It’s good to be back at Overlawyered. For those of you not scarred by my prior guest-blogging stint, this is Skip Oliva, director of the anti-antitrust Voluntary Trade Council, regular co-blogger for the Mises Institute, and freelance paralegal-for-hire.

Since antitrust is my bread and butter, I’ll spend some time this week examining the impact of the four antitrust cases decided in the last Supreme Court term. I’ll also discuss some lesser-known antitrust cases that I’ve been following (and in some cases, directly participating in); and maybe I’ll even address some purely non-antitrust legal topics as well.

But let’s start with—you guessed it—an antitrust case. Last week the U.S. Third Circuit Court of Appeals decided Cosmetic Gallery, Inc. v. Schoeheman Corporation (download PDF), one of the first appellate decisions that relies on the Supreme Court’s May decision in Bell Atlantic v. Twombly. In Twombly, a 7-2 court held that a complaint alleging a conspiracy to restrain trade under Section 1 of the Sherman Act required more than “an allegation of parallel conduct and a bare assertion of conspiracy”; there must be “enough factual matter (taken as true) to suggest that an agreement was made.”

In the Third Circuit case, a New Jersey company that operates hair salons and retails related hair care products (Cosmetic Gallery) sued a Pennsylvania distributor of said products (Schoeneman). Specifically, the issue is “salon-only” products that are normally sold, as the name suggests, only through salons. Distributors like Schoeneman agree to manufacturers’ restrictions on the sale of these products to, according to the Third Circuit, “increase the cachet and prestige” of the products.

Schoeneman wouldn’t sell salon-only products to Cosmetic Gallery, because the retailer and its principal owner had a history of selling “diverted” salon-only products outside of salons, and Cosmetic Gallery’s actual salon sales did not meet the manufacturer’s requirements for salon-only distribution.

Cosmetic Gallery claimed Schoeneman led an illegal “group boycott” to prevent Cosmetic Gallery from entering into deals with any salon-only products distributor. Of course, Cosmetic Gallery offered no direct and little circumstantial evidence to support its claim: The “smoking gun” was a hearsay account of a conversation that Cosmetic Gallery’s owner claimed took place between a Schoeneman executive and another distributor, who contradicted the plaintiff’s account in a deposition.

Following Twombly, the Third Circuit affirmed the district court’s grant of summary judgment to Schoeneman. At best, the court held, Cosmetic Gallery’s allegations proved nothing more than “conscious parallelism”—a fancy antitrust way of saying that Schoeneman and other salon-only distributors decided independently not to deal with Cosmetic Gallery. A conspiracy, it turns out, requires some evidence of, well, conspiracy. The Third Circuit cited this passage from Twombly in a footnote:

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 entitlement to relief.

The argument against this rule maintains that since a presumably secret conspiracy gave rise to the antitrust injury, it’s often impossible for well-meaning plaintiffs to provide many specifics at the pleading stage. Discovery is necessary to fill in the blanks. In Twombly, Justices Stevens and Ginsburg dissented, holding that such specifics should not be required to survive a motion to dismiss. In Cosmetic Gallery’s case, though, the district court granted summary judgment after determining that no set of facts could allow a finding of something other than unilateral conduct by Schoeneman, which does not violate Section 1 of the Sherman Act.

(As an aside, the jurisdictional elements of the Cosmetic Gallery case are noteworthy. Cosmetic Gallery sued Schoeneman under New Jersey’s antitrust statute; Schoeneman removed the case to federal court on diversity grounds, but the courts interpret New Jersey antitrust law under the same principles as the federal Sherman Act. Which begs the question of why have state antitrust laws in the first place.)

At its core, Cosmetic Gallery’s lawsuit was never about a group boycott or some conspiracy to restrain trade. Cosmetic Gallery simply wanted to enter the market with a different business model and compel existing firms to adopt that model, by force of law if necessary. Many if not most antitrust disputes share this premise. Although antitrust is couched in “consumer protection” terms, cases like Cosmetic Gallery’s are fights among businesses. Rather than compete openly, firms often believe it’s more expedient to hire lawyers and bring an antitrust complaint.

Twombly and Cosmetic Gallery may reassure some tort reformers by purporting to tighten pleading standards, but it’s unlikely that these cases will seriously dampen the enthusiasm (or revenues) of skilled antitrust practitioners. For one thing, the conspiracy rule only applies in Section 1 cases; unilateral conduct can still be litigated under Section 2 of the Sherman Act, which infamously bans “attempted monopolization” of a market. Indeed, the Third Circuit has been permissive in interpreting Section 2 claims, evidenced by LePage’s v. 3M, where the appeals court allowed a $68 million judgment to stand based on the then-novel premise that pricing above cost could be condemned as “predatory” when a competitor couldn’t match a discount on bundled products.

Filed under: antitrust, New Jersey, Pennsylvania