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High Court Raises Bar On Antitrust Lawsuits
Latest Tightening Of the Sherman Act Is Bid to Limit Costs
By Jess Bravin
The Wall Street Journal
Tuesday, May 22, 2007

WASHINGTON -- Aiming to rein in the high cost of antitrust litigation, the Supreme Court toughened the standards for plaintiffs to get into court.

The justices, in a 7-2 opinion, ruled that an allegation that two or more companies are acting in parallel isn't enough for an antitrust lawsuit to proceed.  Even if the result benefited the companies and diminished competition, the plaintiffs must go further and include some allegation indicating that the companies were actively working together.

When independent self-interest also could explain the conduct, Justice David Souter wrote for the court, plaintiffs must allege "some factual context suggesting agreement" to restrain trade.  But in throwing out the suit alleging that major telecom companies conspired to restrain trade, the court noted that the plaintiffs failed only because they "have not nudged their claims across the line from conceivable to plausible."

The ruling doesn't radically upend the rules for antitrust actions.  Nevertheless, it marks the latest in a sequence of cases where the court has tightened the scope of the Sherman Antitrust Act, the 1890 statute that took aim at monopoly by outlawing any "contract, combination ... or conspiracy in restraint of trade or commerce."

Business interests contend that many companies are forced to settle even meritless lawsuits, because the cost of discovery may dwarf a payment that would make the case go away.  But the court was vague about what it had in mind as the minimum allegation for a suit to proceed.  "In terms of a bright-line standard, we didn't get one here," said Robin Conrad, executive vice president of the National Chamber Litigation Center, which filed a friend of the court brief in the case.

Justice Souter wrote that "the problem of discovery abuse" could cost innocent defendants huge sums.  In the telecom case, "determining whether some illegal agreement may have taken place between unspecified persons at different [companies], (each a multibillion dollar corporation with legions of management level employees)...is a sprawling, costly and hugely time-consuming undertaking."

The telecommunications industry already fills chapters of antitrust history.  In 1984, a government lawsuit broke up the decades-old Bell System monopoly, only to see the industry reconsolidate into a handful of dominant regional carriers.

The 1996 Telecommunications Act sought to foster competition by allowing the so-called Baby Bells, the Bell System's successors, to sell long-distance service while also requiring them to open their local exchanges to rival carriers.  But instead of promoting a robust marketplace for local telephone service, the Baby Bells largely declined to enter each others' regions and, plaintiffs alleged, they made it hard for upstart competitors to use their exchanges.

Citing this parallel conduct, plaintiffs, represented by the class-action firm Milberg Weiss Bershad & Schulman, filed suit.  They alleged that the mutually beneficial parallel conduct by the Baby Bells -- which, after various mergers and name changes, now include AT&T Inc., Qwest Communications International Inc. and Verizon Communications Inc. -- suggested some sort of agreement.  Plaintiffs sought to begin discovery in search of evidence supporting the claim.

A federal judge in Manhattan dismissed the case, ruling that plaintiffs must also allege facts that tend "to exclude independent self-interested conduct as an explanation for defendants' parallel behavior."

But the Second U.S. Circuit Court of Appeals, in New York, reinstated the case, citing a 1957 Supreme Court opinion that a suit shouldn't be dismissed "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim."  Since a conspiracy was a conceivable explanation for conduct that undercut competition, the court ruled the case could proceed.

Not so, wrote Justice Souter, joined by Chief Justice John Roberts and Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas, Stephen Breyer and Samuel Alito.

In this case, Justice Souter wrote, the plaintiffs didn't list "a single fact in a context that suggests an agreement."  The Baby Bells, he observed, descended from a world where telecom was a monopoly and "doubtless liked the world the way it was."  Thus, "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."

In dissent, Justice John Paul Stevens, largely joined by Justice Ruth Bader Ginsburg, contended that the majority was driven not by settled law but a "transparent policy concern" to protect antitrust defendants from litigation costs.

(Bell Atlantic Corp. v. Twombly)

Write to Jess Bravin at jess.bravin@wsj.com