Telecom ruling likely to reduce frivolous suits

T he U.S. Supreme Court in a 7-2 ruling Monday rejected an antitrust class-action lawsuit brought against Bell Atlantic (now Verizon) and four other phone companies.

Basically, the high court decided that before an antitrust case can be brought, there must at least be some evidence beyond what antitrust scholars call “parallel behavior” of some sort of collusion or conspiracy to fix prices or occupy markets.

This is a healthy development.

The case arose as a result of 1996 changes in telecommunications law under which local phone companies were to open local monopoly markets to competition in exchange for the opportunity to enter the long-distance business. The lawsuit, brought by prominent “consumer” attorney William Twombley, part of a notoriously aggressive law firm, alleged that the companies kept to their territories rather than competing as aggressively as the writers of the legislation had intended. The suit was on behalf of everyone who had leased a phone line or paid for an Internet connection for the past 10 years.

Justice David Souter, on behalf of the court majority, ruled that “a bare assertion of conspiracy will not suffice,” but that such claims must move across the line between “possibility and plausibility.”

Some authorities disagree, but this ruling looks to have an important and salutary impact not just on antitrust practices, but on the practice of filing sweeping class-action lawsuits in order to force companies to open their books so lawyers can start looking around to find evidence of alleged wrongdoing. The mere threat of such a lawsuit, considering the high costs that can be involved in such “discovery,” causes many companies to settle even frivolous lawsuits.

Several aspects of the decision suggested a desire to discourage frivolous lawsuits. “The threat of discovery expense will push cost-conscious defendants to settle even anemic cases,” Justice Souter wrote. Before a sweeping lawsuit can be considered, there must be “enough facts to state a claim to relief that is plausible on its face.”

In essence, the decision sets a higher standard for beginning a class-action lawsuit, and not only in antitrust cases. Luke Froeb, an economist at Vanderbilt University (and former chief economist at the Federal Trade Commission), who filed an amicus curiae brief in the case on behalf of 25 antitrust economists, said as a result, “we should see fewer frivolous lawsuits, so courts will be able to spend their scarce time evaluating serious suits.”

This decision does not challenge the basic premise of antitrust law — that the most effective way to prevent monopolies and conspiracies by businesses is to regulate them by law. Many economists believe that simply having a free market in which entry into various lines of business is not obstructed by law is a more effective protection against business monopolies.

Given the law as it exists, however, this decision is likely to reduce the number of frivolous or marginal lawsuits the courts must consider. That’s a healthy outcome.