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SUPREME COURT DOCKET REPORT
OCTOBER TERM 2006
DECISION ALERT


May  21, 2007

Today the Supreme Court issued two decisions, described below, of interest to the business community.


Bell Atlantic Corporation v. Twombly, No. 04-1350 (previously discussed in the June 26, 2006 Docket Report). The Telecommunications Act of 1996 requires regional telecommunications monopolies, known as incumbent local exchange carriers (“ILECs”), to share their local telephone markets and networks with long-distance carriers, known as competitive local exchange carriers (“CLECs”). Plaintiffs, a putative class consisting of “90 percent of all subscribers to local telephone and high-speed Internet service in the continental United States,” sued a group of ILECs alleging that they engaged in a “combination” or “conspiracy” in restraint of trade in violation of Section 1 of the Sherman Act. Plaintiffs claimed that the ILECs engaged in a “parallel course of conduct” to “prevent competition from CLECs,” agreed not to compete against one another, and conspired to prevent competitive entry into their markets. The Supreme Court granted certiorari to decide whether these allegations survive a motion to dismiss.

With Justice Souter writing for seven justices (Justices Stevens and Ginsburg dissenting), the Court held that to survive a motion to dismiss a Section 1 complaint must allege “enough factual matter (taken as true) to suggest that an agreement was made.” A complaint’s allegations must go beyond “labels” and “conclusions” that an agreement existed, raising instead “a right to relief above the speculative level.” It must provide “plausible grounds to infer an agreement” and create “a reasonable expectation that discovery will reveal evidence of illegal agreement”—not just be “consistent with” agreement. Therefore, “an allegation of parallel conduct and a bare assertion of conspiracy will not suffice”; the allegations “must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct.” On these standards plaintiffs’ complaint alleging parallel conduct and making conclusory assertions of agreement—in circumstances in which the Court discerned “an obvious alternative explanation” for defendants’ conduct in the ILECs’ natural economic incentive to resist market entry by competitors—failed to pass muster.

In reaching this decision the Court emphasized the high cost of discovery in antitrust cases and the fact that “the success of judicial supervision in checking discovery abuse has been on the modest side.” The heavy burden of discovery, the Court observed, pushes defendants to settle even meritless suits. The Court concluded that “it is only by taking care to require allegations that reach the level suggesting conspiracy that we can hope to avoid the potentially enormous expense of discovery” and forced settlement in cases in which there is no reasonable prospect that discovery will produce evidence of conspiracy.

The Court’s ruling brings Section 1 pleading rules into line with previous decisions that, at later stages of the litigation, a plaintiff’s proof must tend to exclude the possibility that defendants were acting independently. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984). And it finally inters the oft-cited statement in Conley v. Gibson, 355 U.S. 41, 47 (1957), that a complaint should not be dismissed unless “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief”—a statement that some courts have held to permit highly speculative pleading revealing only “the theory of a claim.” Stating that this “famous observation has earned its retirement,” the Court concluded that it is “best forgotten as an incomplete, negative gloss” on standards that apply only once a claim has been stated adequately.

The Court’s decision has wide-reaching implications for federal antitrust litigation and signals a victory for antitrust defendants in a variety of industries. Paired with Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), this case reflects the Court’s sensitivity to the pressures of settlement prior to discovery and its concomitant willingness to interpret strictly the Rule 8 entitlement requirement.


Hinck v. United States, No. 05-1056 (previously discussed in the October 27, 2006 Docket Report). In this case, the Supreme Court unanimously held that under 26 U.S.C. § 6404(e)(1) the Tax Court provides the exclusive forum for judicial review of a failure to abate interest on income tax deficiencies attributable to IRS errors or delays. Generally, the federal district courts and the Court of Federal Claims have jurisdiction to hear certain tax matters. Up until 1996, however, no court could review abatement claims under Section 6404(e)(1), because the statute committed the abatement of interest to the sole discretion of the IRS, and the APA specifies that decisions left to agency discretion by law are not reviewable. In 1996, Congress amended Section 6404 to provide that the “Tax Court shall have jurisdiction over any action brought by a taxpayer * * * to determine whether the Secretary’s failure to abate interest under this section was an abuse of discretion,” without indicating whether the Tax Court had exclusive jurisdiction over such claims.

Today, the Supreme Court decided that the Tax Court’s jurisdiction is exclusive. It relied upon two canons of statutory interpretation: first, that, in most contexts, "'a precisely drawn, detailed statute pre-empts more general remedies,'" EC Term of Years Trust v. United States, 127 S. Ct. 1763, 1767 (2007), and second, that when Congress enacts a specific remedy when none was previously recognized, or when previous remedies were "problematic," the remedy provided is generally regarded as exclusive, Block v. North Dakota ex rel. Bd. of Univ. and School Lands, 461 U.S. 273, 285 (1983).

The Court rejected the argument that Congress, in amending Section 6404, had merely removed a substantive barrier to judicial review by providing that abatement decisions now could be reviewed for abuse of discretion and had left unaltered the jurisdiction of district courts and the Court of Federal Claims to review tax refund actions under the new standard. That interpretation ignores the detailed nature of Congress’s enactment, the Court held, and would allow litigants to “isolate one feature of this statute and use it to permit taxpayers to circumvent the other limiting features in the same statute, such as a shorter statute of limitations than in general refund suits or a net-worth ceiling for plaintiffs eligible to bring suit.”

The Court’s ruling may affect a litigant’s decision whether to sever a refund claim from an interest abatement claim when the two stem from the same set of facts because the federal district courts continue to have exclusive jurisdiction over refund claims. (Choosing to sever the refund and abatement claims risks claim preclusion because the decision of the court that rules first as to whether the IRS erred may also effectively determine the outcome in the second action.) More broadly, today’s ruling illustrates the Court’s resort to canons of construction to resolve ambiguities in statutory schemes.
 



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Mayer Brown Supreme Court Docket Reports provide information and comments on legal issues and developments of interest to our clients and friends. They are not a comprehensive treatment of the subject matter covered and are not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed.

 
 
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