|March 3, 2014|
Previously published on February 27, 2014
The Supreme Court made it clear in its well-known Twombly decision in 2007 that “liberal pleading requirements of the Federal Rules do not negate the need to plead sufficient facts so that each element of an alleged antitrust violation can be identified.”1 “Factual allegations must be enough to raise a right to relief above the speculative level.”2 The allegations must “plausibly” suggest a right to relief.3 The Second Circuit’s recent opinion in Affinity LLC v. GfK Media Research & Intelligence, LLC,4 relied on these requirements in affirming the dismissal of an antitrust complaint charging that the defendant engaged in predatory, below-cost pricing in violation of Section 2 of the Sherman Act. Given the facts of the case as alleged, the question is whether the court went too far, even under the Supreme Court’s Twombly pleading standard?
Affinity and GfK, the parties in the case, had entered into merger negotiations that ultimately were not successfully concluded. After the negotiations failed, GfK launched a service that competed directly with Affinity’s service. It was similar to, and allegedly more successful than, Affinity’s service. Ultimately, Affinity went out of business, allegedly due to GfK’s success. Affinity then filed an antitrust and business tort suit against GfK, alleging in its antitrust claims that GfK had engaged in predatory pricing that amounted to monopolization and attempted monopolization in violation of Section 2 of the Sherman Act. The District Court dismissed the claims, holding that Affinity had not sufficiently pleaded its claims under the Twombly standard. In a summary order, the Second Circuit affirmed.
In upholding the District Court’s dismissal, the Second Circuit paid close attention to Affinity’s allegations in its complaint. To properly plead a predatory pricing claim, the Second Circuit Panel stated, the plaintiff must plead that the defendant was pricing below some level of measurable costs, and also that the defendant had a strong likelihood of recouping its losses once the plaintiff had exited the market. This is the standard adopted by the Supreme Court in 1993 in Brooke Group, Ltd. V. Brown & Williamson Tobacco Corp. 5 According to the Second Circuit:
Affinity references its own costs in an attempt to allege that GfK MRI priced below an ‘appropriate measure of  costs.’ As the district court pointed out, however, such an allegation is ‘entirely conclusory and unavailing,’ because GfK MRI's '"experience in the industry . . . spann[ed] decades beyond Plaintiffs,’ and Affinity makes no allegations in the amended complaint to ‘undercut the obvious inference that Defendant realized efficiencies in developing, marketing, and delivering its services due to its size.
As a result, the Second Circuit Panel observed, Affinity did not address whether GfK’s experience and efficiencies enabled GfK to naturally price lower in the market, and yet still price well above its costs. The Second Circuit did not address how Affinity could know these facts at that stage of the proceedings, however.
The Second Circuit also did not believe that Affinity’s allegations about GfK’s ability to recoup any alleged losses were sufficient. According to the Court of Appeals,Affinity's own declarations depict remarkably low barriers to entry in the market. As the district court summarized, ‘[b]y detailing VISTA's launch, Plaintiff makes clear that a small, undercapitalized startup can create a foothold in both the Audience and Advertising Effectiveness Markets in a matter of months and for a relatively minor investment.
If GfK did charge supracompetitive prices in order to recoup its alleged losses in pricing below its costs, the appellate court theorized, a new startup could enter the market and price below GfK, thereby taking market share away from GfK and preventing it from recouping any losses. Absent an ability to recoup its losses, the appellate court concluded, a predatory pricing claim necessarily fails. Thus, according to the Second Circuit, the complaint failed to allege sufficient facts to meet each of the Supreme Court’s Brooke Group requirements: sales below an appropriate level of costs, and the likelihood of recouping its losses after it drove Affinity out of the market. According to the court,
Affinity’s pleadings did not address the presumption that GfK’s product was more successful simply due to it being a better product. The court also gave short shrift to Affinity’s allegation that GfK gained confidential information during the parties’ failed merger talks and then used that information to wrongfully compete against Affinity. Instead, the court declared that the allegations were conclusory and offered no specific facts regarding what information was obtained and how it was used improperly—as required by Twombly.
Both the District Court and the Court of Appeals were far from sympathetic to Affinity’s plight, and lack of access to information. No plaintiff can accurately predict a defendant’s cost structure, nor can it know specifically whether a defendant’s success is based upon business acumen or suspected theft of trade secrets. Affinity did know, however, what information it had made available during the failed merger negotiations, but neither the District Court nor the Court of Appeals addressed that fact.
True, courts must act as a gatekeeper in order to reduce the number of frivolous, expensive antitrust suits. And the law is now clear under Twombly that the factual allegations in a complaint must be sufficiently pleaded to demonstrate that a violation is plausible, not just speculative. Some observers might question, however, how much factual detail a private plaintiff, without any pre-complaint investigative capability, must be required to state pre-discovery. A controlled round of targeted discovery can reveal the cost structure and anticompetitive activities that a plaintiff believes at the complaint stage, on information and belief, demonstrates the likelihood of below cost sales. On the other hand, the plaintiff may have sufficient facts about competition in the relevant market to suggest that a dominant competitor will likely be able to recoup its costs for driving a competitor out of business, which the Second Circuit noted, was insufficiently alleged in the complaint. Perhaps it was the lack of these factual allegations, in the face of information in the complaint that the Second Circuit indicated showed a low threshold to entry into the market that justified the dismissal of the complaint.
1 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007).
3 Id. at 557.
4 No. 13-1536-cv; United States Court of Appeals, Second Circuit (Dec. 5, 2013).
5 509 U.S. 209, 222(1993).