- Subtracting Plus Factors: First Circuit Finds Recycling Company’s Pleading Plausible Under Twombly Standard
- August 22, 2013 | Author: Emily A. Sickelka
- Law Firm: Greenberg Traurig, LLP - New York Office
Admonishing courts to be wary of conflating the Twombly pleading requirements to withstand a motion to dismiss with the standard applicable to a summary judgment motion, the First Circuit held, in its recent Evergreen Partnering 1 decision, that a recycling company’s circumstantial allegations of a horizontal boycott among producers of polystyrene products plausibly stated a conspiracy claim under Section 1 of the Sherman Act and should not have been dismissed. In Evergreen, the three-judge panel vacated the district court’s dismissal of plaintiff Evergreen’s claims that the defendant producers of polystyrene products conspired to keep Evergreen out of the market for polystyrene recycling, and faulted the district court for improperly occupying a fact-finder’s role when it “chose among plausible alternative theories interpreting defendants’ conduct.” 2
The appellate court also rejected the notion that, in order to meet the Supreme Court’s standard for a pleading to survive a motion to dismiss set out in Twombly, a plaintiff must allege “plus factors,” or specific circumstances indicating that defendants entered into an agreement. Even without such allegations, the First Circuit seemed to suggest, the complaint can still place defendants’ challenged parallel conduct in a context that plausibly suggests a conspiracy. In earlier articles, we examined 2012 and 2013 Second Circuit decisions in which the allegation of such “plus factors” to support motions to dismiss conspiracy claims featured prominently and, indeed, appeared crucial to a complaint’s survival under Twombly—at least in the Second Circuit.3 By contrast, in Evergreen, the First Circuit noted that while plus factors are “certainly helpful,” they are not necessary for a plaintiff to survive a motion to dismiss4—although, as noted below, potential plus factors were alleged in the complaint.
According to the complaint, Evergreen was the first company to develop a business model to recycle polystyrene products by using a post-consumer polystyrene resin (PC-PSR) to create what it called “Poly-Sty-Recycle.”5 Evergreen’s business model involved collecting polystyrene products from large school systems, processing them into PC-PSR, and then using the PC-PSR to manufacture new products for use in the same school system, as well as in other products.6 According to Evergreen, its initial partnerships were successful, including pilot programs with school systems.7 However, Evergreen lacked the production capacity to meet the growing demand from bulk consumers such as large school systems, fast-food operators, supermarkets and institutional cafeterias, and its success was thus dependent on partnering with at least one of the five polystyrene producers that made up an estimated 90 percent of the market for single-service polystyrene food service packaging and tableware.8
In 2005, one of those producers, Dolco Packaging, allegedly expressed an interest in working with Evergreen.9 According to the complaint, however, in late 2005 or 2006, during a meeting of a business group consisting of manufacturers of food service packaging made from polystyrene, representatives of two of the allegedly dominant producers announced that recycling polystyrene products was not an option, in view of the industry’s battles with polystyrene critics. 10 These two companies allegedly used their dominant market positions, and the fact that they provided significant funding to the business group, to prevent the other large polystyrene food service product manufacturers from working with Evergreen. 11 Shortly after the meeting, Dolco broke off most aspects of its agreement with Evergreen.12 Additionally, other large producers not only refused to work with Evergreen, but, according to the complaint, took other steps to undermine Evergreen’s efforts to expand its business model, including the promotion of what Evergreen claimed was a sham competitor.13 In December 2008, allegedly as a result of defendants’ conduct, Evergreen was forced to shut down its operations.14
Evergreen filed a lawsuit against the five large polystyrene food service product manufacturers and their trade association, alleging that they had agreed to boycott Evergreen in violation of Section 1 of the Sherman Act and the Massachusetts Fair Business Practices Act (commonly known as Chapter 93A).15 The defendants moved to dismiss for failure to state a claim. 16 The district court granted defendants’ motion, noting that, as in the Supreme Court’s decision in Twombly, there were “legitimate business reasons” that could “as easily explain defendants’ refusal to deal with Evergreen or to compete with one another for market share as [could] any insinuation of a conspiratorial agreement.”17 Evergreen appealed. The First Circuit reversed, declaring that Evergreen’s allegations were sufficient under Twombly to support a plausible conspiracy claim under Section 1.18
Court of Appeals Decision
The First Circuit initially noted that the Supreme Court’s directive in Bell Atlantic v. Twombly that in order to survive a motion to dismiss, a complaint must allege a “plausible” agreement, rather than mere parallel conduct, had “elicited comparable confusion among the lower courts.”19 This confusion, according to the First Circuit, has led to a “slow influx of unreasonably high pleading requirements at the earliest stages of antitrust litigation,” including improper citations to case law evaluating antitrust claims at the summary judgment or post-trial stage, rather than at the motion to dismiss stage.20 The court stressed that it was “imperative” that it “correct this confusion and clarify the proper pleading requirements for sufficiently alleging agreement in §1 complaints.” 21
The First Circuit panel began by examining the Supreme Court’s “guidance” in Twombly as to how to plead an agreement properly.22 The court first noted that the Twombly court required more than a complaint based exclusively on allegations of parallel conduct—the allegations contained in the complaint must be “placed in a context that raises a suggestion of” of an agreement.23 Specifically, the complaint must “at least allege the general contours of when an agreement was made, supporting those allegations with a context that tends to make said agreement plausible.” 24 According to the First Circuit, Twombly also clarified that there is no probability requirement at the pleading stage; rather, a plaintiff need only plead “enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal agreement.”25 The court went on to note that “[i]t is not for the court to decide, at the pleading stage, which inferences are more plausible than other competing inferences, since those questions are properly left to the factfinder.” 26
The court then turned to a discussion of what it perceived to be the lower courts’ increasing examination of “plus factors” in determining the plausibility of an alleged agreement.27 The court pointed to the genesis of the use of plus factors as a footnote in Twombly in which the Supreme Court referred to commentators’ examples of the types of evidence that may indicate collusion, including:
. . . parallel 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[;] . . . conduct [that] indicates the sort of restricted freedom of action and sense of obligation that one generally associates with agreement.28
The First Circuit commented that, although “many courts have referenced ‘plus factors’ in analyzing the plausibility of § 1 claims at the pleadings stage,” such references have “invariably been drawn from cases evaluating the merits of an antitrust plaintiff’s conspiracy claim at the summary judgment and trial stages of litigation, when there is significantly more information available regarding whether complex analyses of pricing structures and other information suggest agreement.”29 While the court recognized that a conspiracy claim could “be made more plausible by bolstering factual allegations of parallel conduct with appropriate ‘plus factors,’” it added that it was not necessary for a plaintiff to allege such factors at the motion to dismiss stage, provided the plaintiff provided “other, more general allegations informing the context of an agreement . . . .”30
In the complaint before it, the court concluded that Evergreen had properly alleged the general contours of an agreement, and had supported its allegations with context that tended to make the agreement more plausible. Specifically, the First Circuit emphasized that Evergreen had pointed to the 2005-2006 business trade meeting as “the locus of the agreement,” alleging that all defendants were members of the trade association, and that two dominant defendants specifically had expressed their position at that meeting that recycling polystyrene products—of which Evergreen was the sole provider—was not an option in light of the industry’s battle with polystyrene critics.31 The court stated that Evergreen’s claim was further supported by defendants’ parallel conduct after the meeting, including their “global failure” to adopt Evergreen’s closed-loop system. 32 The court declared particularly noteworthy Evergreen’s allegation regarding defendants’ promotion of an allegedly sham competitor, which the court believed described “proactive destructive conduct” that was “difficult to explain outside the context of a conspiracy.”33 The court added that the complaint provided other allegations setting forth circumstantial evidence that, taken together, established a context for a plausible agreement in the form of industry information and facilitating practices, including the following facts: (i) that the polystyrene food services industry was highly concentrated, (ii) that Evergreen’s success was dependent on the participation of at least one of the defendants, (iii) that defendants’ alleged conduct stifled innovation in the market for recycling polystyrene food service products, and (iv) that defendants in an email had denied a request from Evergreen for funding. 34
Finally, the court said it was of no moment at the pleading stage that defendants had asserted that their refusal to deal with Evergreen was based on legitimate business reasons, such as the fact that Evergreen’s PC-PSR was, in fact, more expensive than virgin resin.35 The court remarked that while the reasons provided by defendants for their parallel refusal to deal with Evergreen could prove, during later states of litigation, enough to prevent Evergreen from sufficiently ruling out the possibility of independent action, it was not up to the court to choose among plausible alternative theories for interpreting defendants’ conduct at the motion to dismiss stage.36
The First Circuit’s Evergreen decision quoted extensively from the Second Circuit’s recent decision in Anderson News, L.L.C. v. American Media, Inc. 37 to support its proposition that, in the case of competing plausible explanations for parallel behavior at the motion to dismiss stage, the benefit of the doubt must go to the plaintiff. However, the First Circuit’s statements regarding plus factors seem to depart from both Anderson News and another recent Second Circuit case, Mayor and City Council of Baltimore, Maryland v. Citigroup, Inc.,38 each of which emphasized plus factors in considering dismissal motions.
First, the three-judge Anderson News panel denied a motion to dismiss a complaint challenging parallel conduct in the magazine distribution industry, stressing that the plaintiffs had referred to various dates during which specific executives had met or communicated with their competitors and others, and statements that plausibly could have been interpreted as evincing defendants’ agreement to eliminate competitors from the market.39 These plus factors, according to the Second Circuit, were sufficient to differentiate the allegations from those made in Twombly, thereby allowing the complaint to survive a motion to dismiss.40
Second, in Citigroup, in which a group of securities buyers and dealers alleged that financial institutions had conspired to simultaneously exit the market for auction rate securities, a partly distinct panel of three judges noted that a horizontal agreement could be inferred on the basis of conscious parallelism when such interdependent conduct “is accompanied by circumstantial evidence and plus factors.”41 The Second Circuit Citigroup panel concluded that the plus factors alleged by plaintiffs—including a handful of interfirm communications—evidenced merely conscious parallelism and not agreement, and dismissed the complaint. 42
Can the First Circuit’s Evergreen opinion be harmonized with the Second Circuit’s recent decisions? Importantly, despite the First Circuit’s dicta regarding plus factors, the Evergreen plaintiffs did allege specific circumstances that could be considered plus factors—a trade association meeting Evergreen claimed was the “locus of the agreement,” and the promotion by the defendants of an alleged sham competitor—and the First Circuit gave considerable weight to these factors in its analysis. Thus, the apparent conflict between the two appellate courts about whether “plus factors” are necessary to survive a motion to dismiss may be more semantics than substance, and it is possible the Evergreen plaintiffs would have likewise survived a motion to dismiss in the Second Circuit. However, the specific requirements necessary for a plaintiff to allege an agreement plausibly and survive a motion to dismiss in a conspiracy case remain murky and may, at this point, be circuit court panel-dependent.
1 Evergreen Partnering Grp., Inc. v. Pactiv Corp., No. 12-1730, Slip Op. at *37 (1st Cir. June 19, 2013), available here.
3 See Emily Sickelka, The Power of Plus Factors: Rational Business Behavior Leads to Dismiss of Conspiracy Claim Against Broker-Dealers in Second Circuit, Greenberg Traurig Antitrust Quarterly, Spring 2013, available here; Scott Martin, Second Circuit Finds Anderson News Pleading is Plausible ... Enough, Greenberg Traurig Antitrust Quarterly, Spring 2012, available at www4.gtlaw.com/marketing/LIT/14580/newsletter.htm#Article1.
4 Evergreen Partnering Grp., Inc., No. 12-1730, Slip Op. at *29.
5 Id. at *3-4.
6 Id. at *4.
7 Id. at 7.
8 Id. at *5, 8.
9 Id. at 9.
12 Id. at 10.
13 Id. at 10-17.
14 Id. at 17.
17 Evergreen Partnering Grp., Inc. v. Pactiv Corp., 865 F. Supp. 2d 133, 140 (D. Mass. 2012).
18 Evergreen Partnering Grp., No. 12-1730, Slip Op. at *18.
19 Id. at *22.
20 Id. at *23.
21 Id. at *22-23.
22 Id. at *23.
23 Id. at *24 (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 556-57 (2007)).
24 Id. at *28.
25 Id. at *25 (quoting Twombly, 550 U.S. at 556)).
27 Id. at *28.
28 Id. at *25 (quoting Twombly, 550 U.S. at 557 n.4).
29 Id. at *28.
30 Id. at *29.
31 Id. at *31.
32 Id. at *32.
33 Id. at *33.
34 Id. at *33-36.
35 Id. at 37.
36 Id. at 37-38.
37 680 F.3d 162 (2d Cir. 2012).
38 709 F.3d 129 (2d Cir. 2013).
39 Anderson News, L.L.C., 680 F.3d at 187.
41 709 F.3d at 136 (emphasis added).
42 Id. at 137-38.