More Than Just Notice

In what will almost certainly be the most practically significant case of this term, a major, major win for defendants, especially corporate defendants, today in the Supreme Court, and via a 7-2 decision written by Justice Souter from which only Justices Stevens and Ginsburg dissented.
The Court, in Bell Atlantic v. Twombly, No. 05-1126 (May 21, 2007), held that plaintiffs in an antitrust conspiracy case may not survive a motion to dismiss the complaint at the outset under Rule 12(b)(6) by a bare assertion of conspiracy. In so holding, the Court significantly clarified the Rule 8 pleading standards governing motions to dismiss non-fraud-based claims.
To put the matter in non-lawyer-ese, the Court held that plaintiffs’ lawyers (in this case class action plaintiffs in an antitrust case, but the ruling will affect all civil lawsuits in federal court) need to have more of a factual basis for filing lawsuits before they can kick-start the expensive and intrusive discovery process.

The putative class plaintiffs in Bell Atlantic alleged an antitrust conspiracy in which the “Baby Bell” companies, after being permitted to enter each other’s local telephone markets by the 1996 Telecommunications Act, failed to do so. The plaintiffs alleged facts showing parallel conduct – the failure to compete in one another’s previously-exclusive markets – and conclusorily asserted that this parallel conduct amounted to a conspiracy. The Second Circuit, noting the Supreme Court’s plaintiff-friendly enunciation of the notice pleading standards in the Swierkiewicz case (which involved pleading of the nonstatutory “McDonnell Douglas” factors that give rise to an inference of discrimination and shift the burden to the employer in an employment discrimination case), concluded that Rule 8’s liberal pleading standards required no more. Subsequent Rule 8 decisions by the Supreme Court regarding the pleading of proximate/loss causation in securities and RICO cases (the Dura and Anza decisions) called that holding into question.
The Court began by reciting the familiar reasons why parallel conduct alone is not a basis for a Sherman Act conspiracy claim without proof that excludes the possibility of independent action:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.

The crux of the case, however, was the holding regarding pleading standards; the Court relied heavily on the writings of Judges Easterbrook and Posner on the potential for abuse in the discovery process as a reason to weed out weak claims early:

[A] plaintiff’s obligation 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, see Papasan v. Allain, 478 U. S. 265, 286 (1986) (on a motion to dismiss, courts “are not bound to accept as true a legal conclusion couched as a factual allegation”). Factual allegations must be enough to raise a right to relief above the speculative level, see 5 C. Wright & A. Miller, Federal Practice and Procedure § 1216, pp. 235-236 (3d ed. 2004) (hereinafter Wright & Miller) (“[T]he pleading must contain something more … than … a statement of facts that merely creates a suspicion [of] a legally cognizable right of action”)

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[W]hen the allegations in a complaint, however true, could not raise a claim of entitlement to relief, “‘this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court.'” 5 Wright & Miller § 1216, at 233-234 . . . see also Dura, supra, at 346; Asahi Glass Co. v. Pentech Pharmaceuticals, Inc., 289 F. Supp. 2d 986, 995 (ND Ill. 2003) (Posner, J., sitting by designation) (“[S]ome threshold of plausibility must be crossed at the outset before a patent antitrust case should be permitted to go into its inevitably costly and protracted discovery phase”).

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It is no answer to say that a claim just shy of a plausible entitlement to relief can, if groundless, be weeded out early in the discovery process through “careful case management,” post at 4, given the common lament that the success of judicial supervision in checking discovery abuse has been on the modest side. See, e.g., Easterbrook, Discovery as Abuse, 69 B. U. L. Rev. 635, 638 (1989) (“Judges can do little about impositional discovery when parties control the legal claims to be presented and conduct the discovery themselves”). And it is self-evident that the problem of discovery abuse cannot be solved by “careful scrutiny of evidence at the summary judgment stage,” much less “lucid instructions to juries,” post, at 4; the threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching those proceedings. Probably, then, 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. Dura, 544 U. S., at 347 (quoting Blue Chip Stamps, supra, at 741; alteration in Dura).

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[D]etermining whether some illegal agreement may have taken place between unspecified persons at different ILECs (each a multibillion dollar corporation with legions of management level employees) at some point over seven years is a sprawling, costly, and hugely time-consuming undertaking not easily susceptible to the kind of line drawing and case management that the dissent envisions. . . . Given the system that we have, the hope of effective judicial supervision is slim . . .

(Emphasis added; citations omitted). The Court expressly concluded that Conley v. Gibson’s commonly cited “no set of facts” language does not mean that dismissal is proper only if the facts pleaded exclude the possibility of relief, and rejected the argument that Swierkiewicz had anything useful to say about pleading standards in general:

[T]here is no need to pile up further citations to show that Conley’s “no set of facts” language has been questioned, criticized, and explained away long enough. . . . The phrase 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.

(Emphasis added).
The Court then laid out the test for pleading an antitrust conspiracy, one that will likely apply as well to other pleadings of conspiracy and other forms of illicit agreement:

[S]tating 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.

Applying the pleading standard, the Court found plausible alternative explanations of the defendants’ conduct:

In a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement, but here we have an obvious alternative explanation. In the decade preceding the 1996 Act and well before that, monopoly was the norm in telecommunications, not the exception. . . . The ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword. Hence, a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing.
In fact, the complaint itself gives reasons to believe that the ILECs would see their best interests in keeping to their old turf.

(Citations omitted).
The decision is welcome news. Given the broad latitude given to attorneys in discovery and courts’ traditional unwillingness to impose sanctions on all but the most obviously frivolous claims, there really is no meaningful substitite for vigilance in reviewing initial pleadings to weed out lawsuits that act as a drag on the American economy.