When the U.S. Supreme Court scrapped Conley v. Gibson's “no set of facts” federal pleading standard in Twombly (2007) and Iqbal (2009), courts initially struggled to apply the inherently ambiguous “plausibility” standard. In the immediate aftermath, some courts frankly misconstrued Twombly and Iqbal to invite a Daubert-style “gate keeper” appraisal of complaints in which judges could (and should) prune claims that, based on their own personal experience with the subject matter at issue, appeared dubious. One potential source of this confusion is a single sentence in the Supreme Court's Iqbal opinion: “Determining whether a complaint states a plausible claim for relief will … be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” While the U.S. Court of Appeals for the Third Circuit has largely rectified this misconception, courts occasionally toss daunting complex claims based on skepticism and a concern about costly and burdensome discovery rather than a correct application of the plausibility standard. A recent antitrust decision by U.S. District Judge Mark A. Kearney of the Eastern District of Pennsylvania provides a model framework for analyzing plausibility.

• Roxul USA v. Armstrong World Industries

In Roxul USA v. Armstrong World Industries, a manufacturer of ceiling tiles, Roxul, sued one of its competitors, Armstrong, for monopolization and attempted monopolization under Section 2 of the Sherman Act. Armstrong allegedly controlled 55 percent of the ceiling tile market and used its purported monopoly power to foreclose Roxul's access to national distributors. Specifically, Roxul claimed that Armstrong signed exclusive-dealing agreements with its distributors, preventing them from selling the ceiling tiles to Armstrong's competitors (Roxul included). Those agreements contained liquidated damages provisions that penalized distributors for violating the exclusivity clause. When distributors proved intransigent, Armstrong threatened to raise its prices or cut off the supply of ceiling tiles entirely. These agreements supposedly prevented Roxul from competing effectively in the same market with Armstrong. Roxul sought treble damages as well as injunctive relief.

Armstrong filed the ubiquitous knee-jerk motion to dismiss for failure to state plausible claims under the Sherman and Clayton Acts, essentially giving Roxul a costly roadmap to its litigation strategy. It argued that Roxul's complaint failed to plead that Armstrong's exclusive contracts foreclosed Roxul from a substantial share of the relevant market. According to Armstrong, Roxul's market foreclosure allegations were implausible because Roxul could have sold its products through distributors that had not signed exclusive agreements with Armstrong, directly to retailers and contractors by bypassing distributors entirely, or by driving demand through direct advertising to architects. It also posited that Roxul could effectively compete with Armstrong for distributors by offering its own lucrative exclusive dealing arrangements.

Kearney rejected Armstrong's counter version of the competitive landscape, reminding the parties that such factual and expert disputes should be raised at summary judgment or trial. Instead, Kearney properly credited Roxul's market foreclosure allegations, as illustrated by the following discussion: “Armstrong cites to Roxul's allegations identifying direct buy contractors and big-box home improvement retailers as potential alternative distribution channels. But Roxul alleges very few direct buy contractors exist because they lack the financial resources and expertise to establish the same value-added services specialty distributors provide … We accept Roxul's allegations at this preliminary stage. Armstrong's factual defense regarding the availability and viability of alternative distribution channels is best reserved for summary judgment or trial.”

Alternatively, Armstrong argued that its exclusive distributorship agreements were actually procompetitive, an assertion that directly contradicted Roxul's averment that the agreements allegedly facilitated “supra-competitive prices.” According to Armstrong, its exclusive agreements put downward pressure on prices by encouraging competing “dealers to promote each manufacturer's brand more vigorously than would be the case under nonexclusive dealing.” Moreover, “such arrangements can prevent free-riding on the substantial investments that manufacturers … make with distributors to promote their own products” and “can assure supply, price stability, outlets, best efforts [to sell a manufacturer's products] or the like.”

Like market foreclosure, Kearney acknowledged the Armstrong lawyer's argument but concluded it was wholly premature in the context of a limited motion to dismiss: “Armstrong argues it has a valid business justification for entering into exclusivity arrangements with distributors … [and that] the pro-competitive effects of the exclusivity arrangements outweigh the anti-competitive effects. … [But] Roxul alleges sufficient facts outlining the anti-competitive effects the exclusivity arrangements have on the ceiling tile market. Weighing pro-competitive and anti-competitive effects is best reserved for summary judgment or trial after the benefit of discovery.”

• Personal Judicial Experience and Common Sense

Kearney's instructive decision in Roxul USA got it right but is hardly groundbreaking. As the Third Circuit explained in In re Lipitor Antitrust Litigation, quoting Iqbal, “Twombly and Iqbal require only plausibility, a standard 'not akin to a probability requirement.'” Moreover, as the First Circuit pointed out in Evergreen Partnering Group v. Pactiv, a decision vacating the dismissal of a Sherman Act Section 1 claim, “it is not for … courts to decide, at the pleading stage, which inferences are more plausible than other competing inferences, since those questions are properly left to the factfinder.” And of course, as the Second Circuit directed in Anderson News v. American Media, another decision vacating the dismissal of a Sherman Act Section 1 claim, “courts [are] required to proceed on the assumption that all the [factual] allegations in the complaint are true. Even if their truth seems doubtful, Rule 12(b)(6) does not countenance … dismissals based on a judge's disbelief of a complaint's factual allegations.”

These maxims are particularly important in antitrust cases alleging concerted action. As the Third Circuit warned in Pensiero v. Lingle (commenting on a plaintiff's obligation under Rule 11 to investigate its claims prior to filing): “Proving a conspiracy is usually difficult and often impossible without resort to discovery procedures. This is particularly true in antitrust actions, where the proof is largely in the hands of the alleged conspirators.” At a recent Philadelphia Bar Association public meeting, Kearney noted that discovery plays an important role in antitrust conspiracy cases because plaintiffs often lack access to necessary evidence at the pleading stage.

Similarly, in reversing the premature dismissal of an antitrust conspiracy claim in West Penn Allegheny Health System v. UPMC, the Third Circuit soundly rejected the notion that Twombly imposed a “heightened scrutiny” standard for assessing antitrust claims and warned that judges should not act as “gatekeepers,” even where discovery may be costly and burdensome (which special masters and magistrate judges can manage). Disregarding the concern that “discovery in complex cases is expensive and time-consuming,” the Third Circuit nevertheless instructed courts to apply Twombly and Iqbal's deferential standard with the “same level of rigor in all civil actions.” It is inappropriate,” The Third Circuit concluded “to apply Twombly's plausibility standard with extra bite in antitrust and other complex cases.”

So what should courts make of Iqbal's passing suggestion that plausibility can be assessed in the context of personal “judicial experience” and “common sense”? First, the Supreme Court did not say that judges may supplant well-pleaded factual allegations with their own personal opinions, beliefs or observations, even when judicial experience and common sense suggests the allegations may be dubious or alternative explanations are more plausible. That would be a recipe for judge shopping. Twombly and Iqbal require courts to accept all factual allegations as true. As the First Circuit astutely observed in Ocasio-Hernandez v. Fortuno-Burset, quoting Iqbal and Twombly, respectively, “although evaluating the plausibility of a legal claim 'requires the reviewing court to draw on its judicial experience and common sense,' the court may not disregard properly pleaded factual allegations, 'even if it strikes a savvy judge that actual proof of those facts is improbable.'” The sole exception to this rule may be where, as Justice David Souter sharply noted in his Iqbal dissent, “allegations … are sufficiently fantastic to defy reality as we know it [such as] claims about little green men, or the plaintiff's recent trip to Pluto, or experiences in time travel.” Simply stated, with all due respect, Judges apply the law; they are not fact witnesses or experts on subject matters. Nor are they fact-finders in cases where a jury has been requested.

Second, while a court may use its personal judicial experience and common sense to assess whether inferences propounded by the plaintiff are reasonable, courts should remember that the pleading standard under Rule 12(b)(6) is plausibility—not probability, possibility, or propensity, as the Third Circuit discussed in Phillips v. County of Allegheny (2010). The standard is to determine whether an allegation is plausible not whether it is the only or the most plausible explanation. By definition, judges may not weigh plausible inferences to determine which is more accurate. That role is reserved for the trier of fact, usually a jury, after full fact and expert discovery and in the context of trial on the merits. Courts should be mindful that, by definition, inferences require logical extrapolations they must necessarily make in the context of limited factual allegations. Therefore, at the pleading stage, inferences must be drawn in favor of the plaintiff, and competing inferences need not be discredited to proceed to discovery. This is especially true in concerted action cases under the antitrust laws, where, as the Third Circuit has repeatedly admonished, the evidence necessary to prove antitrust claims and promote important public policy objectives will usually be exclusively in the possession of the monopolists or conspirators, not the private plaintiffs or government authorities bringing civil actions.

Courts will no doubt continue to wrestle with the Twombly/Iqbal paradigm, but the Third and other circuits have repeatedly concluded, in exercising de novo review, that plausibility is a low bar. Kearney got that right in the Roxul USA case. Pleadings are intended to put the opposing party on notice, not to litigate the disputed merits of a particularly complex dispute in the limited context of motions to dismiss or even later summary judgment. Instead, as the Third Circuit made clear when reversing the district court for doing so in Doe v. Abington Friends School: “As any practicing attorney can attest, federal litigation revolves around the generous and wide-ranging discovery provided by the Federal Rules of Civil Procedure.” Even when allegations appear dubious on their face, “discovery digs subsurface and may unearth facts that tend to support the [complaint's allegations].” Stay tuned.

Carl W. Hittinger is a senior partner in Baker & Hostetler's antitrust group and litigation group coordinator for the firm's Philadelphia office. He concentrates his practice on complex commercial and civil rights trial and appellate litigation, with a particular emphasis on antitrust and unfair competition matters. His experience also includes a judicial clerkship with U.S. District Chief Judge Emeritus Louis C. Bechtle of the Eastern District of Pennsylvania. He can be reached at 215-564-2898 or [email protected].

Tyson Y. Herrold is an associate in the firm's Philadelphia office in its litigation group. His practice focuses on complex commercial and antitrust litigation matters. His experience also includes judicial clerkships for U.S. District Judge Malachy E. Mannion of the Middle District of Pennsylvania, Judge C. Darnell Jones II of the Eastern District of Pennsylvania and Judge Dolores K. Sloviter of the U.S. Court of Appeals for the Third Circuit. He can be reached at ­215-568-3439 or [email protected].