Proving conspiracy

In Bell Atlantic et al v Twombly et al handed down on 21 May 2007 the Supreme Court explained what a plaintiff must plead in order to bring a claim under s.1 Sherman Act. The Federal Rule of Civil Procedure 8(a)(2) requires "a short and plain statement of the claim showing that the pleader is entitled to relief." The Court (7-2) considered what sufficed and according to the dissent it made claims more difficult.

The facts are easily stated but we need a little background. The liberalisation of the telecommunications market in the US occurred in two stages. In the first stage the market was divided up and a competitive market created for long distance phone calls, while the market for local calls was left with regional monopolies (colloquially the Baby Bells). The Baby Bells were not allowed access to the long distance market. The then Telecommunications Act 1996 made two changes: (1) it abolished the Baby Bell's monopolies and gave entrants strong access rights to use the Baby Bells' facilities to enter the local market and (2) as a qui pro quo it allowed the Baby Bells (Now called ILECS - Incumbent Local Exchange Carriers) to enter the long distance market.

The defendants here are the ILECS. The plaintiffs are clients of some of the firms that had tried to enter the local markets (Competitive Local Exchange Carriers, CLECS). They alleged a conspiracy by the ILECS that had two strands: first the ILECS agreed to make life difficult for new entrants by making access to their networks expensive (here recall the Trinko case of 2004), second the ILECS agreed not to compete against each other, so that an ILEC in one part of the US agreed not to try and compete against another ILEC. The plaintiffs alleged that without this conspiracy the market would have been more competitive, they would have got cheaper telecommunications services and so suffered antitrust injury as a result of this conspiracy.

All well and good, but did the plaintiffs have any evidence to prove this? They had an interesting statement by the Chief Executive Officer of one of the defendants, who said that competing with another ILEC "might be a good way to turn a quick dollar but that doesn't make it right." Have we got enough here to bring a claim?

The majority said no. In line with the earlier case law, parallel behaviour is not sufficient on its own to prove that there is a conspiracy. From a procedural point of view, the Court said that the plaintiff must bring to the table more than an allegation of conspiracy, but some facts to show that the claim is not speculative, which would then entitle the plaintiff to discovery. But mere allegations based on parallel behaviour will not do.

In reaching this decision the Court was influenced by the size of this lawsuit it was a class action by 90% of the subscribes to local telephone or high speed internet against the largest telecommunications firms, for a 7 year conspiracy. The Court feared that if this case was allowed to proceed that the costs of discovery would be too high to bear and discovery too expensive to manage. So here is a tradeoff between the cost of litigation and the benefit of a successful claim. The Court's judgment has been described as a major win for defendants, especially corporate defendants.

This is probably a most significant judgment and it will be interesting to see how it affects stand-alone private litigation. If, before getting the right to discover evidence of a conspiracy you must already have some evidence, does it not create a Catch-22? (Obviously most corporations are sufficiently savvy to avoid placing in the public domain any confession of an agreement, so where is the plaintiff to get his evidence from?)

One small point which might go plaintiff's way is the reasoning of the Court when it considered the fact that the defendants did not try and compete against each other. The Court said: "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." So does this mean that if we find a scenario where say builiders based in Camden regularly refuse to carry out work in Westminster (these are London boroughs) and vice versa, that we have enough evidence to commence a trial?

The Court was not impressed with the CEO's statement either, and quoted this passage which I think is a helpful reminder that not everything that looks inefficient is anticompetitive: “[f]irms do not expand without limit and none of them enters every market that an outside observer might regard as profitable, or even a small portion of such markets.” Areeda & Hovenkamp ¶307d, at 155 (Supp. 2006). The dissent took a different line:

"What did he mean by that? One possible (indeed plausible) inference is that he meant that while it would be in his company’s economic self-interest to compete with its brethren, he had agreed with his competitors not to do so. According to the complaint, that is how the Illinois Coalition for Competitive Telecom construed Notebaert’s statement, id., ¶44, App. 22 (calling the statement “evidence of potential collusion among regional Bell phone monopolies to not compete against one another and kill off potential competitors in local phone service”), and that is how Members of Congress construed his company’s behavior, id., ¶45, App. 23 (describing a letter to the Justice Department requesting an investigation into the possibility that the ILECs’ “very apparent non-competition policy” was coordinated).
Perhaps Notebaert meant instead that competition would be sensible in the short term but not in the long run. That’s what his lawyers tell us anyway. See Brief for Petitioners 36. But I would think that no one would know better what Notebaert meant than Notebaert himself. Instead of permitting respondents to ask Notebaert, however, the Court looks to other quotes from that and other articles and decides that what he meant was that entering new markets as a CLEC would not be a “ ‘sustainable economic model.’ ”

On this basis, the dissent would at least have wished for a trial to hear what the CEO meant, and the dissent feared that now defendants would try and dismiss claims of conspiracy by hiring economists to 'prove' that it was not efficient to collude.

In a Europe thinking about expanding private action, the repercussions of this judgment are worth following closely.