Legal Sanity "Discovered"

Richard A. Epstein, University of Chicago
Richard A. Epstein
This week the U.S. Supreme Court began what might become a welcome revolution in civil litigation when it ordered--without "discovery"--the dismissal of an antitrust class-action suit against telephone companies.

The Federal Rules of Civil Procedure have long been read to allow an extensive and onerous pre-trial discovery process that allows each side to probe its rival's case. The plaintiff only need furnish his adversary "a short and plain statement of the claim showing that the pleader is entitled to relief." No party may obtain a summary judgment before trial until the other side has conducted extensive document searches and oral depositions, both subject only to modest judicial oversight.

These 1938 rules were drafted under the influence of a New Deal world view, which saw litigation as a collaborative search for the truth instead of a regulated form of combat. Yet no matter how we sugarcoat it, all litigation constitutes a form of aggression, which both sides seek to exploit by devising ways to inflict heavy compliance costs on their rivals at little cost to themselves.

Should an hour's work on a word processor allow plaintiffs to depose hundreds of employees and independent contractors and to review the millions of communications within and between the defendants? The power of this threat alone is often an inducement to play large awards in weak cases.

That truth was not fully evident in the old days, perhaps, because a regime of unlimited discovery works with tolerable efficiency in small cases involving car accidents. But scale matters, and the structural weaknesses of the rules become painfully evident in modern, complex litigation where--as this week's landmark decision in Twombly v. Bell Atlantic illustrates--endless factual disputes can swamp the underlying legal issues.

The Telecommunications Act of 1996 ended the local exchange monopoly that each regional Bell operating company (RBOC) held in its own territory. That act allowed any new exchange carrier immediately to offer local service anywhere throughout the country, and any incumbent Bell company to do the same, but only outside its own territory.

In line with prior case law, the Twombly plaintiffs' short and plain complaint alleged that all the defendant RBOCs had conspired nationwide since 1996 not to compete by offering local telephone service in the territory of the other RBOCs--a division of markets that counts as a textbook violation of the Sherman Antitrust Act. Read literally, this one sentence contains all elements of the classic conspiracy, which seems to foreordain immediate and costly discovery on evidentiary issues. But should an hour's work on a word processor allow plaintiffs to depose hundreds of RBOC employees and independent contractors and to review the millions of communications within and between the defendants? The power of this threat alone is often an inducement to play large awards in weak cases.

Even before Twombly, the Supreme Court demanded some minimal "facts" to flesh out any bare bones claim. So the Twombly plaintiffs pleaded that the head of one of the Bell companies, Richard Notebaert, had stated in a 2002 Chicago Tribune interview that the incumbent Bell companies were right not to compete against each other, even if it "might be a good way to turn a dollar." But the rest of the interview showed that Mr. Notebaert was referring to weird Federal Communications Commission pricing rules that made long term planning impossible. What conspirator would tip his hand in a public interview six years into a secret agreement?

Next the plaintiffs' experts were prepared to testify that each RBOC had given up strong profit opportunities for which they received some collusive quid pro quo. But it was equally evident that the cost and risk of a frontal territorial assault gave each RBOC strong independent reasons not to wage war against a sophisticated rival in its own territory. Nor does constant communication among the defendants signal collusion, as it might in other contexts, since all carriers have to communicate to run their businesses under the watchful eye of the FCC.

Last, the request of key members of Congress for Justice Department investigations of industry practices counted for little in light of the DOJ's clean bill of health after its own investigation.

At this point, the Supreme Court faced a moment of truth: Did the plaintiff allege enough facts to make it socially wise to go through discovery, the next procedural step. Instructively, the Court's 1984 decision in Matsushita Industries v. Zenith refused to allow a predatory pricing case to go to trial after exhaustive discovery, reasoning correctly that in the absence of unusual circumstances predation cases are far more likely to stymie legitimate competition than to deter anticompetitive behavior.

Twombly is closer to the line because the division of markets poses economic risks that predation rarely does. It is therefore less likely that a plaintiff has offered nothing "that tends to exclude the possibility that the alleged conspirators have acted independently." But extensive FCC oversight, a DOJ investigation, and the powerful economic reasons for RBOCs to deploy capital elsewhere tipped the balance in favor of ending litigation promptly.

Indeed, Twombly is far more controversial than Matsushita because it cuts off all discovery at the close of pleading. As such it represents a dramatic repudiation of a core feature of the 1938 federal rules, which had already frayed at the edges. But that change, of course, is fully justified, for if this weak amalgam of expert speculation and anecdotal observation permits discovery, then the defendants could do nothing to keep this case from going to trial. It would be a real travesty if millions in legal fees and potential billions in treble damage awards could transform the entire telephone markets on such flimsy evidence.

One looming question is whether Twombly's healthy skepticism carries over, for example, to class-action claims in securities or antidiscrimination cases. It's too early to predict a system-wide transformation in congressional or judicial attitudes. But, given Twombly, both Congress and the courts are far likelier to end in a sensible place, system wide, if they keep asking this question: Has the plaintiff presented enough by way of evidence to justify any huge additional expenditures of public and private resources in pretrial discovery?

One place to start is with across-the-board limitations on discovery, which include stronger judicial oversight coupled with requirements that the moving party bear some or all of the cost of document production and party depositions.

Richard A. Epstein is the author of Antitrust Consent Decrees in Theory and Practice: Why Less Is More (AEI Press, 2007) and coeditor with Michael S. Greve of Federal Preemption: States' Powers, National Interests (AEI Press, 2007).

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