MEMORANDUM To: From: Re: File John G.

Narkin LTL Shipping Services Litigation Satisfaction of Pleading Requirements Under Twombly February 6, 2008

Date:

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This memorandum analyzes two representative complaints in the above matter to evaluate whether they satisfy the pleading requirements for Sherman Act 1 cases established last year by the United States Supreme Court in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007)(Twombly). A. The Twombly Standards To survive a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a complaint must contain (1) enough factual matter (taken as true) to suggest that an [anticompetitive] agreement was made; (2) enough fact to raise a reasonable expectation that discovery will reveal evidence of an illegal agreement; and (3) allegations plausibly suggesting (not merely consistent with) an unlawful agreement. Twombly, 127 S. Ct. at 1965-66. In formulating these requirements, the Twombly court observed that: [L]awful parallel conduct fails to bespeak unlawful agreement. [A]n allegation of parallel conduct and a bare assertion of conspiracy will not suffice. Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality. Hence, when allegations of parallel conduct are set out in order to make a 1 claim, 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 1966. Stated another way, the Twombly court explained: A statement of parallel conduct, even conduct consciously undertaken, needs some setting suggesting the agreement necessary to make out a 1 claim; without that further circumstance pointing toward a meeting of the minds, an account of a defendant's commercial efforts stays in neutral territory. An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a 1 complaint: it gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of entitle[ment] to relief. Id. (citation omitted). Without explicitly defining the nature of the further factual enhancement necessary to successfully nudge allegations of parallel conduct across the line from conceivable to plausible in a 1 action,1 the Supreme Court in Twombly did say that a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of [facts establishing plausible grounds to infer an illegal agreement] is improbable, and that a recovery is very remote and unlikely. Id. at 1965. The Supreme Court also said, [W]e do not require heightened fact pleading of specifics, but only enou gh facts to state a claim to relief that is plausible on its face. Id. at 1974. These statements suggest that the plausibility threshold adopted in Twombly is not unreasonably high. In this connection, any complaint challenged by defendants on Twombly grounds may be contrasted usefully with the allegations in Twombly itself, where the Supreme Court found that nothing contained in the complaint invests either the action or inaction alleged with a plausible suggestion of conspiracy, among other reasons, because the
1

Id. at 1974. 2

pleadings mentioned no specific time, place, or person involved in the alleged conspiracies and the complaint furnishes no clue as to which of the four [defendants (much less which of their employees) supposedly agreed, or when and where the illicit agreement took place. Id. at 1970-71 and n.10. B. The Representative TL Complaints

Because the complaints in this action are similar, if not identical, two representative complaints have been selected for analysis. They are (1) Alternative Rubber & Plastics, Inc. v. AAA Cooper Transportation et. al., 1:07-cv-01827 (D.D.C.), filed on October 10, 2007 (Alternative), and (2) Niagara Frontier Distribution, Inc. v. Arkansas Best Corp., 07 CV 1728 (S.D. Cal.), filed on August 31, 2007 (Niagara). The allegations in both complaints rely heavily on inferences drawn from LTL shippers parallel conduct. See, i.e., Alternative Complaint, 58-70 (alleging that defendants assessed virtual lockstep or standardized fuel surcharges based on a percentage of customers base rates and a U.S. Department of Energy index, regardless of the likely variations in defendants costs and other operational and economic characteristics); Niagara Complaint, 85-86 (same). The ultimate question under Twombly is whether, independent of the lockstep or standardized surcharges alleged in the LTL complaints, the additional allegations set forth by plaintiffs satisfy the need for something more than merely parallel behavior. Twombly, 127 S.Ct. at 1968. The following factual enhancements are invoked in the LTL complaints to augment plaintiffs parallel-conduct allegations: Early fuel surcharges assessed by LTL industry members until 2003 varied significantly from carrier to carrier, at which time

massive consolidation in the LTL industry enabled the carriers, without legitimate business justification, to arbitrarily use common indices, common timing and common trigger points as a means of generating revenues far exceeding the actual cost of fuel increases. Alternative Complaint, 46-78, 86-88; Niagara Complaint, 50-75, 83, 85. As the Alternative Complaint alleged at paragraph 54, [t]his sudden unity could only have been the result of collusion. See also Alternative Complaint, 67 (carriers parallel behavior could only be explained by an agreement to charge identical or nearly identical rates). The LTL carriers used their web sites to post their individual fuel surcharges, which served no apparent purpose other than to enable defendants to monitor and enforce the unlawful agreements. Alternative Complaint, 66; Niagara Complaint, 55, 57, 86. The LTL carriers admitted in annual reports and other public statements that the fuel surcharges did not correlate to any actual increase in the price of fuel, but were sources of revenue and profits. Niagara Complaint, 58-73; Alternative Complaint, 74-77. Defendants agreements may have been reached at industry meetings held under the auspices of the National Motor Freight Traffic Association, Inc. (a trade association of which some defendants are members), the American Trucking Association (an industry advocacy group) and other organizations. Alternative Complaint, 83-85 (emphasis supplied); Niagara Complaint, 76-79, 82. The LTL industry was until recently subject to governmental regulation that facilitated conduct considered anticompetitive under the antitrust laws; this history has made it more likely that participants in the industry would engage in non-immunized conduct involving anticompetitive conduct among competitors. Niagara Complaint, 38-49, 81; Alternative Complaint, 90102.

Given that Twombly, properly construed, does not require a savvy judge to conclude that there is probable merit to plaintiffs claims o r that a recovery by plaintiffs is likely (127 S. Ct. at 1965), these additional allegations could be considered the

something more required by the Supreme Court to suggest the existence of a plausible conspiracy, above and beyond mere parallel conduct. However, plaintiffs provide few details concerning the specific time, place, or person involved in the alleged conspiracies or the particular identity of the defendants that supposedly agreed, or when and where the illicit agreement took place. (Id. at 1970-71 and n.10). In the absence of such details, a skeptical judge might well conclude that the LTL complaints lack the degree of specificity required by Twombly. Indeed, support for this conclusion could be found in plaintiffs equivocal averment that conspiratorial agreements may have been reached at unidentified trade association meetings2 and by their hyperbolic assertion that collusion is the only inference that can be drawn from defendants uniform fuel surcharges.3 Because application of the pleading standards mandated by Twombly is an inherently subjective exercise, the judicial temperament and ideological philosophy of the trial judge is an important part of any analysis of the sustainability of a Section 1 complaint. Here, the Judicial Panel on Multidistrict Litigation transferred the LTL Shipping Services Antitrust Litigation to the United States District Court for the Northern District of Georgia, where it has been assigned to the Honorable William S. Duffey, Jr. for coordinated and consolidated pretrial proceedings. See JPML Order filed on December 20, 2007, at 2. The web site maintained by the Federal Judicial Center summarizes Judge Duffeys background as follows:
2 3

Alternative Complaint, 84; Niagara Complaint, 76 (emphasis supplied). Alternative Complaint, 54, 67. 5

Born 1952 in Philadelphia, PA Federal Judicial Service: Judge, U. S. District Court, Northern District of Georgia Nominated by George W. Bush on November 5, 2003, to a seat vacated by J. Owen Forrester; Confirmed by the Senate on June 16, 2004, and received commission on July 1, 2004. Education: Drake University, B.A., 1973 University of South Carolina Law School, J.D., 1977 Professional Career: Private practice, 1977-1978 Assistant staff judge advocate, U.S. Air Force, 1978-1981 Private practice, Atlanta, Georgia, 1981-2001 Deputy and associate independent counsel, Office of Independent Counsel Whitewater, 1994-1995 Adjunct professor, University of South Carolina, 2000 U.S. Attorney for the Northern District of Georgia, 2001-2004 Race or Ethnicity: White Gender: Male http://www.fjc.gov/servlet/tGetInfo?jid=3062 (emphasis supplied).

Judge Duffeys nomination to the federal bench was confirmed by the Senate by a vote of 93 to 0, with three senators not voting.4 Anecdotally, the Robing Room web site contains two highly subjective evaluations of Judge Duffey:

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=1 08&session=2&vote=00121 6

Judge Duffey is not fair and impartial, does not treat handicapped and/or pro se litigants equally and without prejudice. He should be impeached! I felt that he was very thorough but extremely tough in his sentencing guidelines. Went over the minimum sentencing requirements and did not follow the prosecutor's recommendations - whom, by the way, he had previously hired and trained.

http://www.therobingroom.com/Judge.aspx?ID=531 While Judge Duffeys view of the pleading requirements for Sherman Act 1 cases is not presently known, he did issue an order in October 2006 dismissing a securities class action filed by Schiffrin Barroway for failure to comply with the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. 78u-4. In re Spectrum Brands Inc. Securities Litigation, 1:05-cv-02494-WSD (Order dated Oct. 27, 2006, N.D.Ga.). Without reaching any conclusion about the merits of the allegations in Spectrum Brands and understanding the aforementioned caveat in Twombly that there is no heightened pleading requirement governing Sherman Act 1 complaints, the following statements extracted from this opinion nevertheless provide useful insight into Judge Duffeys thinking concerning the specificity necessary to sustain a class action complaint challenging the legality of corporate conduct: Plaintiffs Complaint sets forth, at most, a hypothesis that Defendants engaged in [unlawful conduct] to inflate artificially short-term quarterly sales revenue, thus boosting temporarily Spectrum Brands stock price, for the primary purpose of Spectrum Brands acquisition of United Industries and other companies. Plaintiffs present a number of generalized conclusory allegations, supplement them with a few averments of specific fact, and, from that mix, offer their conclusion that securities fraud occurred. The

PSLRA, however, requires more than a reasonable hypothesis drawn mostly from generalized observations. (Id. at 19).5 While Plaintiffs may have alleged adequately specific statements alleged to be misleading, and have generally alleged the conduct which they allege render those statements actionably misleading, they have not alleged sufficiently the circumstances of the conduct to show why each statement or omission was misleading. (Id. at 23). Plaintiffs have failed to allege adequately the who, what, when, where and how of the context of its [sic] fraud allegations tied to improper returns and revenue recognition. (Id. at 36-37).

After Judge Duffey granted leave to file an amended complaint in Spectrum Brands, Schiffrin Barroway filed a motion to lift the PSRLA stay of discovery to permit it to obtain confidential information and to extend the deadline for filing a revised complaint. By Order dated May 18, 2007,6 Judge Duffey denied the motion and rendered final his dismissal of the action. Earlier, in NDC Health Corp. v. Garfield, Case No. 1:04-cv-0970 (Order dated July 27, 2005),7 affd, 466 F.3d 1255 (11th Cir. 2006), Judge Duffey had dismissed a substantively similar securities fraud complaint, and he chastised counsel for plaintiffs in Spectrum Brands for disregarding the precedent that he established. Id. at 3 n.1 (Several of the attorneys representing the plaintiff class in the present action represented the plaintiff class in Garfield. Plaintiffs had actual notice of how this Court and the Eleventh Circuit interpret the specificity requirements of the PSLRA before they filed their amended consolidated complaint).

The October 26, 2006 Order in Spectrum Brands is attached to the electronic version of this memorandum at Exhibit A [click on Adobe Acrobat text]. Hard copies of the exhibits to this memo are available upon request. 6 The May 18, 2007 Order in Spectrum Brands is attached to the electronic version of this memorandum at Exhibit B. 7 A copy of this Order is annexed here at Exhibit C. 8

The dismissal Order in NDC demonstrates that Judge Duffey views his role at the pleading stage of litigation as a gatekeeper against frivolous class actions against corporate interests. See NDC Order dated July 27, 2007, at 16, quoting, Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir. 1994) (a pre-PSLRA case) (The heightened pleading requirements under the PSLRA serve important ends: . [They] provid[e] defendants with fair notice of the plaintiffs claim, protect[t] defendants from harm to their reputation and goodwill, reduce[e] the number of strike suits, and preven[t] plaintiffs from filing baseless claims and then attempting to find unknown wrongs). With this as Judge Duffeys articulated judicial philosophy, any class action complaint challenged by defendants will likely receive very close scrutiny. Any complaint that does not provide abundant detailed facts concerning the who, what, when, where and how of corporate misconduct is a prime candidate for dismissal. In this regard, it would not be unreasonable to expect that Judge Duffey might be disinclined to sustain the LTL complaints described in this memorandum. # # #