“Plausibility” and the Non-Conspiracy Elements of Antitrust Claims

by Robins Kaplan LLP
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In Bell Atlantic Co. v. Twombly, the Supreme Court injected a “plausibility” standard into Rule 12(b)(6) for claims asserting an alleged antitrust conspiracy.[1] Since then, lower courts, scholars, and practitioners have written volumes in an attempt to clarify this new standard.[2] Now, seven years in, Twombly — along with the Court’s holding in Ashcroft v. Iqbal, that Twomby’s plausibility standard applies to “all civil actions”[3] — has started to reshape the standard for pleading several other non-conspiracy elements of antitrust claims. As a collection of recent federal cases show, standards have begun to emerge for what it means to plausibly allege other, non-conspiracy elements of a federal antitrust claim.

  1. Pleading a Plausible Antitrust Injury

Every private antitrust claim requires a showing an “antitrust injury”—an ”injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.”[4] A recent Ninth Circuit decision has clarified just how much Twombly raises the bar for pleading an antitrust injury based on overcharge allegations.[5] Before Twombly, a plaintiff bringing a purchaser action to recover overcharges could usually satisfy this element by alleging and then proving that it paid inflated prices as a result of the defendant’s anticompetitive conduct.[6]

But, after the Ninth’s Circuit decision in Somers v. Apple, Inc., plaintiffs may need to do more to plausibly allege antitrust injury in an overcharge case. In Somers, the Ninth Circuit affirmed the dismissal of class-action antitrust claims brought by an iPod purchaser against Apple.[7] The purchaser claiming she had paid “inflated music prices” because Apple allegedly monopolized the music download market by restricting the transfer of songs purchased on iTunes.[8] The plaintiff further claimed that during the alleged five-year period of Apple’s monopoly, Apple was able to charge higher prices for its music “than it could have in a competitive market.”[9]

The Ninth Circuit found that this overcharge claim was not plausible under Twombly because Apple kept its 99¢ download price constant before and after the alleged monopoly began and there was no allegation that prices declined after the monopoly ended.[10] The court also found that the plaintiff’s allegations failed to negate “other ‘obvious alternative explanations’ for the music pricing,” including the possibility that Apple “kept the music prices low to incentivize customers to purchase the iPod” or used low pricing to undercut its rivals.[11]

The result? When it comes to overcharges and the needed antitrust injury, plausibility is as much a test of economic logic as it is of factual detail. To succeed after Somers, a plaintiff’s overcharge theory must not only rise above mere conclusion (i.e., describe the overcharge in sufficient factual detail)—it must also demonstrate economic sense in light of the market facts.

  1. Pleading Plausible Markets

Even before Twombly, federal courts imposed heightened pleading standards for defining the alleged product and geographic markets. Whether considering the relevant product market[12] or the relevant geographic market,[13] courts would dismiss a complaint that:

  1. Failed to define the relevant market “with reference to the rule of reasonable interchangeability and cross-elasticity of demand”; or
  2. Alleged a relevant market “that clearly does not encompass all interchangeable substitute products.”[14]

After Twombly, these requirements have seen further tightening. Increasingly, courts now also demand concrete factual allegations that plausibly support the proposed market definition. For instance, a recent decision by a California federal district court, Sidibe v. Sutter Health, exemplifies the importance of plausibility when it comes to pleading the existence of a “relevant market” in an antitrust claim.[15]

In Sidibe, a putative class of health-plan enrollees asserted several antitrust claims against hospital-chain defendant Sutter Health, alleging that Sutter was imposing “tying arrangements that require[d] [plaintiffs’] health plans to include all Sutter providers in their networks in order to have reduced rate access at Sutter's hospitals,” and was using “its market power to maintain and enhance its monopolies over Inpatient Hospital Services in Northern California.”[16] The named class plaintiffs specifically alleged that the relevant geographic markets for “acute-care in-patient hospital services” were “local in nature, consisting of the area in which the seller operates and in which the purchaser can practicably turn for supplies or services.”[17] At the same time, class plaintiffs alleged “‘the six local geographic markets implicated by Sutter's conduct include San Francisco, Alameda, Contra Costa, Sacramento, Placer, and Amador counties.”[18]

Granting a motion to dismiss rooted in Twombly, the district court found these definitions implausible, despite the complaint’s use of allegations that tracked the relevant standard. In this regard, the court observed that the first major problem with plaintiffs’ market definitions was their lack of clarity, leaving the court unsure “whether Plaintiffs’ claims are based on a single local market, the six county-wide markets, or an indeterminate number of markets bounded by the areas in which Sutter hospitals operate.”[19] The court next rejected plaintiffs attempt to define “six county-wide markets” since the plaintiffs “provide[d] no factual allegations to support drawing lines at these county borders.”[20] Finally, the court observed that if the plaintiffs’ claims were “based on … the local markets in which Sutter hospitals operate, [plaintiffs’] need to identify those markets (in reasonably concrete geographic terms), rather than just describing methodologies for drawing market boundaries.”[21]

Sidibe embodies the level of precision that federal courts may now demand in antitrust litigation under the Twombly plausibility standard when it comes to pleading the existence of a relevant market. Muddled or unstated market definitions—due to presentation of multiple possible definitions or a mere methodology for arriving at a definition—may be all a court needs to dismiss an antitrust claim on the basis of implausibility. The same goes for market definitions that lack a sufficiently comprehensible foundation of facts to back them up.

  1. Pleading Plausible Market Power

To succeed, antitrust plaintiffs must also often allege that the given defendant(s) exercised monopoly power in the plaintiff’s stated geographic and product markets.[22] The plausibility standard now requires antitrust litigants to devote more thought as to how to plead this element. For example, in Intellectual Ventures, LLC v. Capital One, a Virginia federal district court recently dismissed antitrust counterclaims based partly on the defendant’s failure to plausibly allege that the plaintiff held monopoly power in the “relevant markets” at issue.[23]

The plaintiff in the case, Intellectual Ventures, LLC, (“IV”), is a patent assertion entity holding “a portfolio of approximately 80,000 patents and patent applications.” IV originally sued defendant-bank Capital One for patent infringement.[24] Capitol One, in turn, counter-claimed that IV was using its portfolio (and concomitant threat of patent infringement suits) to “monopolize[] the ‘. . . ex post market for technology used to provide commercial banking services in the United States.’”[25]

Rejecting Capital One’s antitrust claims, the district court found it had “failed to allege facts that make plausible its claim that IV wields unlawful monopoly power within that market.”[26] The court reached this conclusion for three reasons:

  1. “Capital One d[id] not allege IV’s share” of the relevant market—instead, Capital One alleged that IV exercised monopoly power because “IV ha[d] demanded and received ‘supracompetitive prices’” in licensing its financial patents.[27]
  2. Even taking this claim of “supracompetitive prices” at face value, “Capital One [did] not allege[] any specific license fees or royalties that IV has demanded from any commercial banks or that those banks have paid”—thus leaving the court without the ability to understand how such fees could be “unlawfully ‘supracompetitive.’”[28]
  3. Capital One provided “no facts or allegations that explain why IV’s alleged ‘supracompetitive prices’ reflect[ed] unlawful monopoly power within the context of IV's right to license its patents.”[29]

Intellectual Ventures reveals how closely federal courts may examine the plausibility of an allegation of “monopoly power.” In this regard, courts may potentially find monopoly-power allegations implausible based on a lack of supporting allegations, such as a failure to plead how much market share a defendant possesses. Or courts may fault these allegations on more complex economic grounds that intertwine with other elements of the claims. In these cases, courts may require that a complaint provide allegations that explain why a defendant’s conduct in a given market is unlawful or why supra-competitive prices result from unlawful monopoly power when a lawful explanation for the higher prices may exist. That kind of reasoning certainly tracks the Supreme Court’s ultimate conclusion in Twombly that while “parallel conduct was consistent with an unlawful agreement [in restraint of trade] . . . it [still] did not plausibly suggest an illicit accord because [this parallel conduct] . . . was more likely explained by lawful, unchoreographed free-market behavior.“[30]

  1. Plausibility and Affirmative Defenses?

As Twombly and its progeny continue to reshape the antitrust pleading landscape, pleadings standards for affirmative defenses remain relatively uncharted territory. Currently, lower courts have not yet reached agreement as to whether Twombly and Iqbal apply to the pleading of affirmative defenses.[31] Thus, it remains to be seen how defendants pleading affirmative defenses in antitrust cases will fare against plaintiffs that demand application of the Twombly plausibility standard.

For example, the issue may arise in a price-discrimination claim under the Robinson-Patman Act where a buyer claims that a seller has lessened competition by selling the same product at different prices to similar buyers. There, a plaintiff could moves to strike the defendant’s affirmative defenses based on cost-justification, meeting-competition, or functional-discount if they are not supported by plausible factual allegations. Application of Twombly and Iqbal to this kind of pleading—or to the pleading of other affirmative defenses—could develop Twombly/Iqbal plausibility into a significant tool for antitrust plaintiffs.

On the other hand, some courts have suggested that Twombly and Iqbal require plaintiffs to plead facts showing that certain defenses and immunities do not apply. Consider the case of Coalition for a Level Playing Field, L.LC., v. AutoZone, in which a New York federal district court dismissed a price-discrimination action against auto-part manufacturers and “big box” retailers under Twombly. There, the complaint failed to negate a functional-discount defense to a price-discrimination claim.[32] The court found implausible the plaintiffs’ allegation that:

  • Defendant Retailers are aware that they are not ‘efficient’ in comparison to the Plaintiffs and that the only thing that keeps the Defendant Retailer in business is buying goods at illegally low prices that do not have any legitimate cost-justification, meeting-competition, or functional discount defense.[33]

Going forward, Twombly’s increased demand for plausibility seems destined to spread no matter which party makes the allegation.

Twombly Has Raised the Bar for Antitrust Claims

Certainly, the main effect of Twombly is to increase scrutiny of the conspiracy-related elements of an antitrust claim. That said, recent decisions in cases like Somers, Sidibe, Intellectual Ventures, and AutoZone show that the Twombly plausibility standards are profoundly influencing all aspects of antitrust pleading, potentially including affirmative defenses. And even though Judge Richard Posner cautioned in Text Messaging that an antitrust complaint will not have to establish each element by a “preponderance of the evidence,”[34] it still seems clear that such complaints must still be supported by economic logic and market facts. Plaintiffs and defendants alike should take note of this reality and rethink how they plead their antitrust theories accordingly.

[1] Bell Atlantic Co. v. Twombly, 550 U.S. 544, 557 (2007).

[2]Decisions like In re Text Messaging Antitrust Litigation, 630 F.3d 622 (7th Cir. 2010)) and Evergreen Partnering v. Pactiv Corp., 720 F.3d 33, 44 (1st Cir. 2013) have drawn attention for their efforts “to clarify the proper pleading requirements for sufficiently alleging agreement in § 1 complaints.”

[3]In Ashcroft v. Iqbal. 556 U.S. 662, 678, 684 (2011) the Supreme Court also said that “[t]hreadbare recitals” of any “element[] of a cause of action … [will] not suffice.”

[4]See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977).

[5]Somers v. Apple, Inc., 729 F.3d 953, 962-966 (9th Cir. 2013).

[6]See, e.g., Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 489 (1968) (“[W]hen a buyer shows that the price paid by him . . . is illegally high and also shows the amount of the overcharge, he has made out a prima facie case of injury and damage within the meaning of § 4 [of the Clayton Act].”).

[7]Somers, 729 F.3d at 962-966.

[8]Id.

[9]Id. at 964.

[10]See id. The court explained, “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible [plaintiff’s] conclusory assertion that Apple’s software updates affected music prices.”

[11]Id.

[12]The relevant product market “includes all reasonably interchangeable products” Craftsmen Limousine, Inc. v. Ford Motor Co., 491 F.3d 380, 388 (8th Cir. 2007).

[13]The relevant geographic market is the “area in which consumers can practically seek alternative sources of the product.” Id.

[14]See Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F. 3d 430, 436 (3d Cir. 1997) (collecting cases).

[15]Sidibe v. Sutter Health, No. C 12-04854 LB, 2013 U.S. Dist. LEXIS 160512, at *31-39 (N.D. Cal. Nov. 7, 2013).

[16]Id. at *2.

[17]Id. at *15.

[18]Id. at *33.

[19]Id. at *34.

[20]Id.

[21]Id.

[22]See, e.g., United States v. Grinnell Corp., 384 U.S. 563, 570-571 (1966) (explaining that one of the elements of “[t]he offense of monopolization under § 2 of the Sherman Act” is “the possession of monopoly power in the relevant market”).

[23]No. 1:13-cv-00740 (AJT/TRJ), 2013 U.S. Dist. LEXIS 177836, at *19-21 (E.D. Va. Dec. 18, 2013).

[24]Id. at *3, *5.

[25]Id. at *14.

[26]Id. at *19.

[27]Id. at *19-20.

[28]Id. at *20

[29]Id.

[30]Iqbal, 556 U.S. at 680 (explaining the Court’s ruling in Twombly).

[31]Compare, e.g., Hayne v. Green Ford Sales, Inc., 263 F.R.D. 647, 650 (D. Kan. 2009) (“[T]he Court agrees with . . . applying the heightened [Twombly] pleading standard to affirmative defenses.”), with, e.g., Wells Fargo & Co. v. United States, 750 F. Supp. 2d 1049, 1051 (D. Minn. Oct. 27, 2010) (“The Court strongly agrees with those judges who have found that Iqbal and Twombly do not apply to the pleading of affirmative defenses.”).

[32]Coalition for a Level Playing Field, L.LC., v. AutoZone, 737 F. Supp. 2d 194, 216 (S.D.N.Y. 2010). The court said the auto-part-store plaintiffs “offered no factual material to support a plausible inference that any discounts taken by the retailer defendants do not reflect bona fide functional discounts.”

[33]Id.

[34]Text Messaging, 630 F.3d at 629.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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