Seventh Circuit Clarifies Pleading Standard for Antitrust Collusion

There has been little consistency between courts when it comes to addressing the scope and application of the Twombly[1] pleading standard in the context of allegations of antitrust collusion.  The Supreme Court’s successor case, Iqbal,[2] did very little to clarify matters.

Recently, the Seventh Circuit’s Judge Posner addressed the confusion that has followed Twombly. In the case In re Text Messaging,[3] Judge Posner noted that the author of the majority opinion in Twombly dissented in Iqbal, and two of the justices who decided Twombly and Iqbal are now retired.[4] With this backdrop the Seventh Circuit used In re Text Messaging to provide helpful guidance on the much contested question — what must a plaintiff allege in order for his or her claim of a price fixing conspiracy to survive a motion to dismiss?

The Seventh Circuit accepted In re Text Messaging as an interlocutory appeal in order to clarify the application of Twombly to price fixing conspiracy pleadings.  Noting the “ferment” in post-Twombly federal litigation pleading standards, the court held that the interlocutory appeal fairly addressed a controlling “question of law” because clarifying the “common law” pleading standard could potentially end the case.[5]

Although the Seventh Circuit has explained, in the summary judgment context, how circumstantial economic evidence can support strong inferences of collusion,[6] it was unclear, until In re Text Messaging, whether a different analysis would apply at the pleading stage because of Twombly.  It does not. In re Text Messaging confirmed that circumstantial economic evidence can, by itself, sufficiently support allegations of collusion at the motion to dismiss stage.

In re Text Messaging was a class action suit charging the defendants with conspiring to fix prices in the text message service market.  The court ultimately affirmed the district court’s decision denying the defendants’ motion to dismiss.[7] Consistent with the court’s summary judgment analysis of economic “parallel plus” behavior in In re High Fructose Corn Syrup, the court held that, “[d]irect evidence of conspiracy is not a sine qua non…Circumstantial evidence can establish antitrust conspiracy.”[8]

In allowing the complaint to proceed, the Seventh Circuit pointed to a mix of parallel behavior and industry structure that added up to suggest a “non-negligible probability that the claim is valid.”[9] This mix of “parallel plus” evidence mirrors the circumstantial economic analysis in the summary judgment context.  Judge Posner has previously separated this economic evidence into two types: (1) structural evidence, tending to show that the structure of the market is conducive to price fixing, and (2) evidence that the market has behaved in a noncompetitive manner.[10] Economic evidence of both kinds is relevant to motions to dismiss as well as summary judgment proceedings; the only difference is the relative burden of proof that the plaintiff must carry at each stage.  Emphasizing that distinction, Judge Posner explained, “[the court] need not decide whether the circumstantial evidence…is sufficient to compel an inference of conspiracy; the case is just at the complaint stage…’”[11]

The Seventh Circuit held that the mix of facts alleged by plaintiffs in In re Text Messaging sufficiently supported the inference of a price fixing conspiracy claim.  Plaintiffs alleged: (1) the market was compromised of a small number of defendants (four) with a large market share (90%), making it easy to coordinate joint action; (2) the defendants were all involved in a trade association that allowed for easy price communication, and (3) the defendants increased prices in the face of steeply falling costs.[12] The first two allegations are prime examples of what Judge Posner called “structural evidence,” tending to build a case for collusion by showing how the structure of the market reality is conducive to price fixing coordination.  The third allegation presents Judge Posner’s second kind of economic evidence — noncompetitive market behavior.

Because private plaintiffs do not have subpoena power in the pre-filing stage of litigation, it is all that more important that counsel and the courts understand how to interpret, analyze, and apply circumstantial economic evidence in the price fixing context.  In re Text Messaging is a welcome clarification, helping to explain an area of law clearly in “ferment.”  The Seventh Circuit was right to reject the argument that a collusion claim could only survive if there was direct “smoking gun” evidence of conspiracy.   Forcing a plaintiff to present such evidence would radically change the pleading stage burden, while simultaneously eliminating fairness from our judicial system.

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