On Appeal from the United States District Court for the District of New Jersey (Honorable Honorable Garrett E. Brown, Jr.) D.C. Civil Action Nos. 04-cv-5184 & 05-cv-1079.
The opinion of the court was delivered by: Scirica, Circuit Judge.
Before: SCIRICA, FISHER and GREENBERG, Circuit Judges.
This appeal from orders of dismissal under Federal Rule of Civil Procedure 12(b)(6) involves multiple putative class actions alleging massive conspiracies throughout the insurance industry. Plaintiffs are purchasers of commercial and employee benefit insurance, and defendants are insurers and insurance brokers that deal in those lines of insurance. According to plaintiffs, defendants entered into unlawful, deceptive schemes to allocate purchasers among particular groups of defendant insurers. The complaints assert that conspiring brokers funneled unwitting clients to their co-conspirator insurers, which were insulated from competition; in return, the insurers awarded the brokers contingent commission payments-concealed from the insurance purchasers and surreptitiously priced into insurance premiums-based on the volume of premium dollars steered their way. As a result of this scheme, plaintiffs allege they paid inflated prices for their insurance coverage and were generally denied the benefits of a competitive market. The question on appeal is whether plaintiffs have adequately pled either a per se violation of § 1 of the Sherman Act (plaintiffs have foresworn a full-scale rule-of-reason analysis) or a violation of the Racketeer Influenced and Corrupt Organizations (RICO) Act. Concluding they had not, the District Court dismissed the complaints. We will affirm in large part, vacate in part, and remand for further proceedings.
I. Procedural History and Plaintiffs' Allegations
This litigation followed on the heels of a public investigation and enforcement action. In October 2004, the New York State Attorney General filed a civil complaint in state court against insurance broker Marsh & McLennan ("Marsh"), alleging "that Marsh had solicited rigged bids for insurance contracts, and had received improper contingent commission payments in exchange for steering its clients to a select group of insurers." In re Ins. Brokerage Antitrust Litig., Nos. 04-5184, 05-1079, 2006 WL 2850607, at *1 (D.N.J. Oct. 3, 2006) (citing People v. Marsh & McLennan Cos., No. 04/403342 (N.Y. Sup. Ct. Oct. 14, 2004)). The next month, a group of attorneys general and state insurance departments began a broader investigation of insurance-industry practices. Private parties also filed numerous federal actions, which are the subject of this appeal.
The private actions were transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the District of New Jersey for consolidated pretrial proceedings. In re Ins. Brokerage Antitrust Litig., 360 F. Supp. 2d 1371 (J.P.M.L. 2005); see 28 U.S.C. § 1407. The District Court severed and realigned the actions into two consolidated dockets-the first pertaining to claims regarding property and casualty insurance (the "Commercial Case"), and the second pertaining to claims regarding employee benefits insurance (the "Employee Benefits Case").
The plaintiffs in the Commercial Case are a proposed class of businesses, individuals, and public entities who, between August 26, 1994 and September 1, 2005, engaged the services of the Broker Defendants to obtain advice with respect to the procurement or renewal of commercial property and casualty insurance and entered into or renewed an insurance policy with the Insurer Defendants. The plaintiffs in the Employee Benefits Case are both employers who utilized the services of the Broker Defendants to obtain group insurance coverage from the Insurer Defendants for their employees as part of their employee benefits plans and employees who obtained insurance from the Insurer Defendants through the employers' benefits plans.
In re Ins. Brokerage Antitrust Litig., 579 F.3d 241, 249 (3d Cir. 2009) (affirming, inter alia, the District Court's approval of plaintiffs' settlement agreements with two defendants in this litigation).*fn1
In accordance with the District Court's restructuring, plaintiffs filed a separate consolidated amended complaint in each of the Commercial and Employee Benefits cases. Each complaint alleged violations of the Sherman Act, 15 U.S.C. § 1, and the RICO Act, 18 U.S.C. § 1962(c), (d), as well as violations of various state-law antitrust statutes and commonlaw duties. Shortly thereafter, defendants moved to dismiss the Sherman Act and RICO claims in both cases under Federal Rule of Civil Procedure 12(b)(6).*fn2
On October 3, 2006, the District Court granted the motions and dismissed the claims without prejudice. Ins. Brokerage, 2006 WL 2850607. Defendants had asserted in their moving papers that they were immune from Sherman Act liability under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011--1015, which "provides a statutory antitrust exemption for activities that (1) constitute the 'business of insurance,' (2) are regulated pursuant to state law, and (3) do not constitute acts of 'boycott, coercion or intimidation.'" Ticor Title Ins. Co. v. FTC, 998 F.2d 1129, 1133 (3d Cir. 1993) (quoting Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 219--20 (1979)); see 15 U.S.C. §§ 1012(b), 1013(b). The District Court rejected this argument on the ground that defendants' alleged conduct was not part of the "business of insurance" within the meaning of the Act. 2006 WL 2850607, at *7--10. But the court nonetheless dismissed both the Sherman Act and RICO claims because it found the complaints lacked the requisite factual specificity.
In granting leave to amend, the District Court instructed plaintiffs to file in each case a supplemental statement of particularity for their federal antitrust claims and an amended RICO case statement for their RICO claims. Plaintiffs did so, and defendants again moved to dismiss. On April 5, 2007, the District Court again granted the motions, but it once again allowed plaintiffs an opportunity to amend their pleadings. In re Ins. Brokerage Antitrust Litig., 2007 WL 1100449 (D.N.J. Apr. 5, 2007) (antitrust claims); In re Ins. Brokerage Antitrust Litig., 2007 WL 1062980 (D.N.J. Apr. 5, 2007) (RICO claims). In response, plaintiffs filed a Second Amended Complaint ("SAC") in each of the Commercial and Employee Benefits cases, as well as a Revised Particularized Statement ("RPS") and Amended RICO Case Statement ("ARCS") augmenting the Second Amended Complaint's allegations. For a third time, defendants moved to dismiss under Rule 12(b)(6). In orders dated August 31 and September 28, 2007, the District Court again dismissed the antitrust and RICO claims-this time with prejudice. Applying the pleading standard set forth by the Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which had been decided on May 21, 2007, the District Court concluded that plaintiffs' allegations in both the Commercial and the Employee Benefits cases were insufficient with respect to both the Sherman Act and RICO claims. In re Ins. Brokerage Antitrust Litig.,2007 WL 2533989 (D.N.J. Aug. 31, 2007) (antitrust claims); In re. Ins. Brokerage Antitrust Litig.,2007 WL 2892700 (D.N.J. Sept. 28, 2007) (RICO claims). Plaintiffs filed a timely notice of appeal in each case.*fn3
Plaintiffs' pleadings are of a substantial volume. The complaint in each case is more than 200 pages (including attached exhibits), and to this total must be added the pages in the Revised Particularized Statements and Amended RICO Case Statements. Significantly, the District Court allowed discovery to proceed while the motions to dismiss were pending. Plaintiffs' amended pleadings were thus able to draw on documents produced and depositions taken pursuant to these discovery orders, as well as material unearthed in the course of the public investigations.
As reflected by the length of this opinion-and of the caption-this is extraordinarily complex litigation involving a large swath of the insurance provider and brokerage industries, elaborate allegations of misconduct, and challenging legal issues. The District Court skillfully managed the consolidated proceedings. We take particular note of the court's thorough treatment of defendants' motions to dismiss, which comprised five separate opinions examining three successive rounds of pleadings. The court's patient and meticulous analysis has greatly aided our review.
1. Broker-Centered Conspiracies
In each complaint, plaintiffs allege the existence of a number of broker-centered antitrust conspiracies. As the name suggests, at the center of each alleged conspiracy was a defendant broker, who colluded with its defendant insurer-partners to steer its clients, purchasers of insurance, to particular insurers in exchange for the payment of contingent commissions. In the Commercial Case, plaintiffs allege six such conspiracies, centered on defendant brokers Marsh,*fn4 Aon Corporation, Wells Fargo & Company, HRH, Willis Group, and Gallagher, respectively. In the Employee Benefits Case, plaintiffs allege five broker-centered conspiracies, led respectively by Marsh,*fn5 Aon, Universal Life Resources, Gallagher, and Willis Group.*fn6
According to the complaints, the broker-centered conspiracies proceeded in two stages. First, "[b]eginning in the mid-to-late 1990s, each of the Broker Defendants," in "a dramatic change" from prior practice, "began to form so-called 'strategic partnerships' with certain insurance companies, to which it would then allocate the bulk of its business." Comm. SAC ¶ 83. The broker and each of its co-conspiring insurers agreed, "and each of the conspiring insurers horizontally agreed," that the broker "would 'consolidate' its business by directing the bulk of its premium volume to its 'strategic partner' co-conspirators, thereby eliminating hundreds of other insurers from competing equally with the conspiring insurers for the majority" of the broker's business. Id. ¶ 158. In the second stage, the insurer-members of each conspiracy each agreed with the broker, "and agreed horizontally among themselves, to reduce or eliminate competition for that secured business among the conspiring ['strategic partner'] insurers." Id.*fn7
As alleged by plaintiffs, a major focus of the second stage of the conspiracies was protecting the incumbent business of each insurer. To maximize insurers' retention of existing customers, the conspiracies allegedly employed a variety of "incumbent protection devices." Specifically, plaintiffs aver that brokers facilitated the non-competitive allocation of customers to insurers by giving insurers "last looks" and "first looks" on bids.*fn8 The complaints also assert that each insurer in each broker-centered conspiracy knew the identity of the broker's other "strategic partners." The brokers also revealed to each insurer detailed information about the arrangements between the broker and its other insurer-partners, including information about the size of the contingent commissions those partners were paying to the broker, and even the amount of premium volume steered by the broker to the other insurers. These facts, plaintiffs contend, evince the existence of an agreement between the insurers and the broker-and among the insurers themselves-to reap inflated profits by stifling competitive bidding and protecting incumbent business, in violation of § 1 of the Sherman Act.
These incumbent protection devices, plaintiffs claim, were common to all of the broker-centered conspiracies. In the Commercial Case only, plaintiffs also allege that insurers in the Marsh-centered conspiracy acceded to broker requests to provide "false" bids that were intentionally higher than the bids of the insurer to which the broker wished to award the business. For example, the complaint relates a statement by a former employee of a defendant insurer that his employer had agreed to "provide losing quotes" to its broker-partner in exchange for, among other things, the broker's "getting 'quotes from other [insurance] carriers that would support the [employer, at least when it was the incumbent carrier] as being the best price.'" Id. ¶ 109. The employee of another insurer allegedly stated that "she provided protective quotes when the broking plan called for it '[t]o show, to pretend to show competition where there is none.'" Id. ¶ 119. This employee was allegedly told by the broker that the insurer "should provide protective quotes so that [it] would not face competition on its own renewals." Id. This bid-rigging behavior facilitated the customer allocation scheme by deceiving insurance customers into believing they were receiving the best possible price in a competitive market. According to plaintiffs, insurers were willing to assist co-conspiring insurers in this way because they expected to be the beneficiary of such bid rigging where their own incumbent business was concerned.
In addition to the broker-centered conspiracies, each complaint alleges a "global conspiracy" among all of the defendants: "[W]hile engaging in their separate 'hub and spoke' schemes [i.e., the broker-centered conspiracies] to create supra-competitive premiums and contingent commissions, each of the Broker 'hubs' simultaneously agreed horizontally not to compete with each other by disclosing any competing broker's contingent commission arrangements, or the consequent premium price impact of those arrangements, in an effort to win those brokers' customers' business." Id. ¶ 354. Although each broker, plaintiffs claim, knew that the other brokers were using contingent commission arrangements to obtain outsized profits, each "also knew that exposing another broker's contingent commission arrangements to the other broker's customers would lead to retaliation, thereby threatening the first broker's own contingent commission scheme and supra-competitive profits." Id. ¶ 355. "Therefore," plaintiffs allege, the brokers "agreed horizontally" to maintain a mutually beneficial silence. Id. ¶ 362. Plaintiffs further allege that the defendant insurers were "complicit" in this horizontal agreement among the brokers, id. ¶ 353, and that they also agreed "horizontally with each other not to disclose the Broker-Centered Conspiracies and resulting supra-competitive premiums to the brokers' customers," id. ¶ 359.
As evidence of this asserted "global" agreement in the Commercial Case, plaintiffs point to allegations that each broker-centered conspiracy operated in a similar way and that the brokers incorporated similar standardized confidentiality provisions into their respective contingent commission agreements with insurers, which prohibited disclosing the terms of the contingent commission agreements to insurance customers. Furthermore, plaintiffs allege that the brokers' membership in the Council of Insurance Agents & Brokers (CIAB), a trade association, "afforded them many opportunities to exchange information and allowed Defendants to adopt collective policies towards nondisclosure of rival brokers' contingent commissions." Id. ¶ 364.
Plaintiffs in the Employee Benefits Case also rely on these types of allegations to support their claim of a global conspiracy. They find additional support, however, in the similar way in which insurers, at the alleged behest of the brokers, accounted for the expense of contingent commissions on Schedule A of Form 5500, a document that must, under ERISA, be filed with the Internal Revenue Service and the Department of Labor. According to plaintiffs, instead of reporting the commissions as "a variable, case-specific cost," insurers treated them "improperly as a non-reportable fixed cost (overhead)." EB SAC ¶ 305. This reporting technique allegedly yielded two advantages to defendants. First, they "were enabled to evade their disclosure requirements under ERISA and mislead their clients." Id. Second, by classifying contingent commissions as a fixed cost spread across all lines of an insurer's business, "the Insurer Defendants artificially raised the price of all lines of insurance, rather than substantially raising the cost of insurance" obtained through the co-conspiring brokers, which would have rendered that insurance blatantly uncompetitive with insurance obtained through other, non-conspiring brokers. Id. ¶ 306. Not only, plaintiffs allege, did defendants adopt a similar approach to accounting for the contingent commission agreements, but employees of the defendants also sometimes exchanged information about how they completed Form 5500. Plaintiffs claim these allegations support an inference of an agreement not to disclose contingent commissions properly in order to conceal the existence of defendants' anticompetitive practices.
Plaintiffs contend that defendants' alleged customer allocation schemes also violated the RICO statute. In the Commercial Case, plaintiffs assert the existence of six RICO enterprises, which correspond to the six broker-centered conspiracies identified in the antitrust claims. "Alternatively, Plaintiffs allege that CIAB is a legal entity which constitutes a RICO enterprise...." Comm. SAC ¶ 512. According to the complaint, the defendants utilized these enterprises to engage in a pattern of racketeering activity consisting of numerous acts of mail and wire fraud that served to conceal and misrepresent defendants' customer allocation schemes.
The Employee Benefit complaint alleges similar predicate acts of racketeering and adds allegations that defendants misrepresented information reported on Form 5500 and otherwise violated ERISA through their use of contingent commissions. Here, plaintiffs allege the existence of five RICO enterprises congruent with the five alleged broker-centered antitrust conspiracies.
We exercise plenary review of the District Court's orders granting defendants' motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). See Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009). This Rule authorizes dismissal of a complaint for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). Under Rule 8(a)(2), a complaint need present "only 'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the defendant fair notice of what the... claim is and the grounds upon which it rests.'" Twombly, 550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)) (omission in Twombly); see Fed. R. Civ. P. 8(a)(2). To comply with this general pleading standard, the complaint, "construe[d]... in the light most favorable to the plaintiff," Gelman, 583 F.3d at 190 (quoting Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008)), must contain "'enough factual matter (taken as true) to suggest' the required element[s]" of the claims asserted, Phillips, 515 F.3d at 234 (quoting Twombly, 550 U.S. at 556).
1. Plausibility Under Twombly
Section 1 of the Sherman Act provides: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1. As we have explained, this statutory language imposes two essential requirements on an antitrust plaintiff.*fn9 "First, the plaintiff must show that the defendant was a party to a 'contract, combination... or conspiracy.'" Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., 530 F.3d 204, 218 (3d Cir. 2008). Instead of assigning each of these last three terms a distinct meaning, courts have interpreted them collectively to require "some form of concerted action," In re Baby Food Antitrust Litig., 166 F.3d 112, 117 (3d Cir. 1999) (internal quotation marks omitted), in other words, a "'unity of purpose or a common design and understanding or a meeting of minds' or 'a conscious commitment to a common scheme,'" In re Flat Glass Antitrust Litig., 385 F.3d 350, 357 (3d Cir. 2004) (quoting Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984)). Put more succinctly, "[t]he existence of an agreement is the hallmark of a Section 1 claim." Baby Food, 166 F.3d at 117; see InterVest, Inc. v. Bloomberg, L.P., 340 F.3d 144, 159 (3d Cir. 2003) ("Unilateral activity by a defendant, no matter the motivation, cannot give rise to a section 1 violation.").*fn10
In addition to demonstrating the existence of a "conspiracy," or agreement, "the plaintiff must show that the conspiracy to which the defendant was a party imposed an unreasonable restraint on trade."*fn11 Mack Trucks, 530 F.3d at 218; see Flat Glass, 385 F.3d at 356 ("Despite its broad language, Section 1 only prohibits contracts, combinations or conspiracies that unreasonably restrain trade."). "[T]he usual standard" applied to determine whether a challenged practice unreasonably restrains trade is the so-called "rule of reason." Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 882 (2007). Under this standard, "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited." Mack Trucks, 530 F.3d at 225 (internal quotation marks omitted). Significantly, under a rule-of-reason analysis, the plaintiff "bears the initial burden of showing that the alleged [agreement] produced an adverse, anticompetitive effect within the relevant geographic market." Gordon v. Lewistown Hosp., 423 F.3d 184, 210 (3d Cir. 2005). Because of "the difficulty of isolating the [actual] market effects of challenged conduct," United States v. Brown Univ., 5 F.3d 658, 668 (3d Cir. 1993), successful attempts to meet this burden typically include a demonstration of defendants' market power, as "a judgment about market power is [a] means by which the effects of the [challenged] conduct on the market place can be assessed," NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 110 n.42 (1984) (quoting the Solicitor General's "correct" observation). Cf. FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 460--61 (1986) ("Since the purpose of the inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition, proof of actual detrimental effects, such as a reduction of output, can obviate the need for an inquiry into market power, which is but a surrogate for detrimental effects." (internal quotation marks omitted)). If the plaintiff carries this burden, the court will need to decide whether the anticompetitive effects of the practice are justified by any countervailing pro-competitive benefits.*fn12 See Eichorn v. AT&T Corp., 248 F.3d 131, 143 (3d Cir. 2001) (describing an analysis in which courts "balance the effect of the alleged anticompetitive activity against its competitive purposes within the relevant product and geographic markets"); see also Leegin, 551 US. at 886 ("In its design and function the rule [of reason] distinguishes between restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating competition that are in the consumer's best interest.").
Judicial experience has shown that some classes of restraints have redeeming competitive benefits so rarely that their condemnation does not require application of the full-fledged rule of reason. Paradigmatic examples are "horizontal agreements among competitors to fix prices or to divide markets." Leegin, 551 U.S. at 886 (citations omitted). Once a practice has been found to fall into one of these classes, it is subject to a "per se" standard. As the Supreme Court has explained, these practices are ordinarily condemned as a matter of law under an "illegal per se" approach because the probability that these practices are anticompetitive is so high; a per se rule is applied when "the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output." In such circumstances a restraint is presumed unreasonable without inquiry into the particular market context in which it is found.
NCAA, 468 U.S. at 100 (quoting Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 19--20 (1979)); see Brown Univ., 5 F.3d at 670 ("Per se rules of illegality are judicial constructs, and are based in large part on economic predictions that certain types of activity will more often than not unreasonably restrain competition." (internal citation omitted)). Under the per se standard, plaintiffs are relieved of the obligation to define a market and prove market power. See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984) (citing N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958)); Rossi v. Standard Roofing, Inc., 156 F.3d 452, 464--65 (3d Cir. 1998); 11 Herbert Hovenkamp, Antitrust Law ¶ 1910a(2d ed. 2005); see also 7 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1509c, at 403--04 (2d ed. 2003) ("Little is lost when the court condemns a restraint that was harmless because the defendants lacked power but that was socially useless in any event."). Once a defendant's practice has been found to fall into one of the recognized classes, it is "conclusively presumed to unreasonably restrain competition." Flat Glass, 385 F.3d at 356 (internal quotation marks omitted).*fn13
While pleading exclusively per se violations can lighten a plaintiff's litigation burdens, it is not a riskless strategy. If the court determines that the restraint at issue is sufficiently different from the per se archetypes to require application of the rule of reason,the plaintiff's claims will be dismissed. E.g., AT&T Corp. v. JMC Telecom, LLC, 470 F.3d 525, 531 (3d Cir. 2006); see also Texaco Inc. v. Dagher, 547 U.S. 1, 7 n.2 (2006) (declining to conduct a rule of reason analysis where plaintiffs "ha[d] not put forth a rule of reason claim"). See generally 11 Hovenkamp, supra, ¶ 1910b (discussing the cost-benefit analysis involved in deciding whether to pursue an exclusively per se theory of liability).
Some restraints of trade are "highly suspicious" yet "sufficiently idiosyncratic that judicial experience with them is limited." 11 Hovenkamp, supra, ¶ 1911a. Per se condemnation is inappropriate, but at the same time, the "inherently suspect" nature of the restraint obviates the sort of "elaborate industry analysis" required by the traditional rule-of-reason standard. Gordon, 423 F.3d at 210. Courts have devised a "quick look" approach for these cases. See Dagher, 547 U.S. at 7 n.3; Cal. Dental Ass'n. v. FTC, 526 U.S. 756, 770 (1999) (stating that a "'quick-look' analysis" is appropriate where "an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets"); see also 11 Hovenkamp, supra, ¶ 1911a ("What [the 'quick-look'] term is intended to connote is that a certain class of restraints, while not unambiguously in the per se category, may require no more than cursory examination to establish that their principal or only effect is anticompetitive."). Under a quick look analysis, which is essentially an abbreviated form of the rule of reason, Cal. Dental, 526 U.S. at 770, "competitive harm is presumed and the defendant must set forth some competitive justification for the restraints," Gordon, 423 F.3d at 210. If no plausible justification is forthcoming, the restraint will be condemned. Brown Univ., 5 F.3d at 669. "If the defendant offers sound procompetitive justifications, however, the court must proceed to weigh the overall reasonableness of the restraint using a full-scale rule of reason analysis." Id.*fn14
Here, plaintiffs abjure "a full-scale rule of reason analysis." They claim instead that defendants' behavior was per se unlawful, or that, at the very least, it is susceptible to condemnation under a "quick look" analysis. Plaintiffs do not dispute that in order to succeed under either of these approaches, they need to show the existence of a horizontal agreement, that is, an agreement between "competitors at the same market level." In re Pharmacy Benefits Managers Antitrust Litig., 582 F.3d 432, 436 n.5 (3d Cir. 2009); see also Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988) ("Restraints imposed by agreement between competitors have traditionally been denominated as horizontal restraints, and those imposed by agreement between firms at different levels of distribution as vertical restraints."). Under the Supreme Court's jurisprudence, virtually all vertical agreements now receive a traditional ruleof-reason analysis. See Leegin, 551 U.S. 877; see also Gordon, 423 F.3d at 210 (rejecting quick look analysis and applying rule of reason where restraint was vertical).*fn15 In the factual context of this case, a horizontal agreement means an agreement among the insurers in the broker-centered conspiracies, and an agreement among either the brokers or the insurers in the global conspiracy. Agreements between brokers and insurers, on the other hand, are vertical and would have to be analyzed under the traditional rule of reason, which plaintiffs have disclaimed.*fn16
Plaintiffs' obligation to show the existence of a horizontal agreement is not only an ultimate burden of proof but also bears on their pleadings. "[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).*fn17
As we have recognized, this plausibility standard is an interpretation of Federal Rule of Civil Procedure 8. Phillips, 515 F.3d at 234; see Twombly, 550 U.S. at 557 (stating that the plausibility standard "reflects the threshold requirement of Rule 8(a)(2) that the 'plain statement' possess enough heft to 'sho[w] that the pleader is entitled to relief.'" (alteration in original)). Twombly's importance to the case before us, however, goes beyond its formulation of the general pleading standard. Twombly is also an essential guide to the application of that standard in the antitrust context, for in Twombly the Supreme Court also had to determine whether a Sherman Act claim alleging horizontal conspiracy was adequately pled.*fn18
The Twombly plaintiffs had alleged that defendant telephone companies had "entered into a contract, combination or conspiracy to prevent competitive entry in their respective local telephone and/or high speed internet service markets and ha[d] agreed not to compete with one another and otherwise allocated customers and markets to one another." Twombly, 550 U.S. at 551 (internal quotation marks omitted). The Court found, however, that this sort of "wholly conclusory statement of claim," id. at 561, was insufficient to plead an entitlement to relief. Id. at 564 & n.9; see id. at 556--57 ("Without more,... a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality."). The Court therefore proceeded to examine the entirety of the complaint's allegations, in order to determine whether the complaint contained "enough factual matter (taken as true) to suggest that an agreement was made," in other words, "enough to render a § 1 conspiracy plausible." Id. at 556.
In conducting this inquiry, the Court looked to well-settled jurisprudence establishing what is necessary to satisfy the conspiracy requirement of a § 1 claim at various post-pleading stages of litigation. Id. at 554 (citing Theatre Enters., Inc. v. Paramount Film Distrib. Corp., 346 U.S. 537 (1954) (affirming denial of directed verdict); Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984) (same); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986) (addressing whether the record evidence of agreement was sufficient to withstand a motion for summary judgment)). The crux of this case law is that evidence of parallel conduct by alleged co-conspirators is not sufficient to show an agreement. Indeed, "[e]ven 'conscious parallelism,' a common reaction of 'firms in a concentrated market [that] recogniz[e] their shared economic interests and their interdependence with respect to price and output decisions' is 'not in itself unlawful.'" Id. at 553--54 (quoting Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 227 (1993)) (alterations in Twombly).*fn19 Parallel conduct is, of course, consistent with the existence of an agreement; in many cases where an agreement exists, parallel conduct-such as setting prices at the same level-is precisely the concerted action that is the conspiracy's object. But as the Supreme Court has long recognized, parallel conduct is "just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market." Id. at 554; see Matsushita, 475 U.S. at 594 (warning that "mistaken inferences" of conspiracy from ambiguous circumstantial evidence may "chill the very conduct the antitrust laws are designed to protect"); see also supra note 10. In order "to avoid deterring innocent conduct that reflects enhanced, rather than restrained, competition," Flat Glass, 385 F.3d at 357, and in order to enforce the Sherman Act's requirement of an agreement, the Supreme Court has required that "a § 1 plaintiff's offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently," Twombly, 550 U.S. at 554; see also Matsushita, 475 U.S. at 597 n.21 ("[C]onduct that is as consistent with permissible competition as with illegal conspiracy does not, without more, support even an inference of conspiracy.").
Some courts have denominated these facts, the presence of which may indicate the existence of an actionable agreement, as "plus factors." Flat Glass, 385 F.3d at 360. Although "[t]here is no finite set of such criteria...[,] [w]e have identified... at least three such plus factors: (1) evidence that the defendant had a motive to enter into a price fixing conspiracy; (2) evidence that the defendant acted contrary to its interests; and (3) 'evidence implying a traditional conspiracy.'" Id. (quoting Petruzzi's IGA Supermarkets, Inc. v. Darling-Delaware Co., 998 F.2d 1224, 1244 (3d Cir. 1993)). As we have cautioned, however, care must be taken with the first two types of evidence, each of which may indicate simply that the defendants operate in an oligopolistic market, that is, may simply restate the (legally insufficient) fact that market behavior is interdependent and characterized by conscious parallelism. Id. at 360--61; see 6 Areeda & Hovenkamp, Antitrust Law ¶ 1434c1 (2d ed. 2003); see also Baby Food, 166 F.3d at 135 ("[E]vidence of action that is against self-interest or motivated by profit must go beyond mere interdependence.").*fn20 The third factor, "evidence implying a traditional conspiracy," consists of "non-economic evidence 'that there was an actual, manifest agreement not to compete,'" which may include "'proof that the defendants got together and exchanged assurances of common action or otherwise adopted a common plan even though no meetings, conversations, or exchanged documents are shown.'" Flat Glass, 385 F.3d at 361(quoting In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651, 661 (7th Cir. 2002); 6 Areeda & Hovenkamp, supra, ¶ 1434b); see 6 Areeda & Hovenkamp, supra,¶ 1416, at 103 (referring generally to "an overt act more consistent with some pre-arrangement for common action than with independently arrived-at decisions").
One important question raised by Twombly is what is the relationship between this summary judgment (and directed judgment) jurisprudence governing the kind of evidentiary facts necessary to support a finding of conspiracy, on the one hand, and the "antecedent" issue, Twombly,550 U.S. at 554, of a § 1 plaintiff's pleading burden, on the other. We think Twombly aligns the pleading standard with the summary judgment standard in at least one important way: Plaintiffs relying on circumstantial evidence of an agreement must make a showing at both stages (with well-pled allegations and evidence of record, respectively) of "something more than merely parallel behavior," id. at 560, something "plausibly suggest[ive of] (not merely consistent with) agreement," id. at 557. See id. at 557 n.5 (noting that a plaintiff's pleadings must cross the line "between the factually neutral and the factually suggestive"). "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." Id. at 557. Put differently, allegations of conspiracy are deficient if there are "obvious alternative explanation[s]" for the facts alleged. Id. at 567.*fn21
A corollary of this proposition is that plaintiffs relying on parallel conduct must allege facts that, if true, would establish at least one "plus factor," since plus factors are, by definition, facts that "tend to ensure that courts punish concerted action-an actual agreement-instead of the unilateral, independent conduct of competitors." Flat Glass, 385 F.3d at 360 (internal quotation marks omitted); accord Lum v. Bank of Am., 361 F.3d 217, 230 (3d Cir. 2004) (describing plus factors as "circumstances under which... the inference of rational independent choice [is] less attractive than that of concerted action" (quoting Bogosian v. Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir. 1977)).*fn22
It bears noting that, consistent with summary judgment analysis, plus factors need be pled only when a plaintiff's claims of conspiracy rest on parallel conduct. Allegations of direct evidence of an agreement, if sufficiently detailed, are independently adequate. See Twombly, 550 U.S. at 564 (distinguishing "independent allegation[s] of actual agreement" from "descriptions of parallel conduct").*fn23 But this does not mean that a § 1 claim will be considered adequately pled because of the bare possibility that discovery might unearth direct evidence of an agreement. The Court of Appeals' opinion in Twombly had pointed to that possibility as a ground for denying dismissal. 425 F.3d at 114. But the Supreme Court expressly rejected this reasoning, stating that "this approach to pleading would dispense with any showing of a 'reasonably founded hope' that a plaintiff would be able to make a case." Twombly, 550 U.S. at 562 (quoting Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 347 (2005)). After Twombly, if a plaintiff expects to rely exclusively on direct evidence of conspiracy, its complaint must plead "enough fact to raise a reasonable expectation that discovery will reveal" this direct evidence. Id. at 556. And if the plaintiff alternatively expects to rest on the circumstantial evidence of parallel behavior, the complaint's statement of facts must place the alleged behavior in "a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action." Id. at 557.*fn24 In other words, regardless of whether the plaintiff expects to prove the existence of a conspiracy directly or circumstantially, it must plead "enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement." Id. at 556.*fn25
Because Twombly dismissed the antitrust claim before it, the Court did not provide specific examples of allegations that would satisfy its plausibility standard. Nonetheless, the Court did point in general terms to "parallel behavior that would probably not result from chance, coincidence, independent responses to common stimuli, or mere interdependence unaided by an advance understanding among the parties." 550 U.S. at 556 n.4 (citing 6 Areeda & Hovenkamp, supra, ¶ 1425, at 167--85). More significantly, the shortcomings identified in the Twombly complaint provide an important-albeit negative-gloss on the governing standard.
The Twombly plaintiffs proffered two basic theories of anticompetitive collusion. First, they charged that the defendant regional telephone companies (ILECs) conspired to "inhibit the growth of upstart" competitors (CLECs). 550 U.S. at 550. Second, they asserted that the ILECs agreed not to compete with one another so as to preserve the preexisting regional monopoly each enjoyed. Id. at 551.
At the outset of its analysis, the Court remarked that the complaint's sufficiency would "turn on the suggestions raised by [defendants' alleged] conduct when viewed in light of common economic experience." Id. at 565. Under this lens, the complaint's first theory immediately revealed its inadequacy because "nothing in the complaint intimate[d] that the resistance to the upstart[ CLECs] was anything more than the natural, unilateral reaction of each ILEC intent on keeping its regional dominance.... [T]here [was] no reason to infer that the companies had agreed among themselves to do what was only natural anyway...." Id. at 566. A rudimentary economic analysis also fatally undermined the complaint's second charge, namely that the ILECs agreed not to enter one another's markets. The Court recognized that "[i]n a traditionally unregulated industry with low barriers to entry, sparse competition among large firms dominating separate geographical segments of the market could very well signify illegal agreement." Id. at 567. But in the telecommunications industry at issue in Twombly, monopoly had been "the norm..., not the exception." Id. at 568. Noting that "[t]he ILECs were born in that world, doubtless liked the world the way it was, and surely knew the adage about him who lives by the sword," the Court found that "a natural explanation for the noncompetition alleged is that the former Government-sanctioned monopolists were sitting tight, expecting their neighbors to do the same thing." Id. In fact, "the complaint itself" bolstered this conclusion. Id. Not only did it "not allege that competition [against other ILECs] as CLECs was potentially any more lucrative than other opportunities being pursued by the ILECs during the same period," but "the complaint [was] replete with indications that any CLEC faced nearly insurmountable barriers to profitability owing to the ILECs' flagrant resistance to the network sharing requirements" of federal law. Id. In short, both "common economic experience" and the complaint's own allegations showed that each defendant ILEC was independently motivated to behave in the ways alleged. Accordingly, neither of plaintiffs' theories successfully pled a § 1 conspiracy because in each case, defendants' parallel conduct "was not only compatible with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009) (summarizing Twombly).
In sum, Twombly makes clear that a claim of conspiracy predicated on parallel conduct should be dismissed if "common economic experience," or the facts alleged in the complaint itself, show that independent self-interest is an "obvious alternative explanation" for defendants' common behavior. For our present purposes, we find this guidance sufficient.
b. Assessing the Sufficiency of Plaintiffs' Pleadings
As the Supreme Court has instructed, we begin by identifying the complaints' bare assertions that the insurers or brokers entered into horizontal agreements. See, e.g., Comm. SAC ¶ 158 ("[T]he Insurers members of the... Broker-Centered Conspiracy all agreed with [the Broker], and agreed horizontally among themselves, to reduce or eliminate competition for [the Broker's] secured business among the conspiring insurers."); id. ¶ 354 ("[T]he Broker 'hubs' simultaneously agreed horizontally not to compete with each other...."). Because these conclusory averments do not "show" but merely "assert" plaintiffs' entitlement to relief, Twombly, 550 U.S. at 555 n.3, they cannot carry plaintiffs' pleading burden. See id. at 556--57 ("Without more,... a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality."); cf. Howard Hess Dental Labs. Inc. v. Dentsply Int'l, Inc., 602 F.3d 237, 254--55 (3d Cir. 2010) (holding that it was inadequate for the complaint to state in "a conclusory manner" that "Defendants, each with all of the others, have entered into two interrelated conspiracies" and that "every Dealer knew that every other Dealer agreed, or would agree, to th[e] same [allegedly unlawful] plan" (emphasis omitted)). Accordingly, we must examine the entirety of the complaints' factual allegations and determine whether, taken as true, they support a plausible inference of horizontal conspiracy.
i. The Broker-Centered Conspiracies
(a) Conspiracies Not Involving Bid Rigging
As the District Court recognized, plaintiffs' "broker-centered conspiracies" are alleged as hub-and-spoke conspiracies, with the broker as the hub and its insurer-partners as the spokes. This type of conspiracy has "a long history in antitrust jurisprudence." Dentsply Int'l, 602 F.3d at 255 (citing Interstate Circuit, Inc. v. United States, 306 U.S. 208 (1939)) (discussing general hub-and-spoke model). "[T]he critical issue for establishing a per se violation with the hub and spoke system is how the spokes are connected to each other." Total Benefits Planning Agency, Inc. v. Anthem Blue Cross & Blue Shield, 552 F.3d 430, 436 (6th Cir. 2008). Here, the District Court found plaintiffs had not adequately alleged the existence of a "wheel" or "rim" (that is, a horizontal agreement) connecting the insurer-spokes. 2007 WL 2533989, at *17; see Dickson v. Microsoft Corp., 309 F.3d 193, 203 (4th Cir. 2002) ("A rimless wheel conspiracy is one in which various defendants enter into separate agreements with a common defendant, but where the defendants have no connection with one another, other than the common defendant's involvement in each transaction.") (citing Kotteakos v. United States, 328 U.S. 750, 755 (1946)); cf. Dentsply Int'l, 602 F.3d at 255 (concluding that "even assuming the Plaintiffs have adequately identified the hub (Dentsply) as well as the spokes (the Dealers),... the amended complaint" fails to allege adequately "an agreement among the Dealers themselves").
Plaintiffs' allegations in support of horizontal conspiracy in the broker-centered schemes fall into two different categories. First, plaintiffs assert that the very nature of the contingent commission agreements between the broker and each of its insurer-partners implies an agreement among the brokers. Second, plaintiffs rely on specific details about the operation of the customer steering schemes, particularly the "devices" used to ensure that a particular piece of business was placed with the designated insurer. With the exception of the bid rigging alleged in the Marsh-centered commercial conspiracy, we agree with the District Court that plaintiffs' allegations do not give rise to a plausible inference of horizontal conspiracy.
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 broker-centered 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.
According to the complaints, the defendant brokers decided to consolidate the pool of insurers to which they referred business in order to improve efficiency and extract higher commissions from each of their insurer-partners. As defendants point out, "[o]nce a broker decided to organize its business in this fashion, each insurer had sound, independent business reasons to pay contingent commissions to become and remain a 'preferred insurer.' Paying such commissions helped the insurer to compete for and retain a larger share of its partners' business than if it had no such vertical relationships." Defendants' EB Br. 38. In short, the obvious explanation for each insurer's decision to enter into a contingent commission agreement with a broker that was consolidating its pool of insurers was that each insurer independently calculated that it would be more profitable to be within the pool than without. The complaints themselves reinforce this conclusion with their portrait of a concentrated brokerage market, in which a handful of brokers controlled the majority of client business, and an unconcentrated, more competitive market of insurers vying for premium dollars. Comm. SAC ¶¶ 70--76; EB SAC ¶¶ 67--73. According to plaintiffs' own account, "[t]he Insurer Defendants are thus largely dependent on the Broker Defendants to assure access to business and protect their market share." EB SAC ¶ 73; accord Comm. SAC ¶ 76; see also id. ¶ 73 ("The close bond between broker and client gives brokers tremendous influence, and often decisive control, over the placement of their clients' insurance business."). Given this economic landscape, each insurer had an obvious incentive to enter into the "strategic partnerships" offered by the defendant brokers, irrespective of the actions of its competitors.
Refusing to concede this point, plaintiffs argue that the parallel decisions of insurers to join the broker-centered conspiracies plausibly imply a horizontal agreement among the insurers because "an insurer would not pay enormous contingent commissions in order to access premium volume if its major rivals were getting the same access for free." Plaintiffs' EB Reply Br. 8 (emphasis omitted). This contention is implausible. Although each insurer would be motivated to achieve the best deal possible with the broker-and would doubtless like to obtain terms as least as favorable as those negotiated by other insurers-the determinative consideration would be whether the insurer is better off paying contingent commissions for privileged access to the broker's clients than it would be saving those payments and foregoing the broker's assistance in winning and retaining business. Especially in light of the market dynamics alleged by plaintiffs, the obvious explanation for the decision of the defendant insurers to enter into contingent commissions agreements with the consolidating brokers is that each insurer found that the benefits justified the costs. In fact, the complaints relate incidents in which insurers who were reluctant to conform to the contingent commission demands of a broker nonetheless did so when faced with the prospect of losing their privileged access to the broker's book of business. See, e.g., Comm. SAC ¶¶ 135--140; EB SAC ¶¶ 163--168; id. ¶¶ 214--226. These anecdotes only strengthen the obvious conclusion that no horizontal agreement was necessary to induce the insurers to become "strategic partners."
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").*fn26 The District Court correctly found that the brokers' alleged consolidation of the insurers with which they did business did not plausibly imply an agreement susceptible to per se condemnation.
Plaintiffs seek to bolster the inference of horizontal agreement with allegations of information-sharing among the members of each putative broker-centered conspiracy. Plaintiffs assert numerous instances, for example, in which a broker communicated the details of its contingent commission agreement with one insurer-partner to other insurer-partners, in violation of confidentiality provisions forbidding such disclosures. In plaintiffs' view, these alleged disclosures helped defendants to police the broker-centered conspiracies by assuring each conspiring insurer that none of the other insurer-partners was "cheating" by taking more than the allegedly agreed-upon share of premium volume.
But there is a significant obstacle to plaintiffs' attempts to infer a horizontal agreement from this sharing of information. The complaints allege only that the brokers made the disclosures; there are no allegations that any insurer ever horizontally disclosed to its competitors the details of its vertical agreement with a broker. Furthermore, there are obvious reasons for each broker to share this information with its insurer-partners, reasons that have nothing to do with preexisting agreements of any kind. The details of commission agreements with other insurers, for example, could be a powerful tool for a broker attempting to negotiate a more favorable agreement with a particular insurer-partner. Either match the "market" price for my premium volume, a broker might threaten, or I will transfer your share of my business to other, higher-commission-paying insurer-partners. This tactic would seem to be an effective way for brokers to exploit the leverage that, according to the complaints, they enjoyed over the insurers. And in fact, the complaints show that brokers used the information in precisely this way. See, e.g., EB SAC ¶ 126 (recounting an incident in which a broker "reveals [to a particular insurer] that the bonus compensation arrangement it was seeking from [that particular insurer] had been agreed to by the other conspiring Insurers, and that [the particular insurer] should offer terms like those put forth by another Insurers [sic]"). Just as a manufacturer's practice of informing each of its distributors of the identities of its other distributors-as well as the prices they paid and the volume of product they received-would not plausibly imply a horizontal agreement among the distributors, the disclosure of information alleged here fails to plausibly suggest a conspiracy among the insurers. It is true that if a horizontal conspiracy of the sort asserted by plaintiffs existed, the exchange of information alleged could conceivably serve the "policing" function plaintiffs describe. But it does not follow that this disclosure of information plausibly implies such a conspiracy; it is at least equally consistent with unconcerted action.*fn27
The manufacturer analogy highlights a basic fallacy that undergirds much of plaintiffs' argumentative strategy. Plaintiffs repeatedly insist that
when [an] insurer knows that it is buying competitive protections for its incumbent business and it knows that other insurers are not getting a real opportunity on its incumbent business, and it knows that there are other partners of the broker who have the same competitive protections bought with the same contingent commissions, it is a fair inference... that this describes... a horizontal conspiracy.
Tr. of Oral Arg. 15--16. "Competitive protections" sound vaguely sinister, but what insurers were allegedly buying was a portion of the ...