Litigation and Trial - Max Kennerly : Philadelphia Trial Lawyer Max Kennerly : Business and Commercial Litigation : Civil Attorney : The Beasley Firm : Philadelphia Pennsylvania

Last week, after more than a year of drafting following oral argument, and nearly two years after the original District Court order, a Third Circuit panel (Chief Judge Scirica and Judges Fisher and Greenberg) issued their magnum opus on pleading Section 1 antitrust violations after Twombly and RICO Act "enterprises" after Boyle in the consolidated Multi-District Litigation In re: Insurance Brokerage Antitrust Litigation.

The plaintiffs alleged a massive, "global" conspiracy among the major insurance companies and insurance brokers to artificially allocate customers and rig prices for commercial insurance:

(Here's the First Amended Complaint; the Second Amended Complaint was, I believe, sealed).

§ 1 of the Sherman Act and § 1962 of the RICO Act are almost constitutional in their breadth and power. Here's the relevant part of § 1 of the Sherman Act:

And here's § 1962(c) of the RICO Act:

Such breadth is a blessing and a curse for plaintiffs; like with the Bill of Rights, § 1 of the Sherman Act and § 1962 of the RICO Act are so broad, and so empowering, that Courts have spent decades literally ignoring the statutes' text to narrow the relief available to plaintiffs. See, e.g., Fitzgerald v. Chrysler Corp., 116 F. 3d 225 (7th Cir. 1997)(admitting that a judicially-created exclusion to the meaning of "enterprise" under the RICO Act "doesn't emerge from the statutory language," but applying it anyway).

The Third Circuit panel does an exceptional job summarizing this unwieldy body of extra-textual precedent on pages 32-42 of the opinion (for § 1 antitrust claims) and 153-172 (for RICO enterprises); any associates or clerks trying to figure out these complex fields could do worse than to review them.

These artificial restrictions force plaintiffs bringing antitrust and RICO claims — who typically only have circumstantial evidence at the beginning of their case given the efforts undertaken by the defendants to conceal their wrongdoing — to make suppositions about how the defendants carried out their scheme.

That's where Twombly and Iqbal come in. 

In the Insurance Brokerage Antitrust cases, there were, shall we say, a lot of defendants*, defendants who, for purposes of antitrust and RICO allegations, could have been configured in a wide variety of ways. The plaintiffs thus, understandably, had to make some tactical decisions about their allegations, like with the type of antitrust violation alleged:

Although plaintiffs’ 16 First Amended Complaints (FAC) expressly pled a rule-of-reason claim in the alternative, see, e.g., Comm. FAC ¶ 530; EB FAC ¶ 454, their Second Amended Complaints omit any reference to the rule of reason, and their moving papers and appellate arguments make clear they are alleging exclusively per se violations. In their initial motions to dismiss, defendants contended that the First Amended Complaints had not adequately defined a market or pled anticompetitive effects and had thus failed to state a claim under the rule of reason. In response, plaintiffs did not assert that they had, in fact, met these requirements; they argued only that “where plaintiffs allege per se claims,” these requirements do not apply.

And with the type of RICO enterprise they alleged:

While plaintiffs strenuously insist they have adequately pled the existence of “broker-centered enterprises,” they have conspicuously refrained, throughout the district-court proceedings and on appeal, from asserting alternative bilateral or single-entity enterprises.

Presumably, the plaintiffs deliberately chose to avoid rule-of-reason claims (in which the plaintiff is required to demonstrate, e.g., the defendant's market power in a defined market) and the allegation of "bilateral or single-entity enterprises" to preserve their class action status against all defendants. If, for example, the plaintiffs had split their claims up into multiple allegations of single-entity enterprises, each of those respective defendants tied to a particular scheme would move to decertify themselves from the bigger case. 

In the end, that's what did the plaintiffs in; their "parallel conduct" allegations ran smack into Twombly**:

Contrary to plaintiffs’ arguments, one cannot plausibly infer a horizontal agreement among a broker’s insurer-partners from the mere fact that each insurer entered into a similar contingent commission agreement with the broker. As the District Court concluded, the first stage of the alleged brokercentered conspiracies—the consolidation of the groups of insurers to which each broker referred business—evinces nothing more than a series of vertical relationships between the broker and each of its “strategic partners.” 2007 WL 2533989, at *15.
…
Moreover, plaintiffs’ argument proves too much. If the parallel decisions by several insurers to pay contingent commissions imply a horizontal agreement, then it is difficult to see why parallel decisions to pay standard commissions (that is, a fixed percentage of each policyholder’s premium payment) would not also imply an agreement. For that matter, plaintiffs’ logic would divine a horizontal agreement from virtually any parallel expenditures for marketing services, on the mistaken ground that a firm would not pay for advertising, for example, in the absence of an agreement with its competitors to enter into similar contracts with the advertising company. Cf. Twombly, 550 U.S. at 566 (noting that “resisting competition is routine market conduct,” and that “if alleging parallel decisions to resist competition were enough to imply an antitrust conspiracy, pleading a § 1 violation against almost any group of competing businesses would be a sure thing”)

And the same problem hit the RICO claims:

In seeking to establish a “rim” enclosing the insurer-partners in the alleged RICO enterprises, plaintiffs rely on the same factual allegations we found deficient in the antitrust context: that each insurer entered into a similar contingent-commission agreement in order to become a “strategic partner”; that each insurer knew the identity of the broker’s other insurer-partners and the details of their contingent-commission agreements; that each insurer entered into an agreement with the broker not to disclose the details of its contingent-commission agreements; that the brokers utilized certain devices, such as affording “first” and “last looks,” to steer business to the designated insurer; and that, in the Employee Benefits Case, insurers adopted similar reporting strategies with regard to Form 5500. As noted, these allegations do not plausibly imply concerted action—as opposed to merely parallel conduct—by the insurers, and therefore cannot provide a “rim” enclosing the “spokes” of these alleged “hub-andspoke” enterprises. Even under the relatively undemanding standard of Boyle, these allegations do not adequately plead an associationin- fact enterprise. They fail the basic requirement that the components function as a unit, that they be “put together to form a whole.” Boyle, 129 S. Ct. at 2244 (internal quotation marks omitted). Because plaintiffs’ factual allegations do not plausibly imply anything more than parallel conduct by the insurers, they cannot support the inference that the insurers “associated together for a common purpose of engaging in a course of conduct.” Id. (quoting Turkette, 452 U.S. at 583); see id. at 2245 n.4 (stating that “several individuals” who “engaged in a pattern of crimes listed as RICO predicates” “independently and without coordination” “would not establish the existence of an enterprise”) ...

In short, plaintiffs' allegations didn't "plausibly" suggest any actual agreement among all the insurers; instead, they merely suggested parallel conduct that, in the Third Circuit's eyes, could just as equally be explained by way of the insurers acting independently.

Thus, the bulk of the claims were dismissed, although the plaintiffs can continue on some of their bid-rigging claims against the Marsh-connected defendants.

But there's plenty for plaintiffs to be relieved about with the opinion.

First, there's the massive size of the case. Although the Third Circuit couldn't outright say it — just like the Supreme Court didn't say it in deciding Twombly — the sheer size of the Insurance Brokerage Antitrust cases was undoubtedly a factor. The cases were an indictment of the entire commercial insurance industry, with a demand for treble damages (and attorney's fees) for years of industry-wide conduct, damages that reached into the billions. If you bring a case of that magnitude, you invite heightened scruinty.

Moreover, and more importantly, the sheer number of defendants, and the extraordinary breadth of the allegations against them, is what stretched the plaintiffs claim from "probable" into "implausible." It is understandably difficult for a court to swallow allegations of a vast conspiracy across an entire industry when the plaintiffs only have concrete evidence against a single group of defendants (the Marsh defendants whose misdeeds launched the whole investigation). The real lesson is, if you're going to file a nationwide suit of that scope, you need either to find yourself a whistleblower or to follow on the coattails of a government investigation (as the claims against the Marsh defendants did). Fair or not, nothing else will work these days.

Second, there's the actual law in In Re: Insurance Brokerage Antitrust:

 “[A] plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (quoting Fed. R. Civ. P. 8(a)(2)). Because Federal Rule of Civil Procedure 8(a)(2) “requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief,” courts evaluating the viability of a complaint under Rule 12(b)(6) must look beyond conclusory statements and determine whether the complaint’s well-pled factual allegations, taken as true, are “enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555 & n.3. The test, as authoritatively formulated by Twombly, is whether the complaint alleges “enough fact[] to state a claim to relief that is plausible on its face,” id. at 570, which is to say, “‘enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal[ity],’” Arista Records, LLC v. Doe 3, 604 F.3d 110, 120 (2d Cir. 2010) (quoting Twombly, 550 U.S. at 556) (alteration in Arista Records).Fn 17

(Bolding mine). I previously covered the Second Circuit's approach to antitrust post-Twombly; it's good news for plaintiffs to see the same approach approved in the Third Circuit, particularly over a prior Third Circuit case (Fowler). Under Twombly and Iqbal, the issue isn't whether or not the plaintiff has uncovered enough evidence to make a prima facie case on the face of their complaint — as some defense lawyers have claimed — but rather whether the plaintiff has alleged "enough fact to raise a reasonable expectation that discovery will reveal evidence of illegality."

The dismissal in In Re: Insurance Brokerage Antitrust might thus prove to have made the law better for plaintiffs in the Third Circuit. That the plaintiffs in the case itself lost many of their claims is of no moment; the case quite literally alleged an industry-wide agreement to commit antitrust and racketeering violations. Plaintiffs with cases of lower orders of magnitude — like those against anything less than dozens of companies at the top of two major industries, insurance and insurance brokering — will have little trouble distinguishing those facts.

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Tomorrow, July 15, 2010, I'm giving the plaintiff's perspective in a webinar CLE titled: Pleadings Standards Post-Iqbal: Meeting Tougher Plausibility Standards in Commercial Litigation.

If you've not yet had the pleasure of litigating the heck out of Iqbal v. Ashcroft, this CLE is a good opportunity to get some case cites and perspective.

If you have litigated the heck out of it, you might still find some use in it (e.g., my part of the presentation cites 16 plaintiff-friendly cases interpreting Iqbal, including opinions from the Second, Third, Fifth, Seventh, Eighth, Ninth, Tenth, and D.C. Circuits) and you'll get 1.5 hours CLE credit from the comfort of your home or office.

The reviews for last year's presentation were quite positive (there's some quotes on the linked website), and one of the highly-informative slides from my part is embedded in this post.

Alternatively, if you're not up for a 1.5 hour CLE, you can spend a few hours perusing some poor, poor federal clerk's nearly 300-page summary of all the recent decisions on Iqbal for the Federal Rules Committee, or perhaps the Administrative Office's statistical analysis of motions to dismiss since Iqbal.

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Last week, Prof. Edward A. Hartnett (of Seton Hall University School of Law) posted Responding to Twombly and Iqbal: Where Do We Go from Here?

Hartnett's idea was eminently reasonable:

I also offer my own proposal, which focuses on the core issue at stake in debates about Twombly and Iqbal: should a plaintiff be able to obtain discovery in an effort to uncover evidence without which he or she cannot prevail?

Hartnett proposes amending Rule 12 of the Federal Rules of Civil Procedure to include:

Rule 12(j): Allegations Likely To Have Evidentiary Support After a Reasonable Opportunity for Discovery

If, on a motion under Rule 12(b)(6) or 12(c) that has not been deferred until trial, the claim sought to be dismissed includes an allegation specifically identified as provided in Rule 11(b)(3) as likely to have evidentiary support after a reasonable opportunity for discovery, the court must either (1) assume the truth of the allegation, or (2) decide whether the allegation is likely to have evidentiary support after a reasonable opportunity for discovery. In deciding whether an allegation is likely to have evidentiary support after a reasonable opportunity for discovery, the court must consider the parties‘ access to evidence in the absence of discovery and state on the record the reason for its decision.

If the court decides that the allegation is likely to have evidentiary support after a reasonable opportunity for discovery, it must allow for that discovery, under the standards of Rule 26, and deny the motion to dismiss. If the court decides that the allegation is not likely to have evidentiary support after a reasonable opportunity for discovery, the court must treat the motion as one for summary judgment under Rule 56, and provide all parties a reasonable opportunity to present all the material that is pertinent to the motion.

Again, eminently reasonable. Such an addition would immediately focus litigation on the real issues, thereby (1) enabling plaintiffs to conduct discovery into the most important areas while also (2) empowering defendants to have cases dismissed—prior to full discovery—if the plaintiff won't be able to prove an essential element of their case.

How could anyone think that was unfair?

The defense bar champions at Drug and Device Law tried to manufacturer an objection, but the argument degenerated into blather and insults. They barely even mention the details of Hartnett's proposal. Instead, they summarily dismissed him with:

Most of these proposals (except Professor Burbank's) actually go far beyond Twombly/Iqbal and would overrule all or most of the prior precedent we cited above. That strikes us as facially overkill and indicative of unexpressed (and in some cases, ulterior) motives at work.

...

We understand that a lot of academics feel that they have to help their students get jobs, or else eventually they won’t have jobs either.  Thus, they tend to support anything and everything that results in more, rather than less, litigation.

Oh, snap.

Then again, an accusation of "ulterior motives" probably would have meant more if it didn't come from someone paid by the hour to ensure corporations pay as little as possible to the people and families they hurt.

Frankly, reading through the post, I can't help but wonder if Beck et al. indeed have some "ulterior motive" in misrepresenting how defense lawyers use Ashcroft v. Iqbal in their practice:

So when we get a complaint, we look to see whether, there’s at least one actual fact pleaded that supports each essential element of a cause of action.  A plaintiff can plead more if s/he so pleases, but there has to be at least one – otherwise we’ll probably file a Twombly/Iqbal motion.

The implied concession there—that they won't file a motion to dismiss if "there's at least one actual fact pleaded that supports each essential element of a cause of action"—is rubbish. They don't run a charity over there at Dechert: if you file a case against one of their clients, they will come up with any argument they can to get it dismissed.

And that's where the problem with Twombly / Iqbal—really, just Iqbal—comes in. Every time a case is filed today, the defendant inevitably files a motion to dismiss claiming that the "actual facts" plead aren't "facts" at all, they're "conclusions," and so are not, under Iqbal, entitled to an assumption of truth.

What's the difference between a "fact" and a "conclusion?" Merriam-Webster says:

fact: an actual occurrence

conclusion: a reasoned judgment

Let me ask you, Dear Reader: who really won more votes in Florida in 2000, Bush or Gore?

Is your answer a "fact" or a "conclusion?" Do you know it as an actual occurrence, or did you make a reasoned judgment?

The problem with Iqbal is that it instructs courts—at the very beginning of the lawsuit, when they have nothing in front of them but a "short and plain" complaint—to perform a wildly subjective analysis about which allegations are merely "conclusions" and which of the non-conclusory allegations are "plausible." 

There's nothing new about that problem. It's the same problem that prompted Rule 8—the Rule supposedly interpreted by Iqbal—to be enacted in the first place:

You used to have the requirement that a complaint must allege the “facts” constituting the “cause of action.” I can show you thousands of cases that have gone wrong on dialectical, psychological, and technical argument as to whether a pleading contained a “cause of action”; and of whether certain allegations were allegations of “fact” or were “conclusions of law” or were merely “evidentiary” as distinguished from “ultimate” facts. In these rules there is no requirement that the pleader must plead a technically perfect “cause of action” or that he must allege “facts” or “ultimate facts.”

Rules of Civil Procedure for the District Courts of the United States: Hearings Before the H. Comm. on the Judiciary, 75th Cong. 94 (1938) (statement of Edgar B. Tolman, Secretary of the Advisory Committee on Rules for Civil Procedure Appointed by the Supreme Court); quoted by p.4 of Professor Stephen Burbank's testimony before the Senate.

The whole point of Rule 8 was to ensure that the right to civil justice didn't turn on metaphysical word games.

And yet we're supposed to come full circle because, as Beck et al. continue,

Twombly/Iqbal are about reining in the cost of litigation; we might feel differently about Professor Hartnett's proposal if it required payment of all a defendant’s costs of “appropriate” (the Article's term) discovery – should designated allegations nonetheless turn out to be unfounded.  But under the proposal as offered, there’s no penalty for over-designation.  If it’s one thing that the fifty-year life span of Conley established, it’s that unrestrained pleading imposes huge discovery costs on defendants.  Even Professor Burbank (who really tried hard) was reduced to relying upon a single study of tiny cases in which even then 25% of the parties believed the process was too expensive.  The excessive cost of modern discovery is simply not a issue capable of dispute any longer.

At least Burbank actually cited something. Defense lawyers think they're entitled to assert the cost of discovery—a cost due primarily to their own practice of relentlessly frustrating discovery at every turn—is "excessive" through sheer ipse dixit.

Sounds like a "conclusion" to me, not an "actual fact."

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Before Ashcroft v. Iqbal improperly re-wrote the Federal Rules of Civil Procedure, Bell Atlantic Corp. v. Twombly foolishly imposed a new hurdle for plaintiffs who brought antitrust claims. Specifically, in Twombly the Supreme Court held,

In applying these general standards to a §1 claim [e.g., a price-fixing claim], we hold that stating such a claim requires a complaint with enough factual matter (taken as true) to suggest that an agreement was made. Asking for plausible grounds to infer an agreement does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal 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.

... 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.”

A number of defense lawyers — and, unfortunately, courts — have interpreted the above language to mean that an antitrust plaintiff can only "raise[ ] a suggestion of a preceding agreement" by proving, at the beginning of the lawsuit, that the defendants secretly agreed to raise prices together.

But how do you prove a secret agreement before you can use court processes to conduct an investigation?

Normally, you can't.

Catch-22.

Thankfully, the Second Circuit has just corrected those errors in reversing dismissal of a price-fixing case against several digital music companies. As the opinion (PDF) holds:

Defendants’ arguments that plaintiffs have failed to state a claim are without merit. Defendants first argue that a plaintiff seeking damages under Section 1 of the Sherman act must allege facts that “tend[] to exclude independent self-interested conduct as an explanation for defendants’ parallel behavior.” Appellee’s Br. 15-17. This is incorrect. Although the Twombly court acknowledged that for purposes of summary judgment a plaintiff must present evidence that tends to exclude the possibility of independent action, 550 U.S. at 554, and that the district court below had held that plaintiffs must allege additional facts that tended to exclude independent self-interested conduct, id. at 552, it specifically held that, to survive a motion to dismiss, plaintiffs need only “enough factual matter (taken as true) to suggest that an agreement was made,” id. at 556; see also 2 Areeda & Hovenkamp § 307d1 (3d ed. 2007) (“[T]he Supreme Court did not hold that the same standard applies to a complaint and a discovery record . . . . The ‘plausibly suggesting’ threshold for a conspiracy complaint remains considerably less than the ‘tends to rule out the possibility’ standard for summary judgment.”).

Defendants next argue that Twombly requires that a plaintiff identify the specific time, place, or person related to each conspiracy allegation. This is also incorrect. The Twombly court noted, in dicta, that had the claim of agreement in that case not rested on the parallel conduct described in the complaint, “we doubt that the . . . references to an agreement among the [Baby Bells] would have given the notice required by Rule 8 . . [because] the pleadings mentioned no specific time, place, or person involved in the alleged conspiracies.” 550 at 565 n.10. In this case, as in Twombly, the claim of agreement rests on the parallel conduct described in the complaint. Therefore, plaintiffs were not required to mention a specific time, place or person involved in each conspiracy allegation.

Starr et al v. Sony BMG et al., slip op., 08-5637 (2d Cir., January 13, 2010), pp. 15-16.

It's hard to call the opinion a "win" for antitrust plaintiffs — Twombly should have been better decided — but it definitely leaves antitrust plaintiffs better off than they were before.

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Oh, Ashcroft v. Iqbal, will we ever stop blogging about you?

The newest online debate pits the class action defense lawyers at Drug & Device Law against University of Pennsylvania Law School Professor Stephen Burbank at PENNumbra, the online supplement to UPenn's Law Review.

Beck and Herrmann open with a defense of Iqbal on several grounds, including:

[C]ourts have no legitimate basis for favoring plaintiffs when interpreting pleading standards. A just system does not pick sides in advance, but instead establishes neutral rules. We reject the normative view that it is somehow “better” to let unmeritorious cases proceed than to risk that meritorious cases will be dismissed. Either way represents error, and neither error is inherently better than the other. Indeed, given the enormous transaction costs that litigation entails, Type II errors (false negatives) are probably preferable to Type I errors (false positives) from a purely economic perspective.

From a "purely economic perspective" it is better if corporations stop wrongfully causing damage in the first place, which they will only do if they have an economic incentive like the threat of legal liability.

But there's a bigger problem with Beck and Herrmann's argument.

It is an "error" when a court dismisses a meritorious case. It is a particularly unjust, unfair, and avoidable "error" when a court dismisses a meritorious case prior to any discovery.

It is not, however, an "error" for a court to refuse to dismiss a case that may be unmeritorious.

Why not? Because the case may be meritorious and, if it is not, the defendant has four more opportunities to resolve the case favorably by testing the merits of plaintiff's claim: judgment on the pleadings, summary judgment, trial, and post-trial relief. That is to say, even after the motion to dismiss, Plaintiff's claims will be assessed, re-assessed, re-re-assessed, then re-re-re-assessed. Then there's an appeal to re-re-re-re-assess each and every element of plaintiff's claims and each and every element of plaintiff's damages.

When a court declines to dismiss an unmeritorious case, there is ample room for error-correction down the road to ensure plaintiff's claims have merit. It's why we have a civil justice system: to provide a thorough airing and evaluation of disputes.

When a court dismisses a meritorious case, however, the only error-correction is a single appeal that will be evaluated under the same unfair anti-plaintiff standard established by Iqbal.

Beck and Herrmann have it exactly backwards: there is "no legitimate basis" for not favoring plaintiffs when interpreting pleading standards. Their "neutral" interpretation of pleading rules is not "neutral" at all, but rather a "normative view" that plaintiffs are not entitled to the same error-correcting procedures to which defendants are entitled.

A "just system" wouldn't pick defendant's side in advance.

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Not too long ago, I argued that Ashcroft v. Iqbal was not nearly as important as commentators thought, and that the sky had not fallen on plaintiffs. Instead, Iqbal merely put into words the standard that numerous courts had already applied to large-scale litigation without saying as much. I also argued that Iqbal in particular involved a very unique circumstance -- a Bivens suit against top-level official -- and so was easily distinguishable from the vast majority of civil litigation.

For a while, it seemed no one agreed with me. Every week there was another "[pharmaceutical manufacturing defect / establishment clause / whatever] case dismissed under Iqbal" story.

It's not easy being green.

But I'm no longer alone.

Drug & Device Law has more news, referencing a law review article and a post by a law professor who, like me, but in a more scholarly fashion, reject the argument that six paragraphs of Iqbal radically re-rewrote the rules of civil procedure.

"They're just professors," the defense bar nay-sayers will nay-say, "Iqbal has nonetheless overruled centuries of precedent, making it nearly impossible to file a lawsuit against anyone anymore."

I, of course, disagree. So how about I up the ante with recent opinions from two of the most respected conservatives judges in the federal appellate courts?

Like Judge Frank Easterbrook:

Lusby contends that Rolls-Royce defrauded the United States about the quality of the turbine blades in the T56 engine. The complaint alleges that five contracts between Rolls-Royce and the United States require all of the engine's parts to meet particular specifications; that the parts did not do so (and the complaint describes tests said to prove this deficiency); that Rolls-Royce knew that the parts were non-compliant (not only because Lusby told his supervisors this but also because audits by Rolls-Royce's design and quality-assurance departments confirmed Lusby's conclusions); and that Rolls-Royce nonetheless certified that the parts met the contracts' specifications. The complaint names specific parts shipped on specific dates, and it relates details of payment. Simple breach of contract is not fraud, but making a promise while planning not to keep it is fraud, see Wharf (Holdings) Ltd. v. United Int'l Holdings, Inc., 532 U.S. 588, 121 S. Ct. 1776, 149 L. Ed. 2d 845 (2001), and this complaint alleges the promise, the intent not to keep that promise, and the details of non-conformity. What else might be required to narrate, with particularity, the circumstances that violate 31 U.S.C. §3729(a)(1)?

Rolls-Royce's answer is: the specific request for payment. Lusby has not seen any of the invoices and representations that Rolls-Royce submitted to its customers. He knows about shipments and payments, but he does not have access to the paperwork. The district court held that, unless Lusby has at least one of Rolls-Royce's billing packages, he lacks the required particularity. Since a relator is unlikely to have those documents unless he works in the defendant's accounting department, the district court's ruling takes a big bite out of qui tam litigation.

We don't think it essential for a relator to produce the invoices (and accompanying representations) at the outset of the suit. True, it is essential to show a false statement. But much knowledge is inferential--people are convicted beyond a reasonable doubt of conspiracy without a written contract to commit a future crime--and the inference that Lusby proposes is a plausible one. 

United States ex rel. Lusby v. Rolls-Royce Corp., No. 08-3593, 2009 U.S. App. LEXIS 14119, at *10–11 (7th Cir. Jun. 30, 2009)(reversing dismissal of qui tam / false claims act complaint).

And Judge Richard Posner:

In our initial thinking about the case, however, we were reluctant to endorse the district court's citation of the Supreme Court's decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007), fast becoming the citation du jour in Rule 12(b)(6) cases, as authority for the dismissal of this suit. The Court held that in complex litigation (the case itself was an antitrust suit) the defendant is not to be put to the cost of pretrial discovery--a cost that in complex litigation can be so steep as to coerce a settlement on terms favorable to the plaintiff even when his claim is very weak--unless the complaint says enough about the case to permit an inference that it may well have real merit. The present case, however, is not complex. Were this suit to survive dismissal and proceed to the summary judgment stage, it would be unlikely to place on the defendants a heavy burden of compliance with demands for pretrial discovery. The parties did not negotiate face to face over the termination agreement, and though some of the negotiations were over the telephone rather than in letters or emails, Smith recorded those and the transcripts are attached to his complaint. So almost all the potentially relevant evidence is already in the record.

But Bell Atlantic was extended, a week after we heard oral argument in the present case, in Ashcroft v. Iqbal, 129 S. Ct. 1937, 173 L. Ed. 2d 868 (2009)--over the dissent of Justice Souter, the author of the majority opinion in Bell Atlantic--to all cases, even a case (Iqbal itself) in which the court of appeals had 'promise[d] petitioners minimally intrusive discovery.' Id. at 1954. Yet Iqbal is special in its own way, because the defendants had pleaded a defense of official immunity and the Court said that the promise of minimally intrusive discovery 'provides especially cold comfort in this pleading context, where we are impelled to give real content to the concept of qualified immunity for high-level officials who must be neither deterred nor detracted from the vigorous performance of their duties.' Id. (emphasis added).

So maybe neither Bell Atlantic nor Iqbal governs here. It doesn't matter. It is apparent from the complaint and the plaintiff's arguments, without reference to anything else, that his case has no merit. That is enough to justify, under any reasonable interpretation of Rule 12(b)(6), the dismissal of the suit.

Smith v. Duffey, No. 08-2804, 2009 U.S. App. LEXIS 17211, at *11–13 (7th Cir. Aug. 3, 2009).

Neither Easterbrook nor Posner are bleeding hearts, and neither has shown much sympathy for plaintiffs in the past. Yet, even they believe the Twombly and Iqbal chatter is overblown.

Chalk two victories up for plaintiffs. It seems the battle over pleading standards is far from over.

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UPDATE III: The most thorough critique I've read of Iqbal is Professor Burbank's Senate testimony, available here (PDF). As an empirical matter, Iqbal has had a significant effect, particularly on constitutional rights plaintiffs:

The statistical analysis of 1,039 cases shows that 49% of 12(b)(6) motions were granted (with or without leave to amend) in the cases selected (from May 2005 to August 2009). Further, the rate of granting such motions increased from 46% of motions decided under Conley, to 48% of motions decided under Twombly, to 56% of motions decided under Iqbal. A multinomial logistic regression indicates that under Twombly/Iqbal, the odds of a 12(b)(6) motion being granted rather than denied are 1.5 times greater than under Conley, holding all other variables constant.

Moreover, the largest category of cases in which 12(b)(6) motions are filed was constitutional civil rights. Motions to dismiss in constitutional civil rights cases were granted at a higher rate (53%) than in cases overall (49%), and the rate of granting 12(b)(6) motions in constitutional civil rights cases increased in the cases selected from Conley (50%) to Twombly (55%) to Iqbal (60%).

Personally, I think the powers that be understated the degree to which cases were dismissed before, and now overstate the degree to which Iqbal will increase their likelihood of being dismissed. The odds are indeed worse now, but they're still generally 50/50.

UPDATE II: Judge Posner weighs in, wondering if Twombly and Iqbal are limited to complex cases or those with other compelling interests, such as ensuring high-level officials are not distracted from their duties by suits of doubtful merit. I have a new post referencing Posner's opinion and a separate opinion by Judge Easterbrook that throw cold water on those who believe Iqbal has doomed all but the sharpest of complaints.

UPDATE: The NYTimes has an article on the case as well, also believing it to be a death-knell for plaintiffs, noting that federal judges "have cited it more than 500 times in just the last two months." As I wrote below, citation is not the same thing as impact. The standard is not any different from what courts have been practically applying for years, except to add the word "plausible."

Indeed, you don't have to go far to see the limits of Iqbal; just last month the District Court in Padilla v. Yoo, a similar suit against a high-ranking government official, denied defendants' motion to dismiss, quoting Iqbal as follows:

“A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). “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.” Id. “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.’” Id. (citing Twombly, 550 U.S. at 557 (brackets omitted))

To reiterate: the sky is not falling on plaintiffs. They need only plead "more than a sheer possibility that a defendant has acted unlawfully," something lawyers have been doing for centuries.]

Drug and Device Law points us to an article in Saturday's Wall Street Journal:

Ashcroft v. Iqbal, released in May, will make it harder to bring a lawsuit without specific factual evidence, raising the threshold for moving a case into expensive litigation and possibly saving companies millions of dollars in legal fees. The case was overshadowed by other business rulings on consumer lawsuits, environmental and employment law and other matters in a term set to end Monday, but legal experts said it may be the most important.

"It's the case that will be cited more than any other by a factor of 100," said Tom Goldstein, partner at Akin Gump Strauss Hauer & Feld LLP and founder of the Scotusblog Web site. He called the ruling "an unexpected gift for the business community."

In the case, a Pakistani named Javaid Iqbal sued government officials over his detainment after Sept. 11, 2001. The Supreme Court ruled that Mr. Iqbal didn't have sufficient factual evidence to proceed with his discrimination claims.

"While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations," Justice Anthony Kennedy wrote in the 5-4 opinion. He cited the 2007 decision in Bell Atlantic Corp. v. Twombly, an antitrust case that outlined what plaintiffs must assert to make it through initial court proceedings.

As a result of the Iqbal ruling, businesses may find it easier to fend off lawsuits by persuading courts to dismiss complaints early in litigation.

I disagree. Maybe a handful of cases at the fringes with no factual allegations will be dismissed (most of these cases were already dismissed even prior to Twombly), but that's it. Iqbal's casual reference to pleading standards does not change the narrow focus of the actual opinion, which relates to the very specific issue of how "qualified immunity" applies to high-ranking officials in suits against the federal government for deprivations of constitutional rights.

Tom Goldstein is right that the Ashcroft v. Iqbal opinion will be cited all of the time by defendants' motions to dismiss, and will be cited by court opinions evaluating motions to dismiss, but that doesn't mean defendants will get much mileage out of it.

Rather than argue the details why, let me show you what will probably become my standard draft response to such motions:

Defendant's heavy reliance on Iqbal is misplaced. Iqbal was a Bivens action brought by a Pakistani national who alleged ethnically and racially discriminatory treatment in the post-September 11, 2001, period by numerous federal officials while he was detained for charges of defrauding the United States with regard to identification documents, charges to which he plead guilty, prompting his deportation. Iqbal, 556 U.S. ___; Slip op. 1. There was no dispute that the facts alleged by Iqbal stated a Bivens claim against all individuals directly and indirectly involved in his treatment. Id.

The narrow question in Iqbal was whether Bivens liability -- which indisputably does not extend to supervisors through respondeat superior (see Monell) -- attached where the complaint alleged "a supervisor’s mere knowledge of his subordinate’s discriminatory purpose." Slip op., 13. The Supreme Court reiterated that Bivens creates a unique, disfavored and limited cause of action disconnected from normal tort doctrines and reaffirmed that, "[a]bsent vicarious liability, each Government official, his or her title notwithstanding, is only liable for his or her own misconduct." Id.

Such a Bivens-specific holding bears no relationship to the business lawsuit sub judice. Importantly, though, and contra defendant's arguments, the Supreme Court reiterated in Iqbal that "a court must accept as true all of the allegations contained in a complaint" and that a plaintiff need only "state[] a plausible claim for relief [to] survive[] a motion to dismiss." Slip op. 14-15. Plaintiff has clearly done that here; defendants' heavy reliance on an irrelevant Bivens opinion reveals the lack of any support in existing case law for their request to throw plaintiff out of court entirely. The Supreme Court has always instructed, and continues to instruct, District Courts to assume the facts in the complaint to be true, to make reasonable inferences on behalf of plaintiff's allegations, and to deny dismissal where plaintiff has a "plausible" claim.

Finally, again contra defendants, Iqbal was specifically remanded to the Circuit Court to consider whether the plaintiff there should be permitted to amend his complaint to cure the deficiencies. Such is consistent with this Circuit's precedent, in which leave to amend is to be freely granted prior to dismissal unless such amendment is clearly futile or inequitable.

So there you go. Iqbal soundly rejects Bivens liability for high-ranking government officials merely potentially aware of misdeeds much further down the chain of command (and it reiterates the appealability of an order on qualified immunity), but that's it.

The sky has not fallen on business plaintiffs.

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