Decision of Interest: Seventh Circuit on Twombly/Iqbal & 1292(b) Appeals

Last month, the Seventh Circuit decided an appeal of a district court’s refusal to grant a defendant’s motion to dismiss an antitrust complaint. The case is In re Text Messaging Antitrust Litigation (No. 10-8037), ___ F.3d ___, 2010 WL 5367383, 2010 U.S. App. LEXIS 26299 (Dec. 29, 2010), and Judge Posner’s opinion addresses both pleading standards under Twombly/Iqbal, and whether 28 U.S.C. § 1292(b) allows an immediate appeal of a district court’s denial of a Twombly/Iqbal-based motion to dismiss. The court concludes that 1292(b) is a proper means for appellate review, and then affirms the district court’s conclusion that the complaint passed muster. Detailed excerpts from the opinion (which include a reference to Paradise Lost, a discussion of child-run lemonade stands, and a recognition that "pleading standards in federal litigation are in ferment after Twombly and Iqbal") follow after the jump.

On the 1292(b) issue, Judge Posner writes:

Section 1292(b) requires our permission to appeal as well as the district court’s. The defendants have asked our permission and the plaintiffs urge us to turn them down. They argue that the proposed appeal does not present a “controlling question of law,” as the statute requires. The question presented is whether the second amended complaint states a claim under the standard for pleading set forth in Twombly. It is a controlling question, because if the second amended complaint does not state a claim, the case is likely (though, as the district judge said, not certain) to be over; the plaintiffs are unlikely without discovery to be able to allege additional facts that would persuade the district court to allow them to file a third amended complaint if we held that the second should have been dismissed.

But is it a controlling question of law? It is not an abstract legal question such as whether the Sherman Act forbids price fixing; it is a question whether a particular complaint satisfies the pleading standard of Twombly. Yet the question’s narrowness should not disqualify it, at least in the rather special circumstances presented by the appeal. … [The defendants] are asking us to apply a legal standard—the pleading standard set forth in Twombly—to a set of factual allegations taken as true for purposes of the appeal.

A challenge to a trial court’s application of a legal standard to a set of facts is often described as presenting a “mixed question of fact and law” or an “ultimate question of fact,” but these are not helpful labels. The appellate court’s task in such a case is to determine the legal significance of a set of facts. . . . The main task of an appellate court, which is to maintain the coherence, uniformity, and predictability of the law, is not engaged by review of the application of a legal standard to a unique, nonrecurring set of particular facts. No matter; in this case we have neither factfindings nor the application of a legal standard to factfindings; the question presented by the appeal is the sufficiency of the allegations of a complaint; and, most important, that question requires the interpretation, and not merely the application, of a legal standard—that of Twombly.

Furthermore, when the question presented by an appeal is whether Twombly requires dismissal of a complaint, the concerns underlying that decision argue for empowering the district court and the court of appeals to authorize an interlocutory appeal. Twombly, even more clearly than its successor, Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), is designed to spare defendants the expense of responding to bulky, burdensome discovery unless the complaint provides enough information to enable an inference that the suit has sufficient merit to warrant putting the defendant to the burden of responding to at least a limited discovery demand. When a district court by misapplying the Twombly standard allows a complex case of extremely dubious merit to proceed, it bids fair to immerse the parties in the discovery swamp—“that Serbonian bog . . . where armies whole have sunk” (Paradise Lost ix 592-94)—and by doing so create irrevocable as well as unjustifiable harm to the defendant that only an immediate appeal can avert. Such appeals should not be routine, and won’t be, because as we said both district court and court of appeals must agree to allow an appeal under section 1292(b); but they should not be precluded altogether by a narrow interpretation of “question of law.” …

Twombly is a recent decision, and its scope unsettled (especially in light of its successor, Iqbal—from which the author of the majority opinion in Twombly dissented; and two of the Justices who participated in those cases have since retired). … Pleading standards in federal litigation are in ferment after Twombly and Iqbal, and therefore an appeal seeking a clarifying decision that might head off protracted litigation is within the scope of section 1292(b). The previous cases do not address the relation of Twombly to the standards for interlocutory appeals under that section, and that is a further novelty that justifies the conclusion that the appeal presents a genuine question of law.

Having assured itself that the appeal was proper, the Seventh Circuit found that the complaint was adequate. The court’s analysis is particularly interesting because the Text Messaging plaintiffs were pursuing the same kind of claim the Supreme Court considered (and rejected) in Twombly: a claim under section 1 of the Sherman Act, which requires an agreement or conspiracy among the defendants to engage in anticompetitive behavior. The Seventh Circuit reasoned:

The second amended complaint alleges a mixture of parallel behaviors, details of industry structure, and industry practices, that facilitate collusion. There is nothing incongruous about such a mixture. If parties agree to fix prices, one expects that as a result they will not compete in price—that’s the purpose of price fixing. Parallel behavior of a sort anomalous in a competitive market is thus a symptom of price fixing, though standing alone it is not proof of it; and an industry structure that facilitates collusion constitutes supporting evidence of collusion. An accusation that the thousands of children who set up makeshift lemonade stands all over the country on hot summer days were fixing prices would be laughed out of court because the retail sale of lemonade from lemonade stands constitutes so dispersed and heterogeneous and uncommercial a market as to make a nationwide conspiracy of the sellers utterly implausible. But the complaint in this case alleges that the four defendants sell 90 percent of U.S. text messaging services, and it would not be difficult for such a small group to agree on prices and to be able to detect “cheating” (underselling the agreed price by a member of the group) without having to create elaborate mechanisms, such as an exclusive sales agency, that could not escape discovery by the antitrust authorities.

Of note is the allegation in the complaint that the defendants belonged to a trade association and exchanged price information directly at association meetings. This allegation identifies a practice, not illegal in itself, that facilitates price fixing that would be difficult for the authorities to detect. The complaint further alleges  that the defendants, along with two other large sellers of text messaging services, constituted and met with each other in an elite “leadership council” within the association—and the leadership council’s stated mission was to urge its members to substitute “co-opetition” for competition.

The complaint also alleges that in the face of steeply falling costs, the defendants increased their prices. This is anomalous behavior because falling costs increase a seller’s profit margin at the existing price, motivating him, in the absence of agreement, to reduce his price slightly in order to take business from his competitors, and certainly not to increase his price. And there is more: there is an allegation that all at once the defendants changed their pricing structures, which were  heterogeneous and complex, to a uniform pricing structure, and then simultaneously jacked up their prices by a third. The change in the industry’s pricing structure was so rapid, the complaint suggests, that it could not have been accomplished without agreement on the details of the new structure, the timing of its adoption, and the specific uniform price increase that would ensue on its adoption. …

What is missing, as the defendants point out, is the smoking gun in a price-fixing case: direct evidence, which would usually take the form of an admission by an employee of one of the conspirators, that officials of the defendants had met and agreed explicitly on the terms of a conspiracy to raise price. . . . Direct evidence of conspiracy is not a sine qua non, however. Circumstantial evidence can establish an antitrust conspiracy. We need not decide whether the circumstantial evidence that we have summarized is sufficient to compel an inference of conspiracy; the case is just at the complaint stage and the test for whether to dismiss a case at that stage turns on the complaint’s “plausibility.”

The Court said in Iqbal that the “plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” 129 S. Ct. at 1949. This is a little unclear because plausibility, probability, and possibility overlap. Probability runs the gamut from a zero likelihood to a certainty. What is impossible has a zero likelihood of occurring and what is plausible has a moderately high likelihood of occurring. The fact that the allegations undergirding a claim could be true is no longer enough to save a complaint from being dismissed; the complaint must establish a nonnegligible probability that the claim is valid; but the probability need not be as great as such terms as “preponderance of the evidence” connote.

The plaintiffs have conducted no discovery. Discovery may reveal the smoking gun or bring to light additional circumstantial evidence that further tilts the balance in favor of liability. All that we conclude at this early stage in the litigation is that the district judge was right to rule that the second amended complaint provides a sufficiently plausible case of price fixing to warrant allowing the plaintiffs to proceed to discovery.

There’s additional coverage at BNA’s US Law Week (79 U.S.L.W. 1893)

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(Hat Tip: Brooke Coleman)