DM Research, Inc. v. College of American Pathologists

United States Court of Appeals

For the First Circuit

No. 98-1555

DM RESEARCH, INC., ETC.,

Plaintiff, Appellant,

v.

COLLEGE OF AMERICAN PATHOLOGISTS

and NATIONAL COMMITTEE FOR CLINICAL LABORATORY STANDARDS,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ernest C. Torres, U.S. District Judge]

Before

Boudin, Circuit Judge,

Gibson, Senior Circuit Judge,

and Lynch, Circuit Judge.

Evan Slavitt with whom Andrew A. Honegger and Gadsby & Hannah

LLP were on brief for appellant.

Jack R. Bierig with whom Virginia A. Seitz, Sidley & Austin,

Richard A. Licht, Steven M. Richard and Tillinghast, Licht &

Semonoff were on brief for appellees.

March 4, 1999

BOUDIN, Circuit Judge. DM Research, Inc., the plaintiff

in the district court, is a Rhode Island company that for many

years has been engaged in the production of reagents, which are

substances used in the testing or synthesis of other products. The

defendants in the district court were two organizations: the

College of American Pathologists ("the College"), a non-profit

Illinois corporation comprising several hundred pathologists, and

the National Committee for Clinical Laboratory Standards

("National"), a nonprofit Pennsylvania corporation representing a

variety of manufacturing, testing, and other interests.

Since the case was resolved below on a motion to dismiss,

we take the factual allegations of the complaint as true. SeeWatterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993). Among other

products DM Research makes is what its complaint calls "reagent

grade water," a form of purified water used in clinical

laboratories for various purposes. National's main role is to

develop uniform standards relating to clinical laboratory testing;

its standards, like those of most private standard-setting

organizations, have no legal force but may be followed voluntarily

or used in certification arrangements.

In 1991, National adopted a guideline document titled

"Preparation and Testing of Reagent Water in the Clinical

Laboratory, Approved Guideline" (2d ed. Aug. 1991). The guidelines

set down minimum requirements reagent water should meet, e.g., as

to bacterial content, pH, resistance to electrical transmission,

silicate content, particulate content, and organic content.

According to the complaint, one of the guidelines effectively

requires complying laboratories--at least for certain procedures--

to use reagent water produced using a purification system on site,

rather than using bottled reagent water manufactured elsewhere.

National's guidelines require just-produced water for certain

laboratory tests on the ground that the resistivity of the water

tends to degrade rapidly over time.

Equipment, apparently costing $1,000 or more, is

available for on-site production of reagent water. Laboratories

that choose to comply with the National guideline at issue now

purchase such equipment instead of buying reagent water from DM

Research or its competitors. In DM Research's view, National's

requirement of on-site production is scientifically unjustified.

The details of this scientific quarrel are not important for

present purposes; we assume arguendo that DM Research could prove

at trial that National's guideline is unnecessary.

Although the National reagent water guidelines have no

legal force, the College has incorporated them into its own

guidelines, which it uses in accrediting laboratories, including

hospital laboratories. According to the DM Research complaint, the

loss of such accreditation would, as a practical matter, be

"devastating" to a laboratory. And while the complaint is quite

obscure on this point, we will assume that DM Research could prove

at trial that many of DM Research's potential customers have strong

practical reasons for complying with the College's guidelines even

though they may have no legal obligation to do so.

The complaint alleges that the effect of the National

guidelines and their adoption by the College was to limit the

growth in DM Research's sales of its reagent water and ultimately

to force the owner of DM Research to sell the company at reduced

price. The complaint charged, inter alia, that National and the

College had conspired to restrain trade in the provision of high

grade reagent water products, including bottled reagent water and

water purification equipment, thereby violating section 1 of the

Sherman Act, 15 U.S.C. 1.

The complaint says that the provision of such products to

laboratories constitutes a national "market," within the meaning of

the antitrust laws, and solely for purposes of our decision we will

assume this to be so. It also says that the acts in furtherance of

the conspiracy were as follows:

(a) the creation, adoption, and enforcement of

faulty and arbitrary standards and guidelines

and (b) economic threats and intimidation of

certain laboratories and referring

pathologists to cease or refrain from doing

business with DM Research and other bottled

reagent water manufacturers.

What weight is to be given to allegations of this character, and to

the general charge of "conspiracy," is the central issue in this

case.

The College moved to dismiss, Fed. R. Civ. P. 12(b)(6),

on the ground that the complaint failed to state a claim under the

Sherman Act; National moved to dismiss for this reason and for

lack of personal jurisdiction and venue. DM filed an opposition

but no affidavits. In a thoughtful memorandum and order, dated

April 14, 1998, the district judge granted the motion to dismiss

the Sherman Act count for failure to state a claim and, declining

to exercise supplemental jurisdiction, see 28 U.S.C. 1367,

dismissed without prejudice the remaining state law claims (state

antitrust, tortious interference, and defamation). See DM

Research, Inc. v. College of American Pathologists, 2 F. Supp. 2d

226 (D.R.I. 1998).

On DM Research's appeal, our review of the district

court's decision is de novo. See Preferred Mutual Ins. Co. v.

Travelers Cos., 127 F.3d 136, 137 (1st Cir. 1997). The issue is

whether the complaint states a claim under the Sherman Act,

assuming the factual allegations to be true and indulging to a

reasonable degree a plaintiff who has not yet had an opportunity to

conduct discovery. See Watterson, 987 F.2d at 3. The issue turns

as much on a recurring problem of civil procedure--what force is to

be accorded conclusory terms in a complaint--as it does on

antitrust analysis.

The governing precept, to borrow the district court's

excellent summary, is that while the plaintiff's "facts" must be

accepted as alleged, this does not automatically extend to "[b]ald

assertions, subjective characterizations and legal conclusions,"

2 F. Supp. 2d at 228 (citing cases); further, as the district judge

said, "the factual allegations must be specific enough to justify

'drag[ging] a defendant past the pleading threshold,'" id. at 228

(quoting Gooley v. Mobil Oil Corp., 851 F.2d 513, 514 (1st Cir.

1988)).

Gooley's concept of "the pleading threshold" is critical.

The complaint should include "a short and plain statement" of the

claim showing that the pleader is entitled to relief, Fed. R. Civ.

P. 8(a), so it need not include evidentiary detail. On the other

hand, the price of entry, even to discovery, is for the plaintiff

to allege a factual predicate concrete enough to warrant further

proceedings, which may be costly and burdensome. Conclusory

allegations in a complaint, if they stand alone, are a danger sign

that the plaintiff is engaged in a fishing expedition.

In framing its Sherman Act claim, DM Research chose to

treat National and the College as independent actors who

"conspired" with each other to adopt and implement a scientifically

unjustified restriction that foreclosed to DM Research a

substantial body of customers. Conspiracy in antitrust parlance is

pretty much a synonym for agreement, see, e.g., Copperweld Corp. v.

Independence Tube Corp., 467 U.S. 752, 757 (1984), and almost any

agreement between independent actors that restrains competition is

potentially subject to examination for "reasonableness" under

section 1, see National Soc'y of Professional Eng's v. United

States, 435 U.S. 679, 686-91 (1978). There are exceptions, see,

e.g., NAACP v. Claiborne Hardware Co., 458 U.S. 886 (1982); Eastern

R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S.

127 (1961), but none is apt here.

Whether an agreement is "unreasonable" from an antitrust

standpoint is a complicated matter--much of antitrust law is

devoted to it--apart from a few agreements regarded as "per se"

unlawful (such as price-fixing agreements between competitors).

See U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593

(1st Cir. 1993). Let us suppose National and the College could not

lawfully "agree" on the adoption of a faulty standard that excluded

DM Research from access to important customers. Literally read,

the complaint does allege such a conspiracy, albeit in conclusory

terms.

But no antitrust lawyer could help but ask almost

immediately why National and the College would conspire. It is

easy enough to understand why two manufacturers might agree to

charge above-market prices; if taken together they have market

power, the agreement can increase their profits. See United Statesv. Socony-Vacuum Oil Co., 310 U.S. 150 (1940). The complaint here

does allege that some National members make or are otherwise

interested in the manufacture of water purification equipment.

But, without more detail, it is highly implausible to suppose that

the College or its members have any reason to "agree" with National

to adopt a faulty standard whose main effect would be to raise

costs for laboratories that found it cheaper to buy bottled

reagent water than to make it on site.

DM Research asserts that the district court was required

to accept, for purposes of the motion to dismiss, that such a

conspiracy existed, however implausible it might be. But terms

like "conspiracy," or even "agreement," are border-line: they

might well be sufficient in conjunction with a more specific

allegation--for example, identifying a written agreement or even a

basis for inferring a tacit agreement, cf. Interstate Circuit v.

United States, 306 U.S. 208, 221-25 (1939)--but a court is not

required to accept such terms as a sufficient basis for a

complaint. The case law on this point is ample.

This is no technical mouse-trap for an unduly terse

plaintiff. Litigation, even at the pleading stage, is an on-going

process. Once DM Research knew the thrust of the defendants'

arguments for dismissal, it was perfectly free to respond to the

motion to dismiss by providing the district court with additional

facts to make its complaint concrete and plausible. If DM Research

had responded with an amendment to the complaint or even with an

affidavit setting forth such detail, the district court certainly

would not have dismissed the case out of hand. Yet nothing in DM

Research's opposition, or even its brief on appeal, adds anything

factual to underpin its complaint.

Occasionally, an implausible conclusory assertion may

turn out to be true. Perhaps for some unknown reason National and

the College collaborated in adopting a faulty standard. But the

discovery process is not available where, at the complaint stage,

a plaintiff has nothing more than unlikely speculations. While

this may mean that a civil plaintiff must do more detective work in

advance, the reason is to protect society from the costs of highly

unpromising litigation.

DM Research's brief bears out the district court's

concerns. It speculates that excluding DM Research might lower the

price of purification equipment for reagent water. In fact,

excluding competitors of good substitute products (here, bottled

reagent water) almost always tends to stabilize or raise the price

of substitutes. DM Research says that the health care industry is

a "counter-intuitive" world of its own, "[h]ighly regulated and

idiosyncratic," but DM Research does not explain how this makes its

conspiracy more plausible. And it asserts, unhelpfully, that

"[o]ther [College] and [National] members may benefit for other,

yet unknown reasons."

DM Research points out that individuals or companies

sometimes do act contrary to their own interest. No doubt this is

true and, if DM Research had alleged facts indicating an agreement-

-instead of merely asserting a conspiracy in conclusory terms--

improbability would not normally warrant dismissal for failure to

state a claim (there may be extreme exceptions). But improbability

is ample reason for the court to demand something more than mere

conclusions as to conspiracy, which is all that DM Research has

offered here.

What we have said thus far, very much echoing the

district court, disposes of the Sherman Act claim as it has been

framed by DM Research itself. But the complaint also charged that

the guidelines are scientifically unsupported and adversely

affected DM Research's ability to sell high grade reagent water.

Even if the defendants did not conspire, are these allegations not

enough to frame a complaint against each of the defendants

separately? If so, we might be more hesitant to affirm the

dismissal merely because the theory was imperfectly expressed, cf.Vartanian v. Monsanto Co., 14 F.3d 697, 702 (1st Cir. 1994), even

though the argument might technically be forfeited on appeal, seeNichols v. Cadle Co., 139 F.3d 59, 64 (1st Cir. 1998).

At first blush, separate claims against National or the

College might appear to be foreclosed because each is a

corporation, and under Copperwald Corp. v. Independence Tube Corp.,

467 U.S. 752 (1984), a corporation--although it may comprise and

act through individual employees or wholly owned subsidiaries--is

not deemed able to "conspire" with itself. See id. at 767-69.

This is so not a priori, but for policy reasons; and the policy

reasons may not apply with the same force, in all circumstances, to

a trade or professional association.

After all, such organizations may, in at least some of

their functions, operate essentially as a means of coordinating the

actions of their independent members; and in some cases their

actions have been viewed as the joint actions of the members.

There are so many variables that no single generalization is

secure. We are therefore going to assume arguendo that the actions

of National or the College, taken separately from each other, could

in the present circumstances be regarded as the product of an

agreement of members of each organization operating within the

framework of the single organization.

Nevertheless, it is commonplace, and often very useful,

for organizations to recommend quality standards (like National) or

adopt them as part of a certification process (like the College).

Merely to say that the standards are disputable or have some market

effects has not generally been enough to condemn them as

"unreasonable" under the Sherman Act. A few cases say this

explicitly, see, e.g., Consolidated Metal Products, Inc. v.

American Petroleum Inst., 846 F.2d 284, 294 (5th Cir. 1988), but

more important, something else or more extreme is generally present

in the cases that have condemned quality standards as

anticompetitive.

In such cases, the principal concern has been the use of

standards setting as a predatory device by some competitors to

injure others; normally there is a showing that the standard was

deliberately distorted by competitors of the injured party,

sometimes through lies, bribes, or other improper forms of

influence, in addition to a further showing of market foreclosure.

See Hovenkamp, Economics and Federal Antitrust Law 10.3, at 286

(1985). Without some kind of protective screen for treble damage

liability, there would be few standards set since most involve

disputable judgment calls.

In this case, there is no claim that the College's

members compete with DM Research or at all. In the case of

National, the complaint does allege that two members somehow

involved in the writing of the guidelines were connected with

purification equipment and that other unspecified members of

National have similar interests; but it does not say that such

members dominated the decision making, or bribed or lied to other

members. See Eliason Corp. v. National Sanitation Foundation, 614

F.2d 126 (6th Cir.), cert. denied, 449 U.S. 89 (1980).

The only complaint paragraph (quoted above) that comes

close to alleging improper conduct says that "the conspiracy"

involved "economic threats and intimidation" of certain

laboratories and caused pathologists to cease or refrain from using

bottled reagent water. Once again, the phrasing is general and

there are no specifics. See Canney v. City of Chelsea, 925 F.

Supp. 58, 70 (D. Mass. 1996). Still, this claim may be more

plausible if read--as its phrasing suggests--as directed not to

National's framing of the standard but to its "enforcement" by the

College as a requirement for membership or certification.

If the College says to a laboratory or a pathologist that

membership or its certification depends on respect for the

guidelines, that may well constitute an economic threat from the

standpoint of the laboratory or pathologist who finds it cheaper

to buy bottled water. But it is not intrinsically an antitrust

violation for an organization to limit its endorsement to those who

meet its published standards unless the standard itself is shown to

be anticompetive in purpose or effect. See Greater Rockford Energy

Tech. Corp. v. Shell Oil Co., 998 F.2d 391, 396 (7th Cir.), cert.

denied, 510 U.S. 1111 (1994). And such a showing, even to the

modest extent required in a complaint, requires more than epithets.

Affirmed.