The Third Circuit affirmed a judgment by the District Court for Delaware dismissing a Sherman Act Section 1 claim arising from parallel refusals to extend credit following at least 27 telephone conversations among the defendants. Burtch v. Milberg Factors, Inc., 2011 WL 5027511 (3rd Cir. Oct. 24, 2011).
The plaintiff is a trustee in bankruptcy representing Factory 2-U Stores, a discount clothing retailer. The defendants are garment "factors." The factors extend credit to garment retailers by buying accounts receivable from garment manufacturers. If the factor refuses to buy the receivables of a retailer, manufacturers will not sell to that retailer. Thus, the complaint alleged, the factors can control the viability of any particular retailer.
The plaintiff suffered sales declines in 2001 and 2002. The defendant factors allegedly exchanged credit information about the plaintiff in a series of 27 telephone calls. The defendant factors then declined to buy manufacturers' accounts receivable from the plaintiff. Because the plaintiff could no longer obtain credit, it was unable to buy sufficient inventory, saw its profits decline and filed for bankruptcy.
The complaint was dismissed for failing to state a claim. On appeal, the court relied on a three-part test that the Third Circuit derived from Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009): The court must (1) take note of the elements of the cause of action; (2) distinguish between allegations of fact entitled to a presumption of truth and allegations of conclusions not so entitled; and (3) determine whether the well-pleaded allegations of fact plausibly give rise to a claim for relief.
The court recognized the ordinary elements of a claim under Section 1 - concerted action and unreasonable injury to competition.
The court rejected the argument that exchanging information about creditworthiness of customers necessarily violates the Sherman Act. It is not the exchange of information that is unlawful, the court concluded, but the joint understanding about customers to whom credit should be accorded that may violate antitrust law. Nor does it necessarily matter whether the information is historical or future. The necessary ingredient of an antitrust violation is whether the exchange of information results in an agreement to extend or refuse to extend credit.
Although credit and price may be linked, they are distinct. Sharing information concerning credit is not, the court ruled, treated the same as discussions of price. Exchanges of price information typically serves no purpose other than suppressing competition, but an exchange of information about creditworthiness can protect competitors from insolvent customers. Moreover, the court explained, even if price and credit are treated as the same, the dissemination of price information is not a per se violation. The violation is an agreement on price, and an exchange of information concerning price may not be indicative of an agreement.
The court then addressed the plausibility of the allegations of concerted conduct. The plausibility standard that the court used was not whether the complaint was believable or likely, but whether it alleged facts sufficient to allow an inference of unlawful concerted action. The court found that it did not. There was no allegation of direct evidence of agreement. The allegation of circumstantial evidence was of conscious parallelism without any of the necessary plus factors. That is, there was no motive to act in concert; every defendant's conduct was consistent with its unilateral interest in not buying the receivables of a retailer who is unlikely to pay them; and although the defendants shared information about their plans, there was no allegation of any assurance of common action. The wisdom of not buying the receivables owed by a possibly insolvent retailer did not depend on whether other factors did or did not buy receivables owed by that retailer.
The court also refused leave to amend the complaint. Leave had been requested after the judgment of dismissal, and was therefore controlled by F.R.Civ.P. 59. However, in this instance, the court ruled that a post-judgment motion to amend would be covered by the more lenient standards in F.R.Civ.P. 15. Even so, the amended complaint would be futile because it failed to cure the deficiencies found by the court in the original complaint.
