978-1285770178 Case Printout Case CPC-26-05 Part 2

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Textbook Cengage Advantage Books: Business Law: Text & Cases - Commercial Law for Accountants 13th Edition

Authors Roger LeRoy Miller

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

[2][3] We review de novo a district court's dismissal of a complaint for failure to state a claim under Federal Rules

of Civil Procedure Rule 12(b)(6), accepting all factual allegations as true, but “giving no effect to legal conclusions

couched as factual allegations.” Port Dock & Stone Corp. v. Oldcastle Northeast, Inc., 507 F.3d 117, 121 (2d

Cir.2007). We review the denial of leave to amend a complaint for abuse of discretion, unless the denial was based

on an interpretation of law, in which case the legal conclusion is reviewed de novo. Jones v. N.Y. State Div. of Mili-

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

behavior that would probably not result from chance, coincidence, independent responses to common stimuli, or

mere interdependence unaided by an advance understanding among the parties.” Id. at 556 n. 4, 127 S.Ct. 1955 (in-

ternal quotation marks omitted).

In Twombly, plaintiffs brought a Section 1 claim centered around the market for local telephone service. In 1984, a

system of seven regional local-telephone-service monopolies, called Baby Bells, was created, along with a separate,

competitive market for long-distance telephone service from which the regional Baby Bells were excluded. Id. at

549, 127 S.Ct. 1955. In 1996, Congress withdrew approval for the regional Baby Bell monopolies in enacting the

Telecommunications Act of 1996, which required the Baby Bells to share their local networks with competitors

(called “CLECs”), in exchange for authority to enter the long-distance service market. Id. Not surprisingly, the Baby

CEO that competing in the territory of another Baby Bell “might be a good way to turn a quick dollar but that

doesn't make it right,” supported the allegation that the Baby Bells entered into a conspiracy to prevent entry into

their local markets and agreed to refrain from competing with one another. Id. at 551, 127 S.Ct. 1955.

The Supreme Court held that the ultimate conspiracy allegation was merely a “legal conclusion[ ] resting on the pri-

1996 monopoly was the norm, rather than the exception, “a natural explanation for the noncompetition alleged is

that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same....

[T]he complaint itself [gave] reasons to believe that the [Baby Bells] would see their best interests in keeping to

their old turf.” Id. at 568, 127 S.Ct. 1955.

the defendants dramatically reduced their prices for Internet Music (as compared to CDs), despite the fact that all

defendants experienced dramatic cost reductions in producing Internet Music. Third, when defendants began to sell

Internet Music through entities they did not own or control, they maintained the same unreasonably high prices and

DRMs as MusicNet itself. Fourth, defendants used MFNs in their licenses that had the effect of guaranteeing that the

licensor who signed the MFN received terms no less favorable than terms offered to other licensors. For example,

dence of illegal agreement,” Twombly, 550 U.S. at 556, 127 S.Ct. 1955, the district court erred in denying

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

the motion to amend on the ground of futility. See Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 244

(2d Cir.2007). Therefore, we include the allegations contained in proposed paragraph ninety-nine within

our discussion of the SCAC as a whole. In so doing, we reject defendants' argument that the proposed

clined four years earlier, in 2001. As can be seen above, paragraph seventy-one of the original complaint

alleged that initial costs of distributing Internet Music fell because the price of distributing CDs accounted

for costs such as copying the compact discs, producing the CD case, and labor, all of which were eliminat-

ed in distributing Internet Music. In contrast, the proposed amendment to paragraph ninety-nine alleged

that by May 2005 the costs of distributing Internet Music had fallen because the digitization costs of the

Twombly, 550 U.S. at 557, 127 S.Ct. 1955. First, defendants control over 80% of Digital Music sold to end purchas-

ers in the United States. See 7 Phillip E. Areeda and Herbert Hovenkamp, Antitrust Law (hereinafter “Areeda &

Hovenkamp”) § 1431a (2d ed. 2003) (“[E]mpirical studies considering many industries have suggested that non-

competitive pricing [that may be the result of price coordination] is likely to appear when the four leading firms ac-

count for some 50 to 80 percent of the market.”). Second, one industry commentator noted that “nobody in their

marginal costs.”). Third, the quote from Edgar Bronfman, the current CEO of WMG, suggests that pressplay was

formed expressly as an effort to stop the “continuing devaluation of music.”

Fourth, defendants attempted to hide their MFNs because they knew they would attract antitrust scrutiny. For exam-

ple, EMI and MusicNet's MFN, which assured that EMI's core terms would be no less favorable than Bertelsmann's

Hovenkamp § 1415b (“[O]ne cannot profitably increase its price above that charged by rivals unless they follow the

price-raiser's lead.”). Sixth, defendants' price-fixing is the subject of a pending investigation by the New York State

Attorney General and two separate investigations by the Department of Justice. Finally, defendants raised wholesale

prices from about $0.65 per song to $0.70 per song in or about May 2005, even though earlier that year defendants'

costs of providing Internet Music had decreased substantially due to completion of the initial digital cataloging of all

fixing complaint under Twombly where complaint alleged only that defendant conspired with “numerous” banks to

fix the price of credit and debit card processing fees and received kickbacks from “numerous” banks as considera-

tion for its unlawful agreement); Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048-50 (9th Cir.2008) (where plain-

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

tiffs alleged no facts to support their theory that defendant banks conspired or agreed with each other, dismissing

facts to support those conclusions”).

Defendants' arguments that plaintiffs have failed to state a claim are without merit. Defendants first argue that a

plaintiff seeking damages under Section 1 of the Sherman act must allege facts that “tend[ ] to exclude independent

self-interested conduct as an explanation for defendants' parallel behavior.” Appellee's Br. 15-17. This is incorrect.

plies to a complaint and a discovery record.... The ‘plausibly suggesting’ threshold for a conspiracy complaint re-

mains considerably less than the ‘tends to rule out the possibility’ standard for summary judgment.”).

[15] Defendants next argue that Twombly requires that a plaintiff identify the specific time, place, or person related

to each conspiracy allegation. This is also incorrect. The Twombly court noted, in dicta, that had the claim of agree-

Defendants then argue that inferring a conspiracy from the facts alleged is unreasonable because plaintiffs' allega-

tions “are the very same claims that were thoroughly investigated and rejected by the Antitrust Division of the De-

partment of Justice,” Appellee's Br. 17-18, which closed its inquiry in December 2003 and publicly announced that

it had uncovered no evidence that the joint ventures had harmed competition or consumers of digital music. Even if

we could consider this evidence on a motion to dismiss, defendants cite no case to support the proposition that a

Supreme Court's decision in Texaco Inc. v. Dagher, 547 U.S. 1, 126 S.Ct. 1276, 164 L.Ed.2d 1 (2006). That case

concerned a joint venture formed by Texaco and Shell Oil to completely consolidate their operations in the western

United States. The joint venture, Equilon, produced significant cost savings in production and marketing, see

Dagher v. Saudi Refining, Inc., 369 F.3d 1108, 1111 (9th Cir.2004), rev'd, 547 U.S. 1, 126 S.Ct. 1276, 164 L.Ed.2d

1 (2006), and ended competition between Texaco and Shell Oil altogether in the domestic refining and selling of

ysis, judgment was appropriate as a matter of law. Id.FN4 The Supreme Court agreed, holding that Equilon's pricing

policy was not a price-fixing agreement between competitors, because Texaco and Shell Oil did not compete with

one another in the relevant market (the sale of gasoline). Therefore, the per se rule against price fixing did not apply.

Id. at 5-6. In its holding, the Supreme Court presumed that Equilon was a lawful joint venture, because its formation

had been approved by federal and state regulators and plaintiffs did not argue that it was a sham. Id. at 6 n. 1. Final-

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

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ly, the Supreme Court noted that despite the lawfulness of the joint venture plaintiffs could have, but did not, chal-

lenge Equilon's pricing policy under the rule of reason. Id. at 7.

FN4. A short explanation of per se illegality versus the rule of reason is in order. Per se liability is reserved

“for only those agreements that are so plainly anticompetitive that no elaborate study of the industry is

needed to establish their illegality.” Dagher, 547 U.S. at 5, 126 S.Ct. 1276 (internal quotation marks omit-

Dagher does not support the dismissal of the complaint in this case. First, although the district court below stated

that plaintiffs did not challenge the joint ventures here, the complaint makes clear that plaintiffs do challenge the

joint ventures. See, e.g., SCAC ¶¶ 67, 72-73, 76, 78, 81-83, 85. In the legal memorandum relied upon by the district

court for the proposition that plaintiffs did not challenge the joint ventures, plaintiffs wrote that while “it is not the

existence or creation of these joint ventures that form the basis of the [p]laintiffs' allegations,” defendants used the

federal regulators. Therefore, the Dagher Court's presumption that Equilon was lawful because its formation had

been approved by federal and state regulators and plaintiffs did not argue that it was a sham, 547 U.S. at 6 n. 1, 126

S.Ct. 1276, is not applicable here.FN5 Second, even if we were to presume that MusicNet and pressplay were lawful,

which we do not, plaintiffs would still be free to challenge their activities pursuant to the rule of reason. Dagher, 547

U.S. at 6 n. 1, 126 S.Ct. 1276. The complaint alleges that the activities of the joint ventures actually were anticom-

related to the purpose of the joint venture or the joint venture does not result in significant economic bene-

fits. See Areeda & Hovenkamp 2009 Supplement § 2132 (arguing that if General Motors and Toyota were

to form a joint venture for the production of hybrid car engines, but then place the engines in cars they de-

signed and produced separately, the Supreme Court would not permit them to fix the prices of the finished

cars as part of the lawful joint venture); see also 12 Areeda & Hovemkamp § 2004a (2d ed.2005) (noting

on its face and the particular challenged agreement seems to be reasonably necessary to the purpose of the

venture). In this case, the SCAC obviously does not allege that MusicNet or pressplay were economically

efficient in integrating research, development, production, or distribution or that price fixing was reasona-

bly necessary to any social gain the ventures may have produced.

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

[19] Finally, defendants claim that the conduct alleged in the complaint “would be entirely consistent with inde-

pendent, though parallel, action.” Appellee's Br. 20. Under Twombly, allegations of parallel conduct that could “just

as well be independent action” are not sufficient to state a claim. 550 U.S. at 557, 127 S.Ct. 1955. However, in this

case plaintiffs have alleged behavior that would plausibly contravene each defendant's self-interest “in the absence

of similar behavior by rivals.” 7 Areeda & Hovenkamp § 1415a (2d ed.2003); see also Posner, supra, at 100. For

not reach this question and the parties devote three total pages to it in their briefs, we remand to allow the

district court to consider it in the first instance.

CONCLUSION

The Second Consolidated Amendment Complaint contains “plausible grounds to infer an agreement.” Twombly, 550

allege a price-fixing agreement in violation of section 1 of the Sherman Act, 15 U.S.C. § 1. The complaint had relied

primarily on an allegation of the defendants' parallel conduct.

The perplexing aspect of the Court's opinion is contained in the very first paragraph of the Court's substantive dis-

cussion. The Court there stated:

tributing Corp., 346 U.S. 537, 540-41, 74 S.Ct. 257, 98 L.Ed. 273 (1954)) (alterations and ellipsis in original). FN1

FN1. The basis for perplexity is not lessened by the Court's subsequent statement that “[i]t makes sense to

say, therefore, that an allegation of parallel conduct and a bare assertion of conspiracy will not suffice,”

Twombly, 550 U.S. at 556, 127 S.Ct. 1955, apparently meaning will not suffice to defeat a motion to dis-

miss a complaint.

motion to dismiss. Indeed, that plaintiff had been permitted to present its evidence to a jury, only to have the jury

reject on the merits the claim of a section 1 violation. The plaintiff sought review on the ground that the trial court

had erred in not granting a motion for a directed verdict in the plaintiff's favor. See Theatre Enterprises, 346 U.S. at

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

539, 74 S.Ct. 257. The Supreme Court understandably found no error. See id. at 539-42, 74 S.Ct. 257. In Twombly,

plaintiff with evidence showing nothing more than parallel conduct is not entitled to a directed verdict.” Twombly,

550 U.S. at 554, 127 S.Ct. 1955 (emphasis added).

The fact that an allegation of parallel conduct was held insufficient to require a directed verdict in the plaintiff's fa-

vor is hardly a basis for ruling that such an allegation is insufficient to survive a motion to dismiss for failure to state

they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that

could just as well be independent action.” Id. at 557, 127 S.Ct. 1955.

The context in Twombly was the aftermath of the divestiture of At & T's local telephone service, resulting in the

creation of seven Regional Bell Operating Companies, the so-called “Baby Bells” or Incumbent Local Exchange

In that context, it was entirely understandable for the Court to cast a jaundiced eye on the claim that the parallel

conduct of these newly created ILECs would suffice to permit an inference of agreement. As the Court observed:

[The parallel conduct of the ILECs] was not suggestive of conspiracy, not if history teaches anything. In a tradi-

tionally unregulated industry with low barriers to entry, sparse competition among large firms dominating sepa-

rate geographical segments of the market could very well signify illegal agreement, but here we have an obvious

Id. at 567-68, 127 S.Ct. 1955.

Two years after Twombly, the Court emphasized its view that whether a bare allegation of illegality would suffice to

withstand a motion to dismiss depends on the context in which the allegation is made. “Determining whether a com-

plaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that re-

motion to dismiss and permit some discovery, perhaps leaving the issue for later resolution on a motion for summary

judgment.

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592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

(Cite as: 592 F.3d 314)

In the pending case, as Judge Katzmann has carefully demonstrated, the context in which the defendants' alleged

fices to render the allegation of a section 1 violation sufficient to withstand a motion to dismiss.

C.A.2 (N.Y.),2010.

Starr v. Sony BMG Music Entertainment

592 F.3d 314, 2010-1 Trade Cases P 76,866, 93 U.S.P.Q.2d 1384

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