May 22, 2007Client Alert

U.S. Supreme Court Upholds Dismissal of Antitrust Claims Against Incumbent Providers

On May 21, 2007, the United States Supreme Court upheld a district court decision dismissing a nationwide class action lawsuit alleging federal antitrust claims against a group of large regional telecommunications providers that arose from the 1984 divestiture of the American Telephone & Telegraph Company. Bell Atlantic Corp. v. Twombly, Case No. 05-1126, ___ U.S. ___, 2007 WL 1461066 (May 21, 2007). The regional providers, known in the industry as Incumbent Local Exchange Carriers ("ILECs"), were sued for allegedly conspiring with each other to destroy competition from smaller companies, known as Competitive Local Exchange Carriers (“CLECs”), which arose after the Telecommunications Act of 1996, which ended the ILECs’ monopolies, and, in the words of the Supreme Court, “fundamentally restructured local telephone markets.” The lawsuit also alleged that one strategy used to destroy CLECs was an agreement among the ILECS not to compete in each other’s established market areas.

The action, which was brought on behalf of a putative class of subscribers to local telephone and high-speed internet service against the nation's largest telecommunications firms, was originally dismissed by the United States District Court for the Southern District of New York on grounds that the allegations did not set forth a legally viable claim for violation of the Federal Sherman Act. The dismissal was then overturned by the United States Court of Appeals for the Second Circuit.

In reversing the Second Circuit’s decision and reinstating the District Court’s dismissal, the Supreme Court held that mere allegations of parallel conduct or interdependence among the ILECs was not sufficient to state a claim for antitrust conspiracy, absent plausible grounds to believe that their conduct resulted from an illegal agreement and was not the result of rational, unilateral business decisions prompted by common perceptions of the market. In particular, the Court held that nothing in the Plaintiffs’ complaint inferred that the ILECs were doing anything other than resisting the competitive efforts of the CLECs in their market areas, which the Supreme Court recognized as “the natural, unilateral reaction of each ILEC intent on preserving its regional dominance.”

In addressing the procedural argument that plaintiffs should be able to bring legal action on the basis a “bare bones” complaint, and then pursue discovery to find supporting evidence, the Supreme Court held that a complaint must set forth “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action.” Recognizing the risk that even a “largely groundless claim” can expose defendants to costly discovery and other burdens “representing an in terrorem increment of the settlement value,” of a case, the Court reasoned that it was not unreasonable to require a plaintiff to plead facts that satisfy a standard of plausibility instead of a mere possibility that actionable conduct has occurred.

For other potential plaintiffs and defendants, the Bell Atlantic Corp. decision means that federal courts will continue to recognize that business conduct which enhances a company’s competitive interests is not necessarily anticompetitive or illegal, even if competitors are engaging in the same practices. Because similar and parallel conduct among competitors is often the result of unilateral decisions, such conduct alone will not be sufficient to subject a business to the cost and expense of unfounded antitrust litigation.

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