One major challenge for the telecommunications industry concerns the prospects for peaceful co-existence between direct regulation and the antitrust laws. Some direct industry oversight is needed on the matter of interconnection, such that each carrier must handle traffic generated by others. But with those rules in place, should we still keep the antitrust laws in reserve, as is explicitly done under the 1996 Telecommunications Act? Twombly v. Bell Atlantic, now before the US Supreme Court, offers a powerful object lesson of the dangers of that dual approach.
The Twombly plaintiffs have claimed that since the passage of the 1996 Telecommunications Act, the incumbent Baby Bells have participated in an ongoing conspiracy not to initiate long-distance service in each other’s territories. As stated, their complaint properly alleges an illegal division of markets that is a per se violation under the antitrust laws. But what’s the evidence that their claim is true?
Addressing that question shows why the modern rules of civil procedure are in crisis because of the basic approach they took to civil litigation in 1938. The pleadings need only the adversary notice of the charges against it. The hard work on truth is done in discovery, which allows each side to seek that smoking gun by commandeering the resources of its adversary. That approach works well enough with a simple intersection collision, but not with high stakes antitrust litigation, where defendants have to spend millions to respond to requests for documents and examination of key witnesses - for each separate antitrust claim that takes one sentence to spell out.
Troubled courts have split in deciding what to do. To be sure, frequently they grant defendants summary judgment (which averts the need for trial) at the close of discovery. But that remedy still allows extensive discovery. So some courts, but by no means all, have more aggressively ended some before discovery by holding that the plaintiff has not alleged “facts” sufficient to support his claim.
To forestall this result, antitrust plaintiffs routinely allege certain “plus factors” to bulk up their complaints. It really helps to give dates and place where company officials met to divide territories. But Twombly contains no such allegations. To be sure, the plaintiffs did allege that the defendants had ample opportunity to meet, but that’s no big deal in a regulated industry whose employees have to meet anyhow on interconnection issues. Plaintiffs also alleged that one industry CEO, Richard Notebaert, in a newspaper interview no less, said that entry by one ILEC into the territory of another “might be a way to turn a quick dollar, but that doesn’t make it right.” But the full column makes it clear that Notebaert was visibly upset at the erratic pricing decisions of the FCC that frustrated rational planning.
The plaintiffs further alleged that Congressman John Conyers pressed the Antitrust Division of the Department of Justice to investigate these antitrust claims, but the full investigation turned up nothing. And of course, plaintiffs are always prepared to offer expert testimony that entry into the territory of another firm makes business sense for individual companies in the absence of any agreement to divide territories. Yet defendants experts could offer dozens of independent business reasons why any incumbent local exchange carrier (ILEC) might stay out of places, where it has no obvious advantage over the many new telecom entrants trying to break in the same market.
The entire complaint offers no particulars whatsoever to back up the charges of the alleged conspiracy. The question is whether from a social perspective anything is to be gained by allowing the plaintiff to conduct an expensive discovery process on the off chance that it can fill in the huge gaps in the record. In this case, however, that discovery process has very little, if any likelihood, of coming up with tangible evidence of an actual conspiracy, given that both the FCC and the DOJ found no evidence of a territorial division in their own independent investigations. The errors costs are far higher in allowing the case to go forward than stopping it right now.
The US Supreme Court has not yet ruled on the case, although it has heard oral argument. Many of its earlier decisions have bent over backwards to allow discovery to continue on the strength of very weak complaints. But my guess, and hope, is that it will reject the Second Circuit’s uneasy decision to allow discovery to proceed, and side with the District Court judge who refused to allow discovery.
Think of it this way. Everything that the plaintiff alleged is doubtlessly true. At the summary judgment stage, after discovery, how then could the defendants prevail if all inferences are to be drawn against them as moving parties, when nothing they say enters into the judgment? Quite simply, if the plaintiffs win before the Supreme Court at this stage, it would be hard to put the kibosh on their case even if discovery doesn’t advance the ball an inch.
Here is one object lesson. In the epic predatory pricing case of the 1980s, Matsushita v. Zenith, the Supreme Court granted summary judgment after endless discovery. Yet nothing unearthed in discovery mattered to its decision. The Court just held that none of the allegations in that complaint explained how the defendants could make a business profit by practicing predatory pricing. And for two reasons. First, the costs of driving out the business with low prices is huge to firms that have to suffer large losses on each sale. Second, none of these losses could have been recouped by raising prices thereafter, because new entrants would quickly reduce prices to the competitive level.
Twombly offers the same story for a regulated industry. Right now the entire structure of discovery needs a major overhaul for antitrust cases. That is doubly true in the telecommunications industry, which faces extensive direct regulation. The Supreme Court should take the first step on that long journey by sending the Twombly plaintiffs packing.
Richard A. Epstein is the James Parker Hall Distinguished Service Professor at the University of Chicago, and the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution. He has consulted for Verizon on various telecommunications matter, and has signed a amicus curiae brief in the Supreme Court urging reversal of the case. His article on Twombly can be found at the AEI Brookings Joint Center