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A federal appeals court has breathed new life into an antitrust action alleging that local phone companies conspired to keep out competition and stay away from each other’s turf. The 2nd U.S. Circuit Court of Appeals, in an opinion written by Judge Robert Sack, found that a lower court judge applied the wrong standard in dismissing an action brought against the so-called “baby Bells,” and it ruled that there is no heightened pleading standard for antitrust actions in the United States. The ruling came in Twombly v. Bell Atlantic Corporation, 03-9213, a case that charged that local carriers attempted to frustrate the purpose of the Telecommunications Act of 1996. One of the most prominent features of the act was that the baby Bells, the remnants from the 1984 break-up of the American Telephone & Telegraph Co., agreed to open their lines to allow competitors to connect their own lines and compete locally for subscribers. In return, the baby Bells were allowed to enter the market for long-distance phone service. The complaint charged that the baby Bells agreed not to compete against one another in their respective markets for local telephone and high-speed Internet service, and conspired to prevent competitors from entering those markets, thus violating �1 of the Sherman Act. Southern District Court Judge Gerard Lynch dismissed the case, finding that the complaint failed to allege sufficient facts from which a conspiracy could be inferred. Dealing with a motion to dismiss, Judge Lynch applied the 2nd Circuit’s case law with respect to Sherman Act claims where the defendants are accused of “parallel conduct” as part of a conspiracy to restrain trade. He reasoned that allegations of parallel behavior by competing companies is not enough to violate the Sherman Act unless the allegations include actions that indicate an actual agreement to restrain trade. ” … [A]llowing simple allegations of parallel conduct to entitle plaintiffs to discovery circumvents both �1′s requirement of a conspiracy and Rule 8′s (of the Federal Rules of Civil Procedure) requirement that complaints state claims on which relief can be granted,” he said. Such a complaint must fail, Lynch said, if plaintiffs fail to allege at least one “plus factor”: a factor that “tends to exclude independent self-interested conduct as an explanation for defendant’s parallel behavior.” An example of such a plus factor, he said, might be “evidence that the parallel behavior would have been against individual defendants’ economic interests absent an agreement, or that defendants possessed a strong common motive to conspire.” But Judge Sack, joined by Judges Reena Raggi and Peter Hall, disagreed. “We have consistently rejected the argument — put forward by successive generations of lawyers representing clients defending against civil antitrust claims — that antitrust complaints merit a more rigorous pleading standard, whether because of their typical complexity and sometimes amorphous nature, or because of the related extraordinary burdens that litigation beyond the pleading stage may place on defendants and the courts,” Sack said. ‘MODEST BURDEN’ While the case law does not present a “bright-line rule for identifying the factual allegations required to state an antitrust claim,” he said, it suggests “that the burden is relatively modest.” Under Rule 8 of the Federal Rules of Civil Procedure, plaintiffs are merely required to satisfy the “notice pleading,” standard: make a short and plain statement of the claims sufficient to give the defendant fair notice. The application of Rule 8 to the Sherman Act, he said, is “relatively straightforward.” Under �1 of the Sherman Act, he said, a plaintiff must generally “allege 1) the defendants were involved in a contract, combination or conspiracy that 2) operated unreasonably to restrain interstate trade, together with the factual predicate upon which those assertions are made.” Courts have held that, on a motion for summary judgment, that a plaintiff must show “plus factors” where the defendants’ so-called parallel conduct might be explained by competitors acting on the same information and in the same economic interests. But Sack said, “We are reviewing the grant of a motion to dismiss, not the grant of a motion for summary judgment.” Plus factors, he said, are not required for an “antitrust claim based on parallel conduct to survive dismissal.” Sack said the circuit was well aware that district courts occasionally have “elided” the distinction between the standard applicable for summary judgment and the standard for motions to dismiss based “on the well-founded concern that to do otherwise would be to condemn defendants to potentially limitless ‘fishing expeditions’” in discovery. Judge Lynch was not alone among Southern District judges who have required plaintiffs to allege plus factors in the context of a motion to dismiss. And, in his opinion, Lynch said requiring plus factors made sense because the antitrust laws do not prohibit parallel conduct in and of itself and because defendants need notice of the plaintiffs’ “theory of the conspiracy.” On their appeal, the baby Bells chimed in with another concern — that unless plaintiffs are required to plead plus factors “any claim asserting parallel conduct [will] survive a motion to dismiss,” and antitrust cases will “clog the courts for years, cost defendants millions of dollars to defend, and … threaten to reward plaintiffs’ attorneys for bringing meritless claims.” Sack did not agree. “We are not unsympathetic to these concerns, but we find the arguments based on them ultimately unconvincing,” he said. “At the pleading stage, we are concerned only with whether the defendants have ‘fair notice’ of the claim, and the conspiracy that is alleged as part of the claim, against them,” — enough to enable the defendants to answer and prepare for trial — and “not with whether the conspiracy can be established at trial.” J. Douglas Richards and Michael M. Buchman of Milberg Weiss Bershad & Shulman represented the plaintiffs along with attorneys from Schiffrin & Barroway in Bala Cynwyd, Pa. The defendants were represented by Marc C. Hansen of Kellogg, Huber, Hansen, Todd & Evans and attorneys with Kirkland & Ellis; Mayer, Brown, Rowe & Maw; and Wilmer Cutler Pickering Hale and Dorr.

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