The Supreme Court’s 2007 opinion in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), considered a Rule 12(b)(6) motion to dismiss in an antitrust case where the plaintiff alleged an illegal conspiracy under section 1 of the Sherman Act. The Court defined the narrow question before it as “whether a §1 complaint can survive a motion to dismiss when it alleges that [the defendants] engaged in certain parallel conduct unfavorable to competition, absent some factual context suggesting agreement, as distinct from identical, independent action.” Id. at 548–49. In a 7–2 decision, the majority in Twombly held that the district court properly dismissed the complaint.
In addition to “retiring” the famous “no set of facts” pleading standard from Conley v. Gibson, 355 U.S. 41, 45–46 (1957), Twombly introduced the concept of “plausibility” as the dividing line between complaints that do and do not state a claim. Under the Twombly pleading standard, “a plaintiff’s obligation to provide the grounds of his entitlement to relief requires more than labels and conclusion(s), and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Instead, a plaintiff must allege more than simply conceivable conduct, but also “enough facts to state a claim for relief that is plausible on its face.” Id. at 570 (emphasis added). Leaving wide discretion to trial courts, Twomblycreated a subjective test that balances the permissive pleading standards of Federal Rule of Civil Procedure 8 against the desire to control expensive litigation costs in questionable suits.
Following Twombly, the lower courts were divided in their attempts to discern the level of factual specificity that is needed to satisfy the “plausibility” requirement, and it became clear that the Court would have to revisit the pleading obligations of Rule 8. Just two terms later, the Supreme Court did that in Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009). Initially viewed by some as a qualified-immunity case, Iqbal was decided instead on Rule 12(b)(6) grounds. The Court concluded that the plaintiff’s complaint—which alleged, among other things, that former Attorney General John Ashcroft and former FBI director Robert Mueller had created and implemented an unconstitutional detention policy—simply failed to state a claim. In doing so, the Court held as follows:
The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully. . . . When a complaint pleads facts that are merely consistent with a defendant’s liability, it stops short of the line between possibility and plausibility of entitlement to relief.
Iqbal, 129 S. Ct. at 1949.
Neither Twombly nor Iqbal purports to deviate from the Rule 12(b)(6) standard of reviewing pleadings in a light most favorable to the plaintiff as non-movant, but they undeniably have increased the pleading burden on plaintiffs. Prior to Twombly and Iqbal, a plaintiff only had to “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Conley, 355 U.S. at 47. Now a plaintiff’s burden has been heightened from “fair notice” to a requirement of “plausibility,” and it can be more difficult to predict whether a claim for relief will survive past the initial motion-to-dismiss phase of a case. Given the lack of any clear standards for determining the minimum facts that must be alleged for a claim that is “plausible” on its face, plaintiffs generally must look for guidance on a claim-by-claim, and often court-by-court, basis.
Similar to the claims and facts in Twombly, many of the more recent antitrust cases involving motions to dismiss have involved section 1 claims and the issue of whether the plaintiff sufficiently alleged facts that make the existence of a conspiracy plausible. Courts also have relied on Twombly in deciding motions to dismiss involving other antitrust issues, such as standing and causation, market definition, and market power. Very few courts, however, have applied Twombly in cases where the plaintiff asserted a Sherman Act section 2 claim based on bundling or bundled discounts.
This article specifically focuses on the pleading standards for a section 2 monopolization claim based on a multi-product seller’s exclusionary conduct in offering price discounts or rebates for a group of products purchased as a bundle. Section 2 of the Sherman Act prohibits monopolization and attempted monopolization. Monopolization requires proof of (1) the possession of monopoly power in a market, (2) the willful acquisition or maintenance of that power, and (3) causation of antitrust injury. Attempted monopolization requires proof that (1) the defendant has engaged in anticompetitive conduct with (2) the specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.
Both types of section 2 claims require proof of an antitrust injury, and bundled discounts are one type of conduct sufficient to satisfy that essential element of a monopolization or attempted monopolization claim. But because few courts have addressed bundling in great depth, and even fewer have done so at the motion-to-dismiss phase, it is difficult for antitrust plaintiffs to predict what any given court will require them to plead to survive a motion to dismiss and move on to the discovery phase of the litigation.
Bundling Claims Generally
Perhaps courts have struggled to define anticompetitive bundling because there is no bright line between procompetitive and anticompetitive bundled discounts. Consumers like discounts and, to some extent, have grown to expect them. Additionally, offering a bundled discount can be an effective tool for introducing a new product into the market or to generate interest in a product that has not yet become popular.
The four most recognized tests for anticompetitive bundling are discussed by Jeffrey A. Jaeckel in his article entitled “LePage’s, Cascade Health Solutions, and a Bundle of Confusion” As described in this article, four distinct bundling tests have evolved: (1) the Third Circuit’s LePage’s test, (2) the Brooke Group predatory pricing test, (3) the Antitrust Modernization Commission’s test, and (4) the Ninth Circuit’s Cascade Health Solutions test.
In LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc), the Third Circuit was the first to recognize a claim for section 2 bundled discounting. Under the LePage’s test, bundled discounts are anticompetitive if they (1) have the effect of expanding a monopolist’s share in one or more competitive product markets, and (2) lack a clear and legitimate business justification. Id. at 163–64. The test does not require a plaintiff to prove that the discounted prices in question are below any reasonable measure of cost.
Some commentators (and several antitrust defendants) have advocated a bundled-discount test that is similar to the predatory-pricing test articulated in Brooke Group, Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). This variation of the Brooke Group test treats a bundle of products as a single product, and compares the bundle’s aggregate price with the seller’s total incremental cost in producing the entire bundle. The bundled pricing is deemed to be anticompetitive only when the entire bundle is offered for an aggregate price that is lower than the total incremental cost to produce the bundle.
Another variation of the bundling test was proposed by the Antitrust Modernization Commission (AMC). Under this three-part test, bundling is deemed to be anticompetitive if (1) all of the discounts and rebates on the bundle of products, when applied to the competitive product, cause that product to be sold below its incremental cost; (2) the antitrust defendant likely will recoup any short term losses; and (3) the bundled discounts and rebates likely will have a negative effect on competition.
Finally, the Ninth Circuit in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008), took a middle path between the AMC test and the test used in LePage’s. Under the Cascade Health Solutions test, “the exclusionary conduct element of a claim arising under § 2 of the Sherman Act cannot be satisfied by reference to bundled discounts unless the discounts result in prices that are below an appropriate measure of the defendant’s costs.” Id. at 903. The Ninth Circuit went on to endorse the AMC’s recommended price/cost attribution test for determining the defendant’s “appropriate measure of costs,” though it chose not to adopt the second and third prongs of the AMC test.
With at least four different tests available for determining the legality of bundled discounts, the state of the law as it relates to this type of section 2 claim is, to say the least, up in the air. And until the Supreme Court provides some guidance on the proper test for bundled discounts, plaintiffs will face continued uncertainty in knowing what minimum facts to plead. While there are relatively few lower-court opinions that go into much detail concerning the pleading standard for monopolization claims based on bundling, there are a handful cases that are particularly informative for plaintiffs bringing such claims.
The Blue Sky and Retractable Technologies Cases
One of these instructive opinions was issued by the Central District of California in Blue Sky the Color of Imagination, LLC v. Mead Westvaco Corp., No. CV 10-02175, 2010 WL 4366849, at *1, *4 (C.D. Cal. Sept. 23, 2010). The Blue Sky case involved an antitrust dispute between two competitors in the market of “dated goods,” such as calendars and day planners. Blue Sky only sold dated goods, but Mead sold dated goods and school supplies. In its complaint, Blue Sky alleged that Mead, which controlled approximately 90 percent of both the dated-goods and school-supplies markets, sold both types of products at a bundled price to Office Max, thereby excluding Mead’s competitors from Office Max because the bundled price was lower than the separate prices Mead charged if the dated goods and school supplies were sold individually. Specifically, Blue Sky asserted that Mead’s discounts were “de facto exclusive dealing” and that if “all of Mead’s discounts on school supplies are applied to Mead’s dated goods, Mead is selling dated goods to Office Max at below cost.”
In response to Blue Sky’s complaint, Mead filed a Rule 12(b)(6) motion to dismiss for failure to state a claim. Relying on Cascade Health Solutions, among other cases, Mead argued that Blue Sky’s complaint did not sufficiently allege anticompetitive conduct because it did not provide “sufficient facts about Mead’s prices, revenues, or incremental costs.” The district court, after finding that Blue Sky adequately alleged sufficient market power and injury to competition, went on to hold that Blue Sky also adequately pleaded anticompetitive conduct. The court rejected Mead’s reliance on its cited cases because they did not involve motions to dismiss “antitrust claims under Rule 12(b)(6).” It went on to find that Blue Sky’s allegations that “Mead entered into an exclusive dealing contract with the intent and effect of excluding all rivals from certain office superstores” and “that Mead uses a bundling pricing scheme to sell dated goods below cost” were “not bare legal conclusions” and “sufficient to withstand a motion for dismissal.” Interestingly, the district court did not require Blue Sky to plead all of the bundling-claim elements articulated in Cascade Health Solutions despite the fact that the court was bound to follow the controlling precedent of the Ninth Circuit.
The Eastern District of Texas also issued an instructive opinion in Retractable Technologies, Inc. v. Becton Dickinson & Co., No. 2:08-cv-00016, slip op. at 19–20 (E.D. Tex. Mar. 15, 2011). In that case, Retractable Technologies, Inc. (RTI) and Becton Dickinson (BD) were competitors in the market for various needle products used by acute-care hospitals and other healthcare providers. BD also manufactured and sold other medical-device products purchased by hospitals. RTI’s complaint alleged that BD used “multi-year rebating, loyalty discounts, bundling arrangements, and other loyalty sales incentives and payments” that allegedly “keep the doors of acute care facilities firmly shut and in BD’s control.” RTI also asserted that “upon information and belief, BD’s bundled rebates . . . are exclusionary because after the full amount of BD’s rebates given on all bundled products are allocated to the safety needle devices, BD’s resulting price is below its production costs for its safety needle devices.”
BD responded to the allegations in the complaint by filing a motion to dismiss. The district court denied BD’s motion and held that RTI’s bundling claim was pleaded sufficiently under Rule 8. In doing so, the court recognized that it is difficult for antitrust plaintiffs to plead such claims with great specificity because the details of the alleged bundling “are in the hands of the alleged conspirators” and “dismissals prior to giving the plaintiff ample opportunity for discovery should be granted very sparingly.” Id. (citing Hosp. Bldg. Co. v. Trustees of Rex Hosp., 425 U.S. 738, 746 (1976); Blue Sky, 2010 WL 4366849, at *4).
Pleading Requirements May Be Instructive
Although only a handful of opinions have analyzed motions to dismiss bundling claims, predatory-pricing claims have been the subject of numerous motions to dismiss. Predatory-pricing claims and bundled-discount claims are similar because they both involve issues related to below-cost pricing (at least in jurisdictions that do not follow the LePage’s test). Thus, predatory-pricing cases can offer plaintiffs valuable guidance on what their pleadings should contain to survive a motion to dismiss.
In Brooke Group, the Supreme Court determined that a claim for predatory pricing requires proof that (1) “the prices complained of are below an appropriate measure of its rival’s costs” and (2) “there is a ‘dangerous possibility’ that the defendant will be able to recoup its ‘investment’ in below-cost prices.” Brooke Group, 509 U.S. at 222. Although a plaintiff must prove that the defendant priced goods below cost under the Brooke Group test, this requirement has not been applied consistently among courts in determining the sufficiency of pleadings on a motion to dismiss. In some cases, courts require strict allegations of how a defendant’s alleged predatory pricing is below cost, whereas other courts take a more liberal approach to the below-cost requirement of predatory pricing, refusing to dismiss a plaintiff’s claim that pricing is generally “below cost” if it is supported by some sort of rational justification.
As an example of the stricter approach, the District of Utah explained that “in this circuit the plaintiff must allege that predatory prices be below the ‘average variable cost’ or some other appropriate alternate measure of ‘marginal costs’ without including fixed costs or fully allocated costs.” Philips Elecs. N. Am. Corp. v. BC Technical, Inc., No. 2:08-cv-639, 2009 WL 2381333, at *2 (D. Utah Aug. 3, 2009) (quoting United States v. AMR Corp., 335 F.3d 1115, 1115–16 (10th Cir. 2003)). The district court went on to hold that the plaintiff’s allegations that the defendant offered repair and maintenance services “at prices deliberately calculated to be below those which” the plaintiff was able to offer, while “at the same time . . . maintaining higher prices for maintenance and repair services in markets where” the plaintiff is not active, did not pass muster. The court determined it was “just as plausible” that the defendant had efficiencies within its system that allowed it to offer lower prices than the plaintiff but still be profitable, as it was that the defendant was offering prices below its average variable cost or some other appropriate measure of cost.
Similarly, the Southern District of New York held that a plaintiff did not plead predatory pricing sufficiently because it did not allege facts demonstrating that the defendant’s pricing was below an appropriate measure of its costs. Astra Media Group, LLC v. Clear Channel Taxi Media, LLC, 679 F. Supp. 2d 413, 425 (S.D.N.Y. 2009), rev’d in part on other grounds, 414 F. App’x 334, 336–37 (2d Cir. 2011) (affirming the district court’s dismissal of the plaintiff’s section 2 claim, but vacating dismissal of the plaintiff’s state-law claims and ordering the court to remand those claims to state court). The district court found that the plaintiff’s complaint, which was based on “its own understanding of the industry standard of the cost per unit,” fell short of the required allegations necessary to survive a motion to dismiss because it did not set out any information as to what the defendant actually bid for the contract or what the cost of the advertising was to the defendant.
In contrast to these two cases, the District of New Jersey in Banxcorp v. Bankrate, Inc., No. 07-3398, 2008 WL 5661874, at *7–8 (D.N.J. July 7, 2008), determined that a plaintiff’s pleadings were “sufficient to infer plausibility” of the necessary predatory pricing elements by alleging that the defendant charged “below its average variable cost” and providing “specific rationale and justification as to how it reached the conclusion.” The plaintiff’s “rationale” was based on allegations that the defendant’s “competitors, including Plaintiff, were forced to switch from a flat fee structure to an unreasonably low and unsustainable CPC [cost-per-click] pricing structure, nibbling and scrambling for whatever few clicks remain on the market to be able to match [the defendant’s] pricing.”
Because the requirements for predatory-pricing claims and bundling claims involve similar allegations that a defendant sells products below cost (at least in some jurisdictions), the requirements a court imposes on plaintiffs in pleading claims for predatory pricing are likely to be indicative of how the same court will approach a claim for bundling.
Requiring a Plaintiff to Plead Facts about the Defendant’s Costs
If a plaintiff asserting bundling claims is required to plead specific facts that a defendant sells bundled products below some measure of the defendant’s costs, this usually will present a significant problem for the plaintiff. An antitrust plaintiff typically will not have access to detailed information about a defendant’s business operations—such as its costs—at the time the plaintiff files suit. This difficulty was recognized by the courts in Blue Sky and Retractable Technologies, as well as by other courts. See, e.g., In re Hypodermic Prods. Antitrust Litig., No. 05-CV-5891, 2007 WL 1959224 (D.N.J. June 29, 2007).
Often an antitrust plaintiff will become aware of the effects of a defendant’s anticompetitive conduct without having access to direct proof of any wrongdoing. Because of this, courts may be reluctant to require allegations of a defendant’s below-cost pricing in a bundling case before the plaintiff has an opportunity to take some discovery. As in the Banxcorp case, however, it is much more likely that a plaintiff will be able to survive a motion to dismiss if it can allege in the complaint how the defendant’s alleged anticompetitive conduct has affected the plaintiff, and the surrounding facts that make it plausible that this is due to the defendant selling its product at below cost.
A Realistic Either/Or Approach
A realistic approach for dealing with the plaintiff’s difficulty in alleging facts within the possession of the defendant was adopted by the Southern District of New York in Ortho Diagnostics Systems, Inc. v. Abbott Laboratories, Inc., 920 F. Supp. 455 (S.D.N.Y. 1996). In that case, a manufacturer of devices used to screen blood for viruses brought an antitrust action against its competitor. The court’s analysis distinguished price cutting generally—which is typically thought of as a good thing and a healthy sign of competition—with “price cutting that threatens equally or more efficient firms”— which is the type of conduct “condemned under Section 2.”
The plaintiff in Ortho Diagnostics contended that the defendant was a monopolist that (1) faces competition on only part of a complementary group of products, (2) offers the products both as a package and individually, and (3) effectively forces its competitors to absorb the differential between the bundled and unbundled prices of the product in which the defendant has market power. Based on these contentions, the district court held that the plaintiff must allege and prove either that the defendant has priced below its average variable cost or that the plaintiff is at least as efficient a producer of the competitive product as the defendant, but that the defendant’s pricing makes it unprofitable for the plaintiff to continue to produce. The court went on to say that “[a]ny other rule would entail too substantial a risk that the antitrust laws would be used to protect an inefficient competitor against price competitionthat would afford substantial benefits to consumers.” After applying this test, the court granted the defendant’s summary judgment denying the plaintiff’s bundling claims because the plaintiff conceded that the defendant’s “prices [were] above its average variable costs” and also conceded—by not claiming otherwise—that the defendant’s “package leaves [the plaintiff] able to sell its products at a profit, albeit not as large a profit as previously.” Id. at 469–70.
The court’s test in Ortho Diagnostics may be the best approach for balancing (a) the plaintiff’s ability to plead a bundled-discount claim without evidence of the defendant’s costs, with (b) the defendant’s desire to avoid costly litigation when it is simply offering procompetitive discounts and rebates. As recognized by the Eastern District of Texas in Retractable Technologies, often an antitrust violator carefully guards evidence of its anticompetitive practices. Therefore, an equally efficient competitor may not know the exact pricing structure or costs relevant to the antitrust violator’s business to plead those specifically, but the plaintiff may know enough to recognize that the violator’s practice is harmful to competition.
The Ortho Diagnostics test, however, has not been adopted widely by other courts. In fact, in announcing the “discount attribution test,” the Ninth Circuit in Cascade Health Solutionsrejected Ortho Diagnostics because it is based on the actual plaintiff’s costs—which the defendant has no way of knowing—and instead adopts a standard that is based on a hypothetical equally efficient producer.
The future of bundling claims is in limbo for now. A plaintiff’s ability to rely on anticompetitive bundling will largely depend on how specifically courts require plaintiffs to plead evidence of a defendant’s costs or other information not readily available prior to discovery. But if Blue Sky, Retractable Technologies, and Banxcorp are a good indication of the level of specificity that courts will require, then it is likely that a plaintiff’s general allegations of a defendant’s costs, with a specific rationale as to how the plaintiff reached its conclusions, will be sufficient to state a plausible claim for section 2 bundling.
Keywords: litigation, antitrust litigation, bundling, exclusionary conduct, monopolization, Twombly, pleading standards, motion to dismiss, predatory pricing