In 2007, the United States Supreme Court decided four antitrust cases. In general, those decisions reflect a basic faith that markets, left alone, produce correct outcomes and a belief that the costs of antitrust litigation –” both the direct litigation costs and the chilling effect the threat of litigation can have on markets –” outweigh the potential benefits.

Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Case No. 06-480, decided June 28, 2007).¹

In Leegin, the Supreme Court overruled a near 100-year-old precedent and held that it was not per se illegal under Section 1 of the Sherman Act for a manufacturer to agree with its distributor to set a minimum price the distributor can charge for the manufacturer’s goods. In Dr. Miles Medical Co. v. John D. Park & Sons Co., decided in 1911, the Supreme Court had ruled that it was per se illegal for a manufacturer to set a distributor’s minimum resale price. Under a per se approach, the manufacturer always faced liability if it engaged in that conduct. The manufacturer had no room to argue that its action did not harm consumers or that it promoted competition.

The Court noted in Leegin that a per se rule should apply only to restraints on trade that would always or almost always tend to restrict competition and decrease output. However, modern economics literature has concluded that a manufacturer’s use of minimum resale price maintenance could have pro-competitive effects. For example, by setting a minimum price, a manufacturer could protect its reseller’s margins, thereby encouraging resellers to devote resources to marketing and the provision of services to consumers that would benefit consumers and strengthen inter-brand competition. Price floors might also give consumers more options to choose among low-priced, low-service brands and high-priced, high-service brands, and “brands falling in between.”

The Court did recognize, however, that minimum resale price maintenance could have anti-competitive effects. For instance, it could facilitate a manufacturer cartel or be used to establish a retail cartel. It could also be abused by manufacturers with substantial market shares. Therefore, whether or not minimum resale price maintenance was illegal needed to be judged under a rule of reason. It would be illegal only if a plaintiff could show that the anti-competitive impacts of the agreement outweighed its pro-competitive impacts.

The repeal of the per se rule articulated in Dr. Miles was not unexpected. Many economists and antitrust writers had predicted its demise. However, this change in the law may have little practical impact. Resale price maintenance remains legal under the laws of several states. In addition, the competitive retail environment may limit the ability of manufacturers to impose their will on retailers. However, manufacturers may need to take a fresh look at their resale policies to see whether minimum resale price maintenance makes legal and economic sense.

Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co. (Case No. 05-381, decided February 20, 2007)

In this case, the Supreme Court rejected a claim that the defendant had attempted to monopolize a market by engaging in “predatory bidding” for a key input in that market. Ross-Simmons operated a hardwood sawmill. It contended that Weyerhaeuser bid up the price of the logs used as inputs for its sawmill, which caused Ross-Simmons to incur heavy losses and eventually go out of business. Ross-Simmons contended that Weyerhaeuser was guilty of attempted monopolization of the saw log market in violation of Section 2 of the Sherman Act. At trial, Ross-Simmons obtained a $79 million judgment against Weyerhaeuser, which was affirmed by the federal court of appeals. The Supreme Court agreed to review the judgment, and reversed.

The focus of the case was how to evaluate a claim of “predatory bidding.” Several years ago, the Supreme Court decided a case involving alleged predatory pricing. In that case, the court concluded that a claim of predatory pricing had two important requirements. First, the injured party needed to show that the predator had reduced its sale price to below cost. Pricing below cost was necessary to prove a claim because cutting prices is the essence of competition. Only cutting prices below costs could indicate a predatory intent. Second, once the competitor was gone, the predator needed to have the ability to raise its prices to a super competitive level in order to recoup its investment in below-cost prices. Unless the predator could earn back the “investment” it made by cutting prices to drive the competitor out of business, no rational business would engage in a predatory pricing scheme.

The legal issue before the Supreme Court was whether or not a similar analysis applied to a claim of predatory bidding. The Supreme Court concluded that it did. First, “the predator’s bidding on the buyer side must have caused the cost of the relevant output to rise above the revenues generated on the sale side of those outputs.” In effect, in an actionable case, the predator has bid up the price of the input to raise its costs to the point of losing money on its sales. Second, a plaintiff asserting a predatory-bidding claim would need to show “a dangerous probability of a bidder’s recouping the losses incurred in bidding up input prices through the exercise of monopsony power.” The predator needed to be able to recoup its losses by later exercising its market power to drive down the price of the input to below a competitive level. Absent proof of the ability of the bidder to recoup its losses, a claim of predatory bidding would make no economic sense.

The Court’s opinion reflects a deep suspicion of claims of predatory behavior. In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,² the Court had stated that “predatory pricing schemes are rarely tried, and even more rarely successful.” The Court had the same view of predatory bidding schemes. Ross-Simmons reinforces the Supreme Court’s high standard for analyzing claims of predatory behavior.

Credit Suisse Securities (USA) LLC v. Billing (Case No. 05-1157, decided June 18, 2007)

The Credit Suisse case addressed the application of the antitrust laws to underwriters who participated in initial public offerings (IPOs). The Supreme Court concluded that the underwriters’ practices were governed by the securities laws, and not by the antitrust laws.

The defendants in the Credit Suisse case were banks that had acted as underwriters, forming syndicates that executed IPOs for a number of companies. The plaintiffs, a group of investors, contended that the banks violated Section 1 of the Sherman Act by abusing the practice of combining into underwriting syndicates “by agreeing among themselves to impose harmful conditions upon potential investors.” The plaintiffs contended that the banks had required investors in the IPOs to pay additional anticompetitive charges “over and above the IPO share price plus underwriting commission.”

The case addressed the issue of the interaction between the securities laws enforced by the Securities and Exchange Commission (SEC) and the antitrust laws. The Supreme Court defined the test for determining whether or not the two sets of laws were “clearly incompatible.” In making that determination, the Court looked at three factors: “(1) the existence of regulatory authority under the securities laws to supervise the activities in question; (2) evidence that the responsible regulatory entities exercised that authority; and (3) the resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges or standards of conduct.” In addition, the Court would consider whether the conflict between the two sets of laws affected practices at the heart of activities the securities laws were designed to regulate.

The Supreme Court concluded that all three factors supported a finding that the securities laws impliedly excluded the application of antitrust laws. First, the banks’ promotion and selling of newly issued securities was an activity central to the proper functioning of the securities markets. Second, the SEC had the authority to supervise all of the activities in question. Third, the SEC had exercised its authority to regulate conduct of the type at issue.

Finally, the Supreme Court concluded that applying antitrust laws to the practices at issue was incompatible with the securities laws. The Court was particularly concerned that courts and juries would have an extremely difficult time distinguishing between what is forbidden and what is allowed. The Court believed that such fine judgments should be left in the hands of securities laws experts — namely, the SEC.

Although the decision focused on the market for IPOs, it may have broader implications. It reinforces the impetus to leave decisions about market regulation in the hands of agencies charged with regulating those markets and to prevent private antitrust lawsuits from effectively second-guessing such regulation.

Bell Atlantic Corp. v. Twombly (Case No. 05-1126, decided May 21, 2007)

The Supreme Court in Twombly addressed the adequacy of the allegations of an “agreement” between the defendants in a Sherman Act Section 1 claim. The practical impact of the decision likely will be narrow. However, the more interesting issue raised by the Court’s decision is whether it foretells increasing court scrutiny of the sufficiency of the allegations of all complaints in federal court.

The Twombly plaintiffs filed a complaint purporting to sue on behalf of “all subscribers of local telephone and/or high-speed internet services from February 8, 1996 to the present” against a group of former Bell local exchange carriers. The complaint alleged that the local exchange carriers had engaged in “parallel conduct” in their respective service areas to inhibit the growth of competitive local exchange carriers. The complaint further alleged that the Bell operating companies had agreed not to compete against each other in their respective service areas. The plaintiffs summed up their allegation by asserting that the local operating companies had conspired to prevent competitive entry into their respective markets and to not compete with one another. The Supreme Court agreed to review the case for the purpose of addressing “the proper standard for pleading an antitrust conspiracy through allegations of parallel conduct.”

The Supreme Court previously has ruled that mere parallel conduct, even “conscious parallelism,” is insufficient to establish an illegal agreement to restrain trade.³ Firms may independently choose to take similar actions as a result of pursuing their independent, rational self-interest. A plaintiff claiming that parallel action suggested an illegal conspiracy must present other evidence that tends to exclude the possibility that the alleged conspirators acted independently.

The Federal Rules of Civil Procedure establish a fairly low threshold for stating a claim. They require only that a complaint contain “a short plain statement of the claim showing that the pleader is entitled to relief.”⁴ However, in Twombly, the Supreme Court noted that the plaintiff’s obligation to provide the grounds for his entitlement to relief “requires more than mere labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” In a Sherman Act Section 1 case, the complaint must have “enough factual matter (taken as true) to suggest that an agreement was made.” In a case involving alleged parallel conduct, the complaint must contain factual allegations that plausibly suggest that the parallel conduct is the product of an agreement.

In the case at hand, the Supreme Court concluded that the complaint failed to state a Section 1 claim. The actions of the local exchange carriers in allegedly attempting to exclude competitive local exchange carriers and in declining to compete in each other’s local markets were completely consistent with their acting pursuant to their independent business interests. The plaintiffs’ complaint was inadequate because it did not allege sufficient facts to have “nudged their claims [of conspiracy] across the line from conceivable to plausible.”

In a case involving alleged parallel conduct, the complaint must contain factual allegations that plausibly suggest that the parallel conduct is the product of an agreement.

Twombly did not change the substantive law governing the type of evidence needed to establish an agreement to restrain trade in violation of Section 1 of the Sherman Act. During the last 20 years, the Supreme Court consistently has stated that a plaintiff must present evidence that shows that the actions of the alleged conspirators were the product of an illegal agreement and not actions taken independently in their individual self-interest. Twombly merely recognizes that a defendant can raise the issue at the pleading stage, before discovery begins. Therefore, it puts in the arsenal of defendants a new weapon to use against conclusory allegations of an “agreement to restrain trade.”

Trends Reflected in These Decisions

These decisions reflect a faith in markets. Leegin and Ross-Simmons show that the Supreme Court believes that market participants ought to enjoy greater flexibility in choosing how to do business, unencumbered by the threat of antitrust lawsuits.

All of the decisions reflect a perspective highly suspect of the benefits of antitrust litigation. Leegin reflects a view that the threat of litigation under a per se rule keeps businesses from engaging in pro-competitive behavior. In Ross-Simmons, the Court declared claims of predatory bidding to be inherently suspect. In Credit Suisse, the Court was concerned that antitrust lawsuits would have a chilling impact on the IPO market. In Twombly, the Court expressed concern that businesses would need to endure the burden of expensive litigation while a court or jury attempted to distinguish between illegal conspiracies and innocent, legal parallel conduct. In each case, the Court raised standards for liability to lessen the chilling effect that antitrust litigation might have on markets. If conduct could be construed as either innocent or illegal, the Court was willing to presume the conduct innocent.

The more significant long-run impact may be the signal Twombly sends to lower federal courts about pleading requirements. Federal courts traditionally have viewed as very low the requirements for adequately pleading a claim in a complaint. Under such an approach, whether a plaintiff had a meritorious case was a matter to be determined after discovery, through a motion for summary judgment or at trial. However, in Twombly, the Supreme Court took note of the high costs of discovery, particularly in antitrust cases. As electronic data storage and electronic communications proliferate, the burdens and costs of pretrial discovery are growing. [See Trust The Leaders, Issue 18, pp. 16-22.] The prospect of enduring a costly and burdensome discovery process encourages defendants to settle claims that may have little merit. The Supreme Court may be searching for a new way to empower lower federal courts to weed out such meritless claims. Twombly may be a signal to lower courts that they need to require plaintiffs to plead sufficiently detailed, factually plausible claims, and not mere bare-bones legal conclusions.

Twenty years ago, the Supreme Court issued a trilogy of opinions that had the effect of reviving motions for summary judgment as a procedural device to weed out unsubstantiated claims.⁵ Twombly could be a similar precursor to an increased use of motions to dismiss to weed out unsupportable claims.

Endnotes