In Re Text Messaging Antitrust Litigation

In the

United States Court of Appeals

For the Seventh Circuit

No. 10-8037

IN RE:

T EXT M ESSAGING A NTITRUST L ITIGATION.

A PPEAL OF:

V ERIZON W IRELESS, et al.,

Defendants.

Petition for Interlocutory Appeal from the

United States District Court for the

Northern District of Illinois, Eastern Division.

MDL No. 1997, Case No. 08 C 7082—Matthew F. Kennelly, Judge.

S UBMITTED D ECEMBER 2, 2010—D ECIDED D ECEMBER 29, 2010

Before P OSNER, W OOD , and T INDER, Circuit Judges.

P OSNER, Circuit Judge. A class action suit that has

been consolidated for pretrial proceedings in the

district court in Chicago charges the defendants with

conspiring to fix prices of text messaging services in

violation of federal antitrust law. The district court

allowed the plaintiffs to file a second amended com-

plaint despite the defendants’ objection, based on Bell

2 No. 10-8037

Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), that the

second complaint like the first failed to state a claim.

The defendants asked the district judge to certify, for

interlocutory appeal under 28 U.S.C. § 1292(b), the ques-

tion of the complaint’s adequacy. The judge agreed.

He said: “Though (as plaintiffs argue) the Seventh

Circuit had issued dozens of decisions concerning the

application of Twombly, the contours of the Supreme

Court’s ruling, and particularly its application in the

present context, remain unclear. The Court believes this

is a subject on which reasonable minds could differ. The

question presented is controlling, because there is at

least a decent chance (though it is by no means certain)

that were a court to rule the second amended com-

plaint deficient, the case would be over. Finally, there is

a good chance that immediate review may materially

advance the ultimate conclusion of the case.”

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 sec-

ond amended complaint states a claim under the stand-

ard 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 ad-

ditional 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.

No. 10-8037 3

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 par-

ticular complaint satisfies the pleading standard of

Twombly. Yet the question’s narrowness should not dis-

qualify it, at least in the rather special circumstances

presented by the appeal. Suppose the defendants had

been overheard to say to each other “let’s fix our ice

machines,” and the controlling question in the case

was whether “ice machines” was a euphemism for

prices of text messaging services. That would be a ques-

tion of fact—and it would be pointless to allow an inter-

locutory appeal from its resolution. Disputed facts are

resolved at trial—by the verdict if it’s a jury trial and

if it’s a bench trial by the judge’s findings of fact—and

thus resolution comes at the end of the trial, which ordi-

narily is too late for an interlocutory appeal. Though

there are cases in which a protracted hearing on relief

follows the determination of liability, one can under-

stand why Congress didn’t think it necessary to

authorize interlocutory appeals to decide whether a

finding of fact by a district court was clearly erroneous.

The interlocutory appeal that we are asked to

authorize in this case does not seek to overturn any

findings of fact. The defendants are arguing rather that

even if all the factual allegations of the complaint are

true, the complaint is insufficiently plausible to satisfy

Twombly. They 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.

4 No. 10-8037

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 ques-

tion of fact,” but these are not helpful labels. The ap-

pellate court’s task in such a case is to determine the

legal significance of a set of facts. In Pullman-Standard

v. Swint, 456 U.S. 273, 289 n. 19 (1982), the Supreme

Court left open the question whether appellate review

of such a determination should be deferential, just as

it is when reviewing findings of fact, but the rule in our

court is that it should be. 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, non-

recurring set of particular facts. Wellpoint, Inc. v. Commis-

sioner, 599 F.3d 641, 644 (7th Cir. 2010); Barber v. Rose, 7

F.3d 636, 642-43 (7th Cir. 1993); Mucha v. King, 792 F.3d

602, 605-06 (7th Cir. 1986). 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 com-

plaint; 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 com-

plaint, 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

No. 10-8037 5

of responding to bulky, burdensome discovery unless

the complaint provides enough information to enable

an inference that the suit has sufficient merit to war-

rant 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.”

Now it is true that we ruled in Ahrenholz v. Board of

Trustees of University of Illinois, 219 F.3d 674, 676 (7th

Cir. 2000), that the term “question of law” in section

1292(b) refers “to a question of the meaning of a

statutory or constitutional provision, regulation, or com-

mon law doctrine rather than to whether the party op-

posing summary judgment had raised a genuine issue

of material fact.” We pointed out that “to decide

whether summary judgment was properly granted

requires hunting through the record compiled in the

summary judgment proceeding to see whether there

may be a genuine issue of material fact lurking there;

and to decide a question of contract interpretation

may require immersion in what may be a long, detailed,

6 No. 10-8037

and obscure contract,” whereas “if a case turned on a

pure question of law, something the court of appeals

could decide quickly and cleanly without having to

study the record, the court should be enabled to do so

without having to wait till the end of the case.” Id. at 677;

see also Johnson v. Jones, 515 U.S. 304, 309 (1995); Boim

v. Quranic Literacy Institute, 291 F.3d 1000, 1007 (7th

Cir. 2002); In re Hamilton, 122 F.3d 13 (7th Cir. 1997);

Malbrough v. Crown Equipment Corp., 392 F.3d 135, 136

(5th Cir. 2004); Foster Wheeler Energy Corp. v. Metropolitan

Knox Solid Waste Authority, Inc., 970 F.2d 199, 202 (6th

Cir. 1992); Harriscom Svenska AB v. Harris Corp., 947 F.2d

627, 631 (2d Cir. 1991). As we read in Malbrough v. Crown

Equipment Corp., supra, 392 F.3d at 136, “the underlying

issue of whether [the plaintiff] has presented sufficient

evidence to show a ‘genuine issue . . . [of] material fact’,

and thus avoid summary judgment . . ., is not a question

of law within the meaning of § 1292(b).”

But in this case there is no question of hunting

through a record or immersing ourselves in a com-

plicated contract, and moreover we do have a question

of the meaning of a common law doctrine—namely the

federal common law doctrine of pleading in complex

cases, announced in Twombly. Decisions holding that

the application of a legal standard is a controlling ques-

tion of law within the meaning of section 1292(b) are

numerous. See Portis v. City of Chicago, 613 F.3d 702

(7th Cir. 2010); Armstrong v. LaSalle Bank Nat’l Ass’n, 552

F.3d 613, 615-16 (7th Cir. 2009); Florence v. Board of

Chosen, 621 F.3d 296, 301 (3d Cir. 2010); Weintraub v. Board

of Educ. of City School Dist., 593 F.3d 196, 200-01 (2d Cir.

No. 10-8037 7

2010); Brabham v. A.G. Edwards & Sons Inc., 376 F.3d

377, 380 (5th Cir. 2004); Johnson v. Dayton Elec. Mfg. Co.,

140 F.3d 781, 783-84 (8th Cir. 1998); Kirkpatrick v. J.C.

Bradford & Co., 827 F.2d 718, 720-21 (11th Cir. 1987).

Not that routine applications of well-settled legal stan-

dards to facts alleged in a complaint are appropriate

for interlocutory appeal. But Twombly is a recent deci-

sion, 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).

This court has only twice discussed the application of

Twombly to antitrust violations, and in both cases only

in passing. Tamburo v. Dworkin, 601 F.3d 693, 699-700

(7th Cir. 2010); Sheridan v. Marathon Petroleum Co., 530

F.3d 590, 595, 596 (7th Cir. 2008). 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). Cf. Boim v. Quranic Literacy

Institute, supra, 291 F.3d at 1007. 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.

So we grant the application for interlocutory appeal,

and, since the merits of the appeal have been fully

briefed in the parties’ submissions and would not, we

think, be illuminated by oral argument, we proceed to

the merits.

8 No. 10-8037

The complaint in Twombly alleged that the regional

telephone companies that were the successors to the

Bell Operating Companies which AT&T had been forced

to divest in settlement of the government’s antitrust suit

against it were engaged in “parallel behavior.” Bluntly,

they were not competing. But section 1 of the Sherman

Act, under which the suit had been brought, does not

require sellers to compete; it just forbids their agreeing

or conspiring not to compete. So as the Court pointed

out, a complaint that merely alleges parallel behavior

alleges facts that are equally consistent with an infer-

ence that the defendants are conspiring and an infer-

ence that the conditions of their market have enabled

them to avoid competing without having to agree not

to compete. The core allegations of the complaint

in Twombly were simply that “In the absence of any

meaningful competition between the [defendants] in one

another’s markets, and in light of the parallel course of

conduct that each engaged in to prevent competition

from [other carriers] within their respective local tele-

phone and/or high speed internet services markets

and the other facts and market circumstances alleged

above, Plaintiffs allege upon information and belief

that [the defendants] have entered into a contract, combi-

nation or conspiracy to prevent competitive entry in

their respective local telephone and/or high speed

internet services markets and have agreed not to

compete with one another and otherwise allocated cus-

tomers and markets to one another.” Id. at 551.

Our defendants contend that in this case too the com-

plaint alleges merely that they are not competing. But

No. 10-8037 9

we agree with the district judge that the complaint

alleges a conspiracy with sufficient plausibility to

satisfy the pleading standard of Twombly. It is true as

the defendants contend that the differences between the

first amended complaint, which the judge dismissed,

and the second, which he refused to dismiss, are slight;

but if his refusal to dismiss the second complaint is prop-

erly described as a reconsideration of his ruling on the

first, so what? Judges are permitted to reconsider their

rulings in the course of a litigation.

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 con-

spiracy of the sellers utterly implausible. But the com-

plaint 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

10 No. 10-8037

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 ex-

clusive sales agency, that could not escape discovery by

the antitrust authorities.

Of note is the allegation in the complaint that the defen-

dants 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 associa-

tion—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 heteroge-

neous 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 ac-

complished without agreement on the details of the new

No. 10-8037 11

structure, the timing of its adoption, and the specific

uniform price increase that would ensue on its adoption.

A footnote in Twombly had described the type of evi-

dence that enables parallel conduct to be interpreted as

collusive: “Commentators have offered several examples

of parallel conduct allegations that would state a

[Sherman Act] § 1 claim under this standard . . . [namely,]

‘parallel behavior that would probably not result

from chance, coincidence, independent responses to com-

mon stimuli, or mere interdependence unaided by an

advance understanding among the parties’ . . .[;] ‘conduct

[that] indicates the sort of restricted freedom of action

and sense of obligation that one generally associates

with agreement.’ The parties in this case agree that ‘com-

plex and historically unprecedented changes in pricing

structure made at the very same time by multiple com-

petitors, and made for no other discernible reason’

would support a plausible inference of conspiracy.”

Bell Atlantic Corp. v. Twombly, supra, 550 U.S. at 557 n. 4

(citations omitted). That is the kind of “parallel plus”

behavior alleged in this case.

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. The second amended

complaint does allege that the defendants “agreed to

uniformly charge an unprecedented common per-

unit price of ten cents for text messaging services,” but

12 No. 10-8037

does not allege direct evidence of such an agreement;

the allegation is an inference from circumstantial evi-

dence. Direct evidence of conspiracy is not a sine qua non,

however. Circumstantial evidence can establish an anti-

trust conspiracy. Monsanto Co. v. Spray-Rite Service Corp.,

465 U.S. 752, 764 (1984); Miles Distributors, Inc. v. Specialty

Construction Brands, Inc., 476 F.3d 442, 449 (7th Cir.

2007); In re High Fructose Corn Syrup Antitrust Litigation,

295 F.3d 651, 661-62 (7th Cir. 2002); Craftsmen Limousine,

Inc. v. Ford Motor Co., 363 F.3d 761, 771 (8th Cir. 2004);

Lantec, Inc. v. Novell, Inc., 306 F.3d 1003, 1028 (10th Cir.

2002); Rossi v. Standard Roofing, Inc., 156 F.3d 452, 465

(3d Cir. 1998); Johnson v. Hospital Corp. of America, 95

F.3d 383, 392 (5th Cir. 1996). We need not decide

whether the circumstantial evidence that we have sum-

marized is sufficient to compel an inference of con-

spiracy; 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 likeli-

hood to a certainty. What is impossible has a zero likeli-

hood of occurring and what is plausible has a mod-

erately 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

No. 10-8037 13

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 addi-

tional 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 pro-

vides a sufficiently plausible case of price fixing to

warrant allowing the plaintiffs to proceed to discovery.

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