REQUIREMENTS
HAVE REAL TEETH . . . . . . . . . . . . . . . . . . 19

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
v

TABLE OF AUTHORITIES
Page(s)
Cases:

Ashcroft v. Iqbal,
129 S. Ct. 1937 (2009) . . . . . . . . . 1, 6, 10, 12, 18, 20

Bell Atlantic Corp. v. Twombly,


550 U.S. 544 (2007) . . . . . . . . . . . . . . . . . . . . passim

In re: Insurance Brokerage Antitrust Litigation,


618 F.3d 300 (3d Cir. 2010) . . . . . . . . . . . . . . . 16, 17

In re: Travel Agent Commission Antitrust


Litigation, 583 F.3d 896 (6th Cir. 2009) . . . . . . . . 18

Iqbal v. Hasty,
490 F.3d 143 (2d Cir. 2007),
rev’d sub nom., Ashcroft v. Iqbal,
129 S. Ct. 1927 (2009) . . . . . . . . . . . . . . . . . . . . 20-21

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,


475 U.S. 574 (1986) . . . . . . . . . . . . . . . . . . . . . . . . 19

Monsanto Co. v. Spray-Rite Service Corp.,


465 U.S. 752 (1984) . . . . . . . . . . . . . . . . . . . . . . . . 18

Theatre Enterprises, Inc. v. Paramount


Film Distributing Corp., 346 U.S. 537 (1954) . . . . 12
vi

Page(s)
Statutes:

Sherman Act § 1, 15 U.S.C. § 1 . . . . . . . . . . . . . passim

28 U.S.C. § 1292(b) . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3

Miscellaneous:

Fed.R.Civ.P. 8(a) . . . . . . . . . . . . . . . . . . . . . . . . passim

Fed.R.Civ.P. 12(b)(6) . . . . . . . . . . . . . . . . . . . . . . . . 2, 8
BRIEF OF WASHINGTON LEGAL FOUNDATION
AS AMICUS CURIAE IN SUPPORT OF PETITIONERS
__________

INTERESTS OF AMICI CURIAE

The interests of the Washington Legal


Foundation (WLF) are more fully set forth in the
accompanying motion for leave to file this brief.1

In brief, WLF is a non-profit public interest law


and policy center with supporters in all 50 States. WLF
devotes a substantial portion of its resources to
defending free-enterprise, individual rights, and a
limited and accountable government. To that end, WLF
has frequently appeared as amicus curiae in this and
other federal courts to address the proper scope of the
antitrust laws. See, e.g., Pacific Bell Telephone Co. v.
linkLine Communications, Inc., 555 U.S. 438 (2009).

WLF also has regularly appeared in cases that


address the pleadings standards of Fed.R.Civ.P. 8(a),
which requires all federal complaints to include a
“showing that the pleader is entitled to relief.” See, e.g.,
Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009); Bell Atlantic
Corp. v. Twombly, 550 U.S. 544 (2007). WLF also
regularly publishes articles addressing the requirements
of Rule 8(a), including one that focused on the Seventh
Circuit’s decision in this case. See Jason J. Medro,

1
Pursuant to Supreme Court Rule 37.6, WLF states that
no counsel for a party authored this brief in whole or in part; and
that no person or entity, other than WLF and its counsel, made a
monetary contribution intended to fund the preparation and
submission of this brief. More than ten days prior to the due date,
counsel for WLF provided counsel for Respondents with notice of
intent to file.
2

Seventh Circuit Text Messaging Decision Undermines


High Court Precedent, WLF LEGAL OPINION LETTER,
Vol. 20 No. 8 (April 8, 2011).

WLF is concerned that unless courts are willing


to dismiss complaints that fail to make the showing
required by Rule 8(a), the high costs of litigation will
drive many defendants to pay large sums to settle even
the most insubstantial of federal lawsuits. WLF is
concerned that the decision below undermines the
pleading standards adopted by this Court in its
Twombly decision and provides virtually every plaintiff
with a road map for drafting a Sherman Act § 1
complaint that will survive a Rule 12(b)(6) motion to
dismiss.

WLF submits this brief to urge the Court to grant


review in order to provide guidance regarding the
allegations necessary for an antitrust complaint to
survive a motion to dismiss – an issue that has divided
the federal appeals courts. WLF does not address the
second question presented by the petition, regarding
procedural rules governing interlocutory appeals under
28 U.S.C. § 1292(b).

STATEMENT OF THE CASE

Petitioners are the four largest providers of


cellular telephone services in this country. Among the
most popular data services provided by Petitioners is
text messaging. The volume of text messages sent by
Petitioners’ customers has skyrocketed in recent years,
and the prices charged by Petitioners for text messaging
has dropped sharply during the same time period.
3

Respondents Jim Morris, et al. (collectively,


“Morris”) allege that ever since 2005 Petitioners have
conspired to fix prices charged to consumers who pay for
text messaging on a single-message basis. Morris’s
complaint does not allege a conspiracy based on any
“direct evidence”; rather, its allegation “is an inference
from circumstantial evidence.” Pet. App. 11a. The
circumstantial evidence to which Morris points includes
allegations that: (1) the cellular phone industry is
highly concentrated; (2) Petitioners have engaged in
parallel conduct (e.g., they all charge the same per-call
rate for services provided on a single-message basis, and
on two occasions they raised rates by the same amounts
over the course of less than one year); (3) price were
increased at a time when the costs of providing services
were falling; and (4) Petitioners belong to a trade group
where cell phone marketing issues are discussed,
thereby providing Petitioners with an opportunity to
launch a conspiracy to fix prices. Morris alleges that
Petitioners’ activities violated § 1 of the Sherman Act,
15 U.S.C. § 1.

In April 2010, the district court granted Morris’s


motion for leave to file a Second Amended Complaint
(SAC), finding that the SAC adequately stated a claim
upon which relief could be granted. Pet. App. 13a-20a.
It later certified, for interlocutory review under 28
U.S.C. § 1292(b), the question of the complaint’s
adequacy.

The Seventh Circuit granted the application to


appeal and then, without further briefing, affirmed the
district court. Id. at 1a-12a. The court acknowledged
that although the SAC alleged that Petitioners had
agreed to fix price prices, it did not allege “direct
4

evidence of such an agreement; the allegation is an


inference from circumstantial evidence.” Id. at 11a.
The court stated that “the test for whether to dismiss a
case at [the pleadings] stage turns on the complaint’s
‘plausibility.’” Id. While asserting that this Court’s
Rule 8(a) standard “is a little unclear,” the court said
that “the complaint must establish a nonnegligible
probability that the claim is valid.” Id. at 12a. It held
that Morris’s circumstantial evidence allegations
provided “a sufficiently plausible case of price fixing to
warrant allowing the plaintiffs to proceed to discovery.”
Id.2

The Seventh Circuit said that the SAC could


fairly be characterized as alleging the type of “parallel
plus” behavior that Twombly suggested is sufficient to
state a Section 1 claim: “Complex and historically
unprecedented changes in pricing structure made at the
very same time by multiple competitors, and made for
no discernable reason.” Id. (quoting Twombly, 550 U.S.
at 557 n.4). Importantly, at no point in connection with
its discussion of the cited pieces of circumstantial
evidence did the court engage in a discussion of whether
the alleged behavior was actually undertaken “for no
discernable reason,” and whether it was more consistent
with conspiracy or with innocent behavior. For
example, in discussing the alleged “simultaneous” price

2
The circumstantial evidence cited by the appeals court
included allegations that: (1) Petitioners engaged in “parallel
behavior”; (2) the industry structure “facilitate[d] collusion”; (3)
Petitioners belonged to a trade association at which price
information was shared; (4) Petitioners raised prices in the face of
falling costs; and (5) the price rises were “simultaneous.” Id. at 9a-
10a.
5

increase, the court did not discuss potential innocent


explanations for the increases (which, as noted in the
SAC, actually took place over the course of many
months) – such as that (as the SAC also noted, Pet. App.
101a-103a) Petitioners had strong reasons,
independently of each other, to attempt to induce their
customers to purchase text messaging services other
than on a single-message basis. Rather, according to the
Seventh Circuit, the Rule 8(a) pleading standard is
whether the factual allegations in a complaint, when
accepted as true, create a “nonnegligible probability
that the claim is valid.” Id. at 12a.

REASONS FOR GRANTING THE PETITION

The petition raises an issue of exceptional


importance to the business community, particularly
businesses that operate in concentrated industries:
when an antitrust plaintiff lacks any direct evidence
that businesses entered into a conspiracy to restrain
trade, what level of circumstantial evidence must the
plaintiff allege in order to survive a motion to dismiss
the complaint? The Court addressed the issue in
Twombly, but the federal appellate courts have adopted
sharply conflicting understandings of that decision.
Review is warranted to resolve that conflict.

This is not simply an instance of appeals courts


applying the same legal standard but arriving at
conflicting conclusions after examining similar sets of
facts. Rather, the Seventh Circuit has adopted a Rule
8(a) legal standard that conflicts sharply with the
standard adopted by other circuits, and (WLF
respectfully submits) with the standard adopted by
Twombly as well. All courts, including Twombly, have
6

recognized that a Section 1 complaint cannot survive a


motion to dismiss based solely on allegations that
businesses have acted in a parallel manner. 550 U.S. at
556-57. The issue that has divided the appeals courts is
what sort of “parallel plus” behavior is sufficient to
create the necessary “plausible” inference of a
conspiracy in restraint of trade. In deciding whether a
complaint makes the necessary Rule 8(a) “showing that
the pleader is entitled to relief,” other appeals courts
have undertaken an examination of the proffered
“parallel plus” behavior to determine whether that
behavior really suggests conspiracy or is more consistent
with an innocent explanation. The Seventh Circuit
standard, in contrast, eschews any such analysis. For
example, according to that court a plaintiff adequately
alleges “anomalous” behavior (suggestive of conspiracy)
when he alleges that the defendants raised prices in the
face of falling costs, regardless whether other facts
suggest a more plausible, non-conspiratorial reason for
the price increases. Pet. App. 10a.

Review is also warranted because the Seventh


Circuit decision is symptomatic of a problem faced by a
broad range of civil defendants in federal courts. This
Court sought to convey in both Twombly and Ashcroft v.
Iqbal, 129 S. Ct. 1927 (2009), that Rule 8(a)’s notice
pleading requirement is not toothless. While Rule 8(a)
is intended to be applied liberally, it nonetheless is
intended to weed out complaints that are based on
“labels and conclusions, and a formulaic recitation of
the elements of a cause of action,” and that fail to “raise
a right to relief above the speculative level.” Twombly,
550 U.S. at 555. As the Court recognized, allowing
insubstantial lawsuits to proceed past the pleadings
stage impose significant and unwarranted costs
7

(particularly the costs of discovery) on defendants. Id.


at 557-60. But the Seventh Circuit decision seems to
treat pleadings standards as simply a formulaic exercise.
Plaintiffs’ lawyers are provided a roadmap to those
boilerplate allegations that will hereafter be deemed
sufficient to withstand a motion to dismiss. The
inevitable result: future complaints will include those
allegations (which can be made in good faith to at least
some degree in most antitrust cases), and fewer and
fewer insubstantial complaints will be weeded out at the
pleadings stage. Review is warranted to impress upon
the lower federal courts that Rule 8(a) requires a careful
examination of a complaint’s allegation to ensure that
the complaint does indeed “show[ ] that the pleader is
entitled to relief.”

I. THE SEVENTH CIRCUIT’S PLEADINGS


STANDARD CONFLICTS WITH TWOMBLY
AND OTHER APPEALS COURT
DECISIONS

The Seventh Circuit stands alone in its


willingness to credit any evidence in a Section 1
complaint that lends “plausibility” to a conspiracy
allegation without regard to whether that evidence can
just as plausibly be interpreted as indicative of a
rational and competitive business strategy. As other
circuits have interpreted Twombly, allegations of
“parallel plus” behavior are to be credited only if the
behavior is more consistent with conspiracy than with
innocent behavior. Review is warranted to resolve that
conflict.
8

A. Twombly Tightened the Pleading


Standards for Plaintiffs Alleging
Section 1 Violations

As noted above, Twombly sets forth broadly


applicable rules regarding Rule 8(a), and a general
pleading standard for determining whether a complaint
– regardless of its subject matter – can withstand a
motion to dismiss. But it is particularly relevant to this
case because it addressed a highly similar antitrust
claim. Twombly is an essential guide to the application
of its general pleading standard in the antitrust context,
because the Court’s opinion went on to determine
whether the plaintiffs had adequately pled a claim
under § 1 of the Sherman Act.

Twombly involved claims that several


telecommunications companies – who provided local
telephone services in geographically distinct areas – had
violated § 1 by agreeing among themselves to oppose
entry by rivals and not to enter each other’s geographic
territories. The appeals court held that the plaintiffs
adequately stated a § 1 claim by alleging – based largely
on evidence of parallel conduct (i.e., the failure of any
defendant to enter another defendant’s geographic
territory) – that the defendants must have agreed
among themselves not to compete with one another.
This Court reversed, declaring that a bare assertion of
conspiracy – without some factual allegations in the
complaint to provide support for that assertion – does
not adequately state a § 1 claim. Twombly, 550 U.S. at
555-56. The Court stated:

While a complaint attacked by a Rule 12(b)(6)


motion to dismiss does not need detailed factual
9

allegations, . . . a plaintiff’s obligations to provide


the ‘grounds’ of his ‘entitle[ment] to relief’
requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of
action will not do. . . . Factual allegations must be
enough to raise a right to relief above the
speculative level.

Id. at 555.

The Court then proceeded to apply those general


pleadings standards to claims under § 1 of the Sherman
Act. The Court held that “stating such a claim requires
a complaint with enough factual matter (taken as true)
to suggest that an agreement [to restrain trade] was
made.” Id. at 556. It further held that “an allegation of
parallel conduct and a bare assertion of conspiracy will
not suffice” to state a claim. Id. The Court explained:

Without more, parallel conduct does not suggest


conspiracy, and a conclusory allegation of
agreement at some unidentified point does not
supply facts adequate to show illegality. Hence,
when 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 a preceding
agreement, not merely parallel conduct that
could just as well be independent action. . . . An
allegation of parallel conduct is thus much like a
naked assertion of conspiracy in a § 1 complaint:
it gets the complaint close to stating a claim, but
without some further factual enhancement it
stops short of the line between possibility and
plausibility of “entitle[ment] to relief.”
10

Id. at 556-57.3

The Court then examined (and rejected) each of


the factual allegations that the plaintiffs insisted added
credence to their claim that the defendants had entered
into a conspiracy. The plaintiffs cited evidence that all
of the defendants had acted to thwart efforts by
Congress to encourage upstart firms to begin providing
local telephone service. The Court concluded that while
such conduct was consistent with a conspiracy, the most
plausible explanation was benign: each of the defen-
dants had strong financial incentives to resist
competition within its own geographic territory, quite
apart from any agreement to resist. Id. at 566.

The plaintiffs also cited evidence that none of the


defendants ever sought to compete in nearby geographic
areas where local telephone service was dominated by
one of the other defendants, despite the fact that
expansion into those areas offered them “especially
attractive business opportunities.” Id. at 567. The
Court concluded that that evidence did not increase the
plausibility of the conspiracy claim, because it found
more compelling “an obvious alternative explanation.”
Id. Noting that the defendants were “former
Government-sanctioned monopolists,” the Court

3
The Court subsequently explained Twombly’s treatment
of parallel conduct allegations as follows: “Acknowledging that
parallel conduct was consistent with an unlawful agreement, the
Court [in Twombly] nevertheless concluded that it did not plausibly
suggest an illicit accord because it was not only compatible with, but
indeed was more likely explained by, lawful, unchoreographed free-
market behavior. Iqbal, 129 S. Ct. at 1950 (citing Twombly, 550
U.S. at 567).
11

deemed it most plausible that the defendants failed to


expand into rivals’ territories because they “liked the
world the way it was” and thus desired to “sit[ ] tight,
expecting their neighbors to do the same.” Id. at 568.

Finally, the plaintiffs cited evidence that the


defendants were all members of the same trade
associations, a situation that provided them with an
opportunity to enter into an agreement not to compete
and thus made it more likely that they had, indeed,
entered into such an agreement. Id. at 567 n.12. The
Court dismissed that allegation out of hand, indicating
that an inference that rivals who have met together at
trade associations have not conspired to restrain trade
is at least as plausible as an inference that they have
conspired. Id.

While concluding that the factual allegations in


the complaint were insufficient to state a § 1 claim, the
Court provided only limited guidance regarding what
allegations (other than direct evidence of a conspiracy)
would be sufficient. The Court noted, however, that the
parties in Twombly had agreed “that complex and
historically unprecedented changes made at the very
same time by multiple competitors, and made for no
other discernable reason, would support a plausible
inference of conspiracy.” Id. at 557 n.4.
12

B. Under the 7th Circuit’s Standard,


Allegations Are Accepted as Circum-
stantial Evidence of Conspiracy,
Without First Examining Whether
Apparently “Anomalous” Conduct
Has an Innocent Explanation

The Seventh Circuit acknowledged that


“[p]leadings standards in federal litigation are in
ferment after Twombly and Iqbal.” Pet. App. 7a. The
appeals court characterized Twombly as standing
principally for the proposition that a § 1 complaint “that
merely alleges parallel behavior” does not state a claim
because such allegations “are equally consistent with an
inference that the defendants are conspiring and an
inference that the conditions of their market have
enabled them to avoid competing without having to
agree not to compete.” Id. at 7a-8a.4

The appeals court concluded that the complaint


had alleged more than mere parallel behavior, and thus
that it “allege[d] a conspiracy with sufficient plausibility
to satisfy the pleading standard of Twombly.” Id. at 8a.

4
That assessment of Twombly’s most noteworthy holding
is not widely shared. Twombly itself noted that prior antitrust case
law had long since conclusively established that “parallel business
behavior” does not, by itself, “constitute a Sherman Act offense.”
Twombly, 550 U.S. at 553-54 (quoting Theatre Enterprises, Inc. v.
Paramount Film Distributing Corp., 346 U.S. 537, 540-41 (1954)).
Rather, most of the attention on Twombly focused on its holding
that an allegation that defendants have engaged in an antitrust
conspiracy is a legal conclusion that need not be accepted as true
unless supported by sufficient factual allegations, id. at 555-56, and
on Twombly’s assessment of whether specific factual allegations
were sufficient to state a claim.
13

As noted above, the court supported its conclusion by


citing allegations that: (1) Petitioners engaged in
“parallel behavior”; (2) the industry structure
“facilitate[d] collusion”; (3) Petitioners belonged to a
trade association at which price information was shared;
(4) Petitioners raised prices in the face of falling costs;
and (5) the price rises were “simultaneous.” Id. at 9a-
10a. It stated that these allegations amounted to
“‘parallel plus’ behavior.” Id. at 11a. When citing the
allegations, the court did not deem it necessary to
consider whether the alleged behavior could have an
innocent explanation. The court stated that a more
detailed examination is unnecessary at the pleadings
stage because a plaintiff need only establish “a
nonnegligible probability that the claim is valid” in
order to survive a motion to dismiss. Id. at 12a.

Had the court deemed it appropriate to search for


innocent explanations for the alleged behavior, the
complaint itself would have been a fruitful source. For
example, the appeals court characterized as
“anomalous” Petitioners’ decision, “in the face of
steeply falling costs,” to increase prices charged to
consumers who pay for text messaging on a single-
message basis. Id. at 11a. While such behavior may be
consistent with price fixing, the uncontested facts
suggest that an innocent explanation is at least as
plausible. As the Complaint acknowledges (Pet. App.
89a, ¶ 66), the variable costs to a telecommunications
company in providing a text message is close to zero;
under those circumstances, pricing bears no relationship
to variable costs, so it is not “anomalous” for prices in
one tiny segment of the text messaging market to be
rising while the already-minuscule variable costs are
becoming even smaller. Moreover, Petitioners contend
14

that service providers were independently motivated to


raise single-message prices in order to encourage
customers to sign up for bundled data plans (whose
prices were plummeting). The Complaint essentially
concedes that Petitioners were so motivated. Pet. App.
102a, ¶ 129 (“Defendants, individually and acting in
concert, have adopted uniform and unreasonably high
charges for text messaging in order to encourage their
customers to purchase other services.”). If, as the
Complaint suggests, Petitioners deemed it more
profitable to encourage customers to switch away from
single-message pricing, a highly plausible explanation
for Petitioners’ conduct – one not considered by the
Seventh Circuit – is that they each unilaterally raised
prices as a means of encouraging a switch.

Closer examination of the complaint also suggests


that the manner in which the price increases were
implemented may have an innocent explanation. In
concluding that the manner in which Petitioners raised
their prices constituted “‘parallel plus’ behavior,” the
Seventh Circuit relied on language from Twombly
regarding what might constitute circumstantial
evidence of collusive behavior: “Complex and
historically unprecedented changes in pricing structure
made at the very same time by multiple competitors,
and made for no other discernable reason.” Pet. App.
10a (quoting Twombly, 550 U.S. at 557 n.4). The
Complaint does, indeed, allege that other Petitioners
“immediately” and “at the very same time” followed
Sprint Nextel’s lead when it raised its price in late 2006
(from 10 cents to 15 cents per message) and again in
late 2007 (from 15 cents to 20 cents). Pet. App. 78a, ¶¶
6-8. But in accepting those allegations, the appeals
court deemed it unnecessary to look more closely at the
15

actual timing of the price increases. The Complaint


concedes that Sprint Nextel’s first price increase was
not matched by its competitors for six months, and the
second price increase was not matched for nine months.
Id., ¶¶ 6-7. Such staggered price increases certainly do
not conform to the “changes in pricing structure made
at the very same time” criterion suggested by Twombly.
Indeed, the most plausible inference to be drawn from
the staggered nature of the price increases is that they
were not a product of collusion. The usual purpose of a
price fixing scheme is to allow competitors to raise
prices to a level that would be unprofitable if only one
competitor raised prices. If that was what occurred
here, there would have been little reason for Sprint
Nextel to maintain its higher prices once the others did
not immediately follow its lead, because failing to do so
would have resulted in large losses. Thus, its failure to
retract its price increases strongly suggests that it
raised prices for some “other discernable reason” – such
as its desire to encourage customers to switch away
from single-message pricing.

In sum, the Seventh Circuit has interpreted


Twombly as largely confirming prior case law, which
had held that allegations of parallel conduct, without
more, do not suggest conspiracy. But, the Seventh
Circuit holds, so long as a § 1 complaint alleges “parallel
plus” behavior that establishes a “nonnegligible
probability that the claim is valid,” it can survive a
motion to dismiss.
16

C. In Conflict with the 7th Circuit,


Other Appeals Courts Require Close
Examination of Alleged Circum-
stantial Evidence to Determine
Whether Conspiracy Is the Most
Plausible Interpretation

The Seventh Circuit’s understanding of Twombly


contrasts sharply with decisions from other appeals
courts. In particular, both the Third Circuit and the
Sixth Circuit require a close examination of any
allegations put forward by a § 1 plaintiff as “parallel
plus,” circumstantial evidence of collusion.

In re: Insurance Brokerage Antitrust Litigation,


618 F.3d 300 (3d Cir. 2010), involved (among other
things) claims that insurance industry representatives
had conspired to limit the availability of insurance and
thereby drive up prices. The appeals court cited
Twombly in support of its decision to affirm a Rule
12(b)(6) dismissal of those claims.5 In the absence of
direct evidence of conspiracy, the plaintiffs sought to
rely on circumstantial evidence of conspiracy – beyond
evidence of parallel conduct – to withstand a motion to
dismiss. In contrast to the Seventh Circuit, the Third
Circuit rejected the plaintiffs’ argument that any
allegations based on “parallel plus” evidence was
sufficient to state a claim. Rather, the court required
examination of all such allegations to see whether there
existed innocent explanations for the conduct in

5
The court reinstated one small portion of the claims,
based on direct evidence that some insurance brokers had engaged
in bid rigging.
17

question. The court held, “[A]llegations of conspiracy


are deficient if there are ‘obvious alternative
explanation[s]’ for the facts alleged.” Insurance
Brokerage, 618 F.3d at 322-23 (quoting Twombly, 550
U.S. at 567). It stated, “Twombly makes clear that a
claim of conspiracy predicated on parallel conduct
should be dismissed if ‘common economic experience’ or
the facts alleged in the complaint itself, show that
independent self-interest is an ‘alternative explanation’
for defendants’ common behavior.” Id. at 326.

The Third Circuit examined each of the factual


allegations in the complaint and determined that none
of the alleged “parallel plus” behavior was more
consistent with a market allocation conspiracy than
with the actions of businesses acting in their
independent self-interests. Id. at 327-330. In
particular, the court held that the disclosure of allegedly
confidential information among the alleged conspirators
was not circumstantial evidence of a conspiracy because
it was “at least equally consistent with unconcerted
action.” Id. at 330.6

Similarly, the Sixth Circuit relied on Twombly to


affirm the Rule 12(b)(6) dismissal of a § 1 claim asserted
against airlines that allegedly had conspired to reduce

6
In contrast, the Seventh Circuit – in finding that the SAC
stated a claim – relied in part on allegations that price information
was exchanged at trade association meetings. Pet. App. 9a. The
Seventh Circuit never explained how such information exchanges
were suggestive of price fixing, particularly since each of the
Petitioners’ prices were publicly posted – as one would expect with
a company seeking to sell products or services to the general public.
18

commissions paid to travel agents. In re: Travel Agent


Commission Antitrust Litigation, 583 F.3d 896 (6th Cir.
2009). It held that “parallel plus” evidence was
insufficient to state a § 1 claim unless the evidence could
more plausibly be explained by a conspiratorial
motivation than by an innocent motivation:

The correct standard is that there must be


evidence that tends to exclude the possibility of
independent action. . . . That is, there must be
direct or circumstantial evidence that reasonably
tends to prove that the defendant and others had
a conscious commitment to a common scheme
designed to achieve an unlawful objective.

Travel Agent Commission, 583 F.3d at 907 (quoting


Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752,
768 (1984)). The court held that the complaint failed to
state a claim because with respect to each item of
alleged circumstantial evidence, “defendants have
offered a reasonable, alternative [i.e., non-
conspiratorial] explanation” for their behavior. Id. at
908.

Moreover, the Sixth Circuit explicitly rejected


reliance on one of the “parallel plus” allegations
credited by the Seventh Circuit: meeting with rivals at
industry-wide trade groups. The court said, “[A] mere
opportunity to conspire does not, standing alone,
plausibly suggest an illegal agreement because
American’s and Continental’s presence at such trade
meetings is more likely explained by the lawful, free-
market behavior.” Id. at 911 (citing Iqbal, 129 S. Ct. at
1950).
19

The Seventh Circuit decision also conflicts with


Twombly and other decisions of this Court. While
Twombly is less explicit on this issue than the decisions
from the Third and Sixth Circuits, it includes language
indicating that, even at the pleadings stage, courts
should carefully examine each fact allegation of a § 1
complaint to determine whether the circumstantial
evidence is more suggestive of conspiracy or of innocent
behavior. See, e.g., 550 U.S. at 567-68 (applying
“common economic experience” to determine that the
alleged conduct – defendants’ failure to compete in each
others’ traditional territories – was better explained by
the desire of each defendant to “sit[ ] tight” than by an
express agreement not to compete). See also Matsushita
Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
596-97 (1986) (“[I]f petitioners had no rational economic
motive to conspire, and if their conduct is consistent
with other, equally plausible explanations, the conduct
does not give rise to an inference of conspiracy.”).

Review is warranted to resolve the conflict


between the decision below and decisions of the other
federal appeals courts, as well as of this Court.

II. REVIEW IS WARRANTED TO ENSURE


THAT PLEADING REQUIREMENTS HAVE
REAL TEETH

Review is also warranted because the Seventh


Circuit decision is symptomatic of a problem faced by a
broad range of civil defendants in federal courts. This
Court sought to convey in both Twombly and Iqbal
(2009), that Rule 8(a)’s notice pleading requirement is
not toothless. While Rule 8(a) is intended to be applied
liberally, it nonetheless is intended to weed out
20

complaints that are based on “labels and conclusions,


and a formulaic recitation of the elements of a cause of
action,” and that fail to “raise a right to relief above the
speculative level.” Twombly, 550 U.S. at 555. As the
Court recognized, allowing insubstantial lawsuits to
proceed past the pleadings stage impose significant and
unwarranted costs (particularly the costs of discovery)
on defendants. Id. at 557-60. But the Seventh Circuit
decision seems to treat pleadings standards as simply a
formulaic exercise. Plaintiffs’ lawyers are provided a
roadmap to those boilerplate allegations that will
hereafter be deemed sufficient to withstand a motion to
dismiss. The inevitable result: future complaints will
include those allegations (which can be made in good
faith to at least some degree in most antitrust cases),
and fewer and fewer insubstantial complaints will be
weeded out at the pleadings stage. Review is warranted
to impress upon the lower federal courts that Rule 8(a)
requires a careful examination of a complaint’s
allegation to ensure that the complaint does indeed
“show[ ] that the pleader is entitled to relief.”

Judge Cabranes, in his concurring Second Circuit


opinion in Iqbal, focused on the inability of pleadings
standards, as currently enforced, to protect defendants
from the costs and distractions of even insubstantial
lawsuits:

[A]s a result of the Supreme Court’s precedents


interpreting Rule 8(a), even as modified by the
“plausibility standard” established in [Twombly],
it is possible that the incumbent Director of the
Federal Bureau of Investigation and a former
Attorney General of the United States will have
to submit to discovery, and possibly a jury trial,
21

regarding Iqbal’s claims. . . . In [Twombly], the


Supreme Court has quite rightly expressed
concern that “careful case management” might
not be able to “weed[ ] out early in the discovery
process” an unmeritorious claim in private civil
antitrust litigation, see [Twombly], and might
have limited success in “checking discovery
abuse,” id. This concern is all the more
significant in the context of a lawsuit against,
inter alia, federal government officials charged
with responsibility for national security and
entitled by law to assert claims of qualified
immunity. Even with the discovery safeguards
carefully laid out in [the Second Circuit’s]
opinion, it seems that little would prevent other
plaintiffs claiming to be aggrieved by national
security programs and policies of the federal
government from following the blueprint laid out
by this lawsuit to require officials charged with
protecting our nation from future attacks to
submit to prolonged and vexatious discovery
processes.

Iqbal v. Hasty, 490 F.3d 143, 178-79 (2d Cir. 2007)


(Cabranes, J., concurring), rev’d sub nom., Ashcroft v.
Iqbal, 129 S. Ct. 1927 (2009).

The Seventh Circuit provides a similar pleadings


roadmap for antitrust plaintiffs. Lawyers carefully
heading Judge Posner’s instructions regarding what
allegations are sufficient to state a claim should have
little difficulty withstanding a Rule 12(b)(6) motion to
dismiss. Review is warranted to ensure that the Rule
8(a) pleading standards are not so easily avoided.
22

CONCLUSION

The Washington Legal Foundation requests that


the Court grant the petition for a writ of certiorari.

Respectfully submitted,

Daniel J. Popeo
Richard A. Samp
Washington Legal Foundation
2009 Massachusetts Ave., NW
Washington, DC 20036
(202) 588-0302
rsamp@wlf.org

Dated: April 22, 2011