Do firms conspire by having governance rights in an association?

Now that I'm done blogging about the antitrust professors' amicus brief I wrote for the Fifth Circuit in Teladoc v. Texas Medical Board, let me talk briefly about an antitrust professors' amicus brief I joined in Visa Inc. v. Osborn. The brief was prepared by the good folks at WilmerHale; the counsel of record is Seth Waxman, and one of the lawyers on the team is my law school classmate Daniel Volchok (no relation).

As is only appropriate for this blog, the issue is conspiracy! The question in Visa Inc. v. Osborn is:

Whether allegations that members of a business association agreed to adhere to the association's rules and possess governance rights in the association, without more, are sufficient to plead the element of conspiracy in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, as the court of appeals held below, or are insufficient, as the Third, Fourth, and Ninth Circuits have held.

Our amicus brief argues the following:

The D.C. Circuit held in this case that a plaintiff can plausibly plead a horizontal conspiracy among competitors in violation of section 1 of the Sherman Act merely by claiming (in addition to conclusory and unsupported allegations of agreement) that members of a business association have governance rights in the association and agreed to adhere to its rules. Amici submit that this holding is inconsistent with this Court's precedent requiring plaintiffs, in order to allege an illegal agreement, to plead facts plausibly suggesting collusion among the defendants to achieve a common unlawful objective. The approach approved by the court of appeals would mean that every business that participates in the affairs of a business association can be subjected to expensive discovery concerning an allegedly anticompetitive rule of the association so long as the plaintiff makes a bare assertion of horizontal agreement. That would discourage beneficial business-association activities, to the detriment of businesses and consumers alike.

Here's the first part of the brief:

I. Business Associations Yield Important Consumer Benefits, and Hence Antitrust Law Should Distinguish Between Concerted Conduct and Mere Participation in Business-Association Activities

A. As both courts and antitrust-enforcement agencies have recognized, collaboration among industry participants in the form of business associations frequently has "decidedly procompetitive effects." SD3, LLC v. Black & Decker (U.S.) Inc., 801 F.3d 412, 435 (4th Cir. 2015), cert. denied, 136 S. Ct. 2485 (2016). These effects include "greater product interoperability" and "incentives to innovate." Princo Corp. v. ITC, 616 F.3d 1318, 1335 (Fed. Cir. 2010); see also Federal Trade Commission, Spotlight on Trade Associations ("Most trade association activities are procompetitive[.]"). As the leading antitrust treatise puts it, "joint innovation often produces significant social benefits in relation to costs." 13 Areeda & Hovenkamp, Antitrust Law ¶ 2115a, at 112 (3d ed. 2012). And this Court itself observed long ago that business associations are "beneficial to [] industry and to consumers." Maple Flooring Mfrs. Ass'n v. United States, 268 U.S. 563, 566 (1925).

That observation makes sense: As Judge Wilkinson has explained, "many minds may be better than one. Joint ventures … and trade association meetings may allow individuals of different specialties to benefit from each other's expertise," enabling "efficient and effective product development." SD3, 801 F.3d at 455 (concurring in part and dissenting in part). "Those efficiencies in turn generate reduced costs of doing business that can then be passed along to the consumer in the form of reduced prices and better products." Id.

Specific instances of these benefits of collaboration are easy to identify. "To take but one example, industry-wide coordination has been a driving force for technological progress in American semiconductor manufacturing." SD3, 801 F.3d at 454 (Wilkinson, J., concurring in part and dissenting in part). The ATM networks at issue here provide another example. Absent cooperation among banks, customers wishing to withdraw cash from their accounts would be limited to using an ATM run by their own institutions. An ATM network gives customers the convenience of using an ATM operated by another bank (or other owner), virtually anywhere in the world. See Hayashi et al., A Guide to the ATM and Debit Card Industry 7 (2003) (noting the importance of "national networks," such as the Visa and MasterCard networks, in linking smaller ATM networks to ensure accessibility). To provide that convenience, ATM networks need rules that govern the interactions both among members of the network and between the network and third parties, such as ATM owners. See, e.g., In re ATM Fee Antitrust Litig., 554 F. Supp. 2d 1003, 1015 (N.D. Cal. 2008) ("rules establishing hours of availability, ATM functionality standards, and ATM card standards [are] central to the functioning of an ATM network"). And given the proliferation of competing ATM networks, individual networks-whether organized as associations or single entities-need latitude to adopt rules and policies designed to enhance their competitiveness with rival networks. See Hayashi, supra p. 3, at 50-51 (describing "competitive battlegrounds" in the ATM-network industry).

B. To avoid deterring the collaboration that yields these benefits for consumers, the courts of appeals have closely scrutinized complaints to determine whether they adequately allege an illegal agreement, which is necessary for section 1 of the Sherman Act to apply. In particular, courts have refused to subject business-association members to liability based solely on their participation in the association's activities, including participating in its governance structure and deciding to adhere to the rules of the association. As one court explained in upholding the dismissal of a section 1 complaint, while "[a] trade association by its nature involves collective action by competitors[,] . . . [it] is not a 'walking conspiracy.'" Viazis v. American Ass'n of Orthodontists, 314 F.3d 758, 764 (5th Cir. 2002) (alterations in original) (internal quotation marks omitted). Or as another put it in affirming summary judgment, "although the nature of trade associations is such that they are frequently the object of antitrust scrutiny, every action by a trade association is not concerted action by the trade association's members." AD/SAT, Div. of Skylight, Inc. v. Associated Press, 181 F.3d 216, 234 (2d Cir. 1999) (per curiam) (citation omitted).

More specifically, courts have held that "membership in an association does not render an association's members automatically liable for antitrust violations committed by the association." Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048 (9th Cir. 2008). Indeed, the court of appeals here recognized this, stating that "mere membership in associations is not enough to establish participation in a conspiracy with other members of those associations." Pet. App. 20a. Courts have further recognized that "[e]ven participation on the association's board of directors is not enough by itself" to create liability. Kendall, 518 F.3d at 1048.

Instead, courts have held that to avoid dismissal a complaint must "forecast [the required] factual showing," SD3, 801 F.3d at 422, namely that "association members, in their individual capacities, consciously committed themselves to a common scheme designed to achieve an unlawful objective," AD/SAT, 181 F.3d at 234. Put differently, a complaint must allege how each of the "defendants was involved in the alleged conspiracy" without relying on "indeterminate assertions" against all "defendants." In re Travel Agent Comm'n Antitrust Litig., 583 F.3d 896, 905 (6th Cir. 2009).

Consistent with these decisions, the "few cases" finding that members of a business association colluded in violation of section 1 involved a showing that the challenged rule or standard promulgated by the association "'was deliberately distorted by competitors of the injured party, sometimes through lies, bribes, or other improper forms of influence, in addition to a . . . showing of market foreclosure.' " SD3, 801 F.3d at 436 (quoting DM Research, Inc. v. College of Am. Pathologists, 170 F.3d 53, 57-58 (1st Cir. 1999)). "In other words, a plaintiff must ordinarily show that the . . . activity had a market-closing effect that was committed 'through the use of unfair, or improper practices or procedures.' " Id. (quoting Clamp-All Corp. v. Cast Iron Soil Pipe Inst., 851 F.2d 478, 488 (1st Cir. 1988) (Breyer, J.))).

At the petition stage, respondents claimed (Opp. 13 n.5) that the Fourth Circuit's description in SD3 (which respondents called "Sawstop") of what is required to state and prove an illegal agreement under section 1 applies only in the narrow context of industry standard-setting organizations. They cited no language from the decision, however, to support that reading. Nor do they point to any distinction between the business association context here and standard-setting organizations that justifies applying a differing legal standard to allegations of illegal collusion. As this Court has instructed, evaluating whether competitors have engaged in concerted action for section 1 purposes requires a flexible, functional analysis of the economic consequences of their particular business arrangements, and must not be based on distinctions without a difference. See American Needle, Inc. v. National Football League, 560 U.S. 183, 192-196 (2010). Respondents' proposed distinction also makes little sense given that a wide variety of business and trade associations are called upon to set "standards" for group members. For example, in Consolidated Metal Products, Inc. v. American Petroleum Institute, 846 F.2d 284 (5th Cir. 1988), the court rejected conspiracy allegations based on a trade association's product approval programs, observing that "it has long been recognized that the establishment and monitoring of trade standards is a legitimate and beneficial function of trade associations." Id. at 293-294; see also Hassan v. Spicer, 2006 WL 228958, at *4 (E.D.N.Y. Jan. 31, 2006) (similarly for laboratory-accreditation organization), aff'd, 216 F. App'x 123 (2d Cir. 2007). Finally, the formulation in SD3 simply characterizes what this Court has long held is required to prove an illegal agreement: a conscious commitment to achieve an unlawful objective. Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984).

C. The court of appeals decisions cited in the previous subsections are consistent with this Court's precedent. For example, in Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988), the defendant was found to have conspired with others to "subvert" the voting process for an industry standard in order achieve their common goal of excluding a competitive product. Id. at 498. The plaintiff had proved (and therefore was or should have been required to plead) that the defendant did far more than participate in the governance of the association and adhere to the association's rules; the defendant had colluded with others in a scheme aimed at misusing the association processes for the purpose of achieving a common illegal objective. Similarly, in American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982), an industry-standards association was found to have violated section 1 based on its agents' collusion with a supplier of heating boiler safety devices to misuse the association's processes to exclude a rival supplier. Id. at 560-562. Nothing similar has been pled here.

More recently-and more generally-this Court held in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), that to state a claim under section 1, a plaintiff must allege "enough factual matter (taken as true) to suggest that an agreement was made." Id. at 556. A section 1 complaint, that is, must plausibly allege concerted action on the part of each defendant. And to show concerted action, the Court explained previously, a plaintiff must allege that there is a "conscious commitment to a common scheme designed to achieve an unlawful objective" among each member of the alleged conspiracy. Monsanto, 465 U.S. at 764 (internal quotation marks omitted).

To state a claim that members of a business association engaged in an antitrust conspiracy, then, a plaintiff must allege facts plausibly suggesting that each member consciously committed to pursue a common illegal objective with other members. Allegations that members of a business association agreed to adhere to an association's rules, or participate in the association's governance, do not by themselves meet this standard, because such allegations are consistent with "merely parallel conduct that could just as well be independent action." Twombly, 550 U.S. at 552; see also Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ("Where 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.'" (quoting Twombly, 550 U.S. at 557)).

Moreover, unless Twombly is rigorously applied, the happenstance of an organizational structure that makes members easy targets for unsupported claims of horizontal collusion will dissuade business associations from establishing rules that enable them to compete most effectively with their rivals and thereby benefit consumers. That would contravene this Court's insistence that Section 1 was not designed to "chill[] vigorous competition through ordinary business operations" or lead to "judicial scrutiny of routine, internal business decisions. American Needle, 560 U.S. at 190. But it would also undermine the fundamental principle that entities must be free to organize in the form that best "serve[s] efficiency of control, economy of operations, and other factors dictated by business judgment," and not be forced to contort their structure to address arbitrary antitrust distinctions that are not well-grounded in economic principles. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 773 (1984).

Finally, proper application of Twombly's gatekeeping standards in the business association context is critical because, as the Court observed in that case, "proceeding to antitrust discovery can be expensive." 550 U.S. at 558. Indeed, "discovery in antitrust cases frequently . . . gives the plaintiff the opportunity to extort large settlements even when he does not have much of a case." Kendall, 518 F.3d at 1047. These concerns are particularly salient when the conspiracy allegations rest solely on the defendant's participation in a business association. Because such associations necessarily involve some collective action by competitors, plaintiffs may be quick to claim an antitrust conspiracy whenever they do not like an association rule. Strict enforcement of Twombly is thus necessary to avoid burying associations and their members in discovery over meritless claims. See, e.g., Consolidated Metal, 846 F.2d at 288 (baseless allegation of collusion based on the actions of a standard-setting organization led to two years of discovery). Failing to do so "would stifle the beneficial functions of such organizations," Golden Bridge Tech., Inc. v. Motorola, Inc., 547 F.3d 266, 273 (5th Cir. 2008), and chill "product development, innovative joint ventures, and useful trade association conclaves," SD3, 801 F.3d at 443.