Recent Ninth Circuit decision illustrates what it takes to satisfy the Twombly pleading standard when relying on circumstantial evidence of a price-fixing conspiracy

A July 21, 2023 decision from the Ninth Circuit revived Flextronics International USA’s antitrust suit alleging that inductor manufacturers violated Section 1 of the Sherman Act by participating in a price-fixing conspiracy.[1] The court’s nonprecedential decision provides illuminating rulings on the factual sufficiency for pleading (1) parallel pricing and (2) the “plus factors” which courts use to distinguish permissible parallel conduct from impermissible conspiracy. After summarizing those rulings, this article highlights strategic takeaways for plaintiffs alleging a Sherman Act violation without direct evidence of a price-fixing agreement.

Background

Flextronics’s case took a winding path to the Ninth Circuit. After the media reported in January 2018 that the United States Department of Justice (“DOJ”) issued subpoenas to unnamed companies as part of an investigation into the inductors industry, a class of direct purchaser plaintiffs filed a complaint against several inductor manufacturers.[2] Flextronics, a direct purchaser of inductors, opted to bring an individual suit rather than join the class with other direct purchasers.[3] Flextronics’s complaint generally tracked that of the class action.[4]

The Northern District of California judge presiding over the cases held that the class complaint “failed to allege a Section 1 violation in which each individual defendant joined the conspiracy and played some role in it.”[5] Specifically, the court held that the complaint did not allege a Section 1 violation because class plaintiffs failed to allege parallel conduct. Instead of alleging parallel conduct, the class plaintiffs “relied on average, aggregated pricing, rather than any price charged for any product by any Defendant at any time.”[6]

While the class plaintiffs’ failure to plead parallel conduct alone proved fatal, the court further held that the class’s allegations that defendants shared confidential and detailed corporate information at meetings of the Japan Electronics and Information Technology Industries Association (“JEITA”), including meetings of the Passive Components Committee (“PCC”) and the PCC Inductors Subcommittee, were insufficient for the court to infer a price-fixing conspiracy.[7] It also rejected an argument that the structure of the inductors market constituted circumstantial evidence of a conspiracy given hundreds of Chinese manufacturers entered the market during the relevant time period and eroded defendants’ market share.[8] The court further “held that the DOJ investigation into the inductors industry did not support the alleged conspiracy because the mere existence of a government investigation into price-fixing in the inductor market does not support an inference of collusion.”[9] Lastly, the court held that allegations that some of the defendants engaged in antitrust violations in other markets was insufficient to support an inference that there was an antitrust violation in the inductors market.[10]

Flextronics’s district court litigation

To overcome the court’s objections to the class complaint, Flextronics amended its complaint several times, yet the court still dismissed Flextronics’s Third Amended Complaint.[11] Among other things, the court held that Flextronics failed to plead sufficient facts showing circumstantially the existence of a broad conspiracy between the defendants to fix inductor prices.[12]

The court explained that “plaintiffs attempting to plead a conspiracy based on circumstantial evidence must allege both parallel conduct and ‘plus factors’ that demonstrate that the conduct is the result of conspiracy and not independent action.”[13] Flextronics, however, did not dispute that it “failed to allege parallel conduct.”[14] Flextronics argued instead “that it need not allege parallel conduct because it assert[ed] a bid-rigging conspiracy.”[15] The court rejected this argument because it had previously held that the alleged bid-rigging conspiracy which only included a subset of the defendants Flextronics sued could not support a broad market conspiracy comprising all of the defendants.[16] The court also concluded that spreadsheets of pricing in the inductor market that Flextronics submitted did not show parallel pricing because they did not identify the defendants by name, the prices were different by company, and they did not show that any defendants shared pricing information to align with each other.[17]

Having held that Flextronics’s Third Amended Complaint failed to allege parallel pricing, the district court did not address any of Flextronics’s alleged “plus factors.”[18]

Flextronics then amended its complaint a fourth time.[19] It relied on two sources of evidence to plead parallel pricing.[20] First, “Flextronics engaged an expert to demonstrate statistical evidence of parallel pricing.”[21] Second, it made price comparisons involving certain pairs of defendants that it suggested demonstrated parallel pricing.[22]

The district court held that these revisions did not remedy the lack of parallel pricing allegations in Flextronics’s Third Amended Complaint.[23] It faulted Flextronics’s expert for only suggesting parallel pricing among co-conspirators who were no longer defendants in the case.[24] The court faulted the evidence that did relate to the defendants in suit—Flextronics’s price comparisons—for failing to “show any trends, patterns, or relationships among the Defendants' pricing over time.”[25]

Unlike in its decision dismissing Flextronics’s Third Amended Complaint, the court’s decision dismissing Flextronics’s Fourth Amended Complaint did address some of the plus factors.[26] Flextronics alleged in its Fourth Amended Complaint that the defendants participated in JEITA meetings.[27] However, it did not allege facts showing that the defendants improperly exchanged information during these meetings.[28] The Court held this would be insufficient to show that the defendants joined a conspiracy and played some role in it because “mere participation in trade-organization meetings where information is exchanged and strategies are advocated does not suggest an illegal agreement.”[29] In other words, Flextronics’s Fourth Amended Complaint did not “allege facts ‘tending to exclude the possibility that defendants acted independently.’”[30]

The Ninth Circuit’s decision

On appeal, the Ninth Circuit reversed the district court’s dismissal of Flextronics’s Fourth Amended Complaint.[31] The Ninth Circuit held that the district court erroneously concluded that Flextronics failed to adequately allege parallel pricing.[32] It also held that the district court erred in its analysis of Flextronics’s plus factors in two respects: (1) by focusing only on the defendants’ participating in JEITA meetings and failing to consider Flextronics’s Fourth Amended Complaint holistically, and (2) “by requiring Flex to plead facts tending to exclude the possibility that defendants acted independently.’”[33]

The Ninth Circuit explained that parallel pricing need only be “similar and reasonably contemporaneous.”[34] It held that the facts plead in Flextronics’s Fourth Amended Complaint, when construed in Flextronics’s favor, plausibly alleged such conduct.[35] Although the statistical price analysis conducted by Flextronics’s expert only found statistical evidence of parallel pricing for non-defendant co-conspirators because Flextronics did not purchase enough products from the defendants still in suit to permit a statistical analysis for them, Flextronics did provide factual allegations supporting an inference that those defendants’ prices moved in parallel with the prices of the non-defendant co-conspirators.[36] As examples, the Ninth Circuit pointed to Flextronics’s allegations that (1) monthly median prices for certain inductors sold by two of the defendants “exhibited similar trend lines over time and were nearly identical by 2012, (2) there were at least 14 examples of price comparisons where the defendants had substantially similar prices to the non-defendant co-conspirators “for the same type of inductor during a particular month,” and (3) when one of the non-defendant co-conspirators submitted prices to an OEM customer on three occasions from 2012–2013, it knew one of the defendant’s price and pricing strategy for similar inductors such that the non-defendant co-conspirator never submitted a lower price than that defendant.[37]

In reversing the district court’s holding related to the plus factors, the Ninth Circuit corrected the lower court’s misreading of the law. It explained that rather than focus on defendants’ participation in JEIT meetings, the district court should have “consider[d] each purported plus factor in turn and cumulatively to determine whether [Flextronics] ha[d] alleged nonconclusory facts sufficient to state a claim under § 1.”[38] And rather than require Flextronics to plead facts excluding the possibility that any parallel conduct by the defendants was lawful independent conduct, the proper standard for evaluating the defendants’ motion to dismiss was that which ‘applies to all § 1 complaints: a plaintiff must plausibly allege an agreement that is unreasonable “per se” or under the “rule of reason."[39] The former standard, the Ninth Circuit explained, “is more appropriate at summary judgment, rather than on a motion to dismiss.”[40]

The Ninth Circuit applied the proper standard and concluded that Flextronics plead five factors weighing in favor of finding conspiracy.[41] First, Flextronics plead facts “which are plausibly understood as invitations to collude in a price-fixing conspiracy. For example, at a November 2008 meeting, the then-chairman of JEITA stated to the Passive Components Committee (“PCC”)—a committee covering capacitors, inductors, and resistors—that “it is not the time to reduce prices.”[42] The Fourth Amended Complaint further alleged that an employee of one defendant, in a June 2010 meeting, referred to efforts to control price corrections and suppress reductions.[43] And the complaint alleged that in 2014 an employee of one of the other defendants contacted all the defendants to decide on Consumption Factor values for inductors—which were used to calculate average sales prices—in violation of company policy.[44]

Second, Flextronics plead “facts reflecting consciousness of guilt or acknowledgements by co-conspirators that their conduct is anticompetitive.”[45] For instance, an employee of one defendant stated in 2012 that certain information exchanges that occurred between defendants were considered compliance violations under the company's fair-trade policy.[46] Similarly, an employee of another defendant advised a superior to handle meeting notes with care because “In North America, these sorts of meetings are completely prohibited.”[47] Furthermore, an executive of a third defendant acknowledged that certain aspects of JEITA meetings put the company at risk of violating antitrust laws.

Third, Flextronics plausibly alleged that one of the defendants “participated in similar and overlapping conspiracies to fix the prices of capacitors and resistors.”[48] That defendant sought amnesty from the DOJ in connection with price fixing of both capacitors and resistors during the same period Flextronics alleged the defendants were fixing prices for inductors.[49] Crucially, Flextronics alleged that meetings for resistors and capacitors were held at the same time as meetings for inductors, and “capacitors, inductors, and resistors were treated similarly by Defendants and their employees.”[50]

Fourth, Flextronics’s Fourth Amended Complaint “alleges that the exchange of firm-specific, forward-looking, and confidential information at JEITA meetings facilitated the price-fixing conspiracy.”[51] According to the court, that allegation has three qualities that the Federal Trade Commission and the DOJ have suggested “are more likely to raise competitive concern: (1) ‘information relating to price, output, costs, or strategic planning’; (2) ‘information on current operating and future business plans’; and (3) ‘individual company data’ rather than ‘aggregated data that does not permit recipients to identify individual firm data.’”[52] Additionally, Flextronics’s allegation that attendees of a May 2007 PCC meeting “discussed customer ‘cost-down’ requests, or requests by customers for price decreases” is “largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.”[53]

Fifth, and finally, Flextronics “alleges that the characteristics of the inductors market make it conducive to conspiracy.”[54] Five companies “controlled over 80% of the market for inductors in 2004 and over 66% in 2016,” product differentiation between inductor manufacturers is minimal, there are high barriers to entry for new inductor producers, and demand for inductors is inelastic.[55]

Accordingly, the Court held that “actual allegations of parallel pricing and plus factors” in Flextronics’s Fourth Amended Complaint “nudge[d] its claim of a price-fixing conspiracy ‘across the line from conceivable to plausible.’”[56]

Strategic takeaways

Although non-precedential, the Ninth Circuit’s decision in Flextronics International USA, Inc. v. Panasonic Holdings Corporation offers a useful illustration of how trial courts must evaluate circumstantial evidence of a price-fixing conspiracy at the motion to dismiss stage. For Plaintiffs alleging such a conspiracy and opposing a motion to dismiss for failure to state a claim, the case offers several key takeaways:

Overcome incomplete evidence of parallel pricing by illustrating broader trends over common time periods: A major factor in the district court’s conclusion that Flextronics had not plead parallel pricing was the fact that Flextronics did not provide statistical evidence of parallel pricing among the defendants over the period of the alleged conspiracy. The Ninth Circuit’s decision shows that less direct evidence is sufficient at the pleading stage, but Plaintiffs should include as many price comparisons between alleged co-conspirators as possible with available data and the comparisons should cover as much of the time period of the conspiracy as possible. Furthermore, the Ninth Circuit’s decision shows that statistical data of non-defendant conspirators may be helpful in illustrating parallel pricing trends.

Set the standard for evaluating plus factors: Explaining to the trial court how your complaint alleges various plus factors will not save your case if the trial court does not weigh those factors properly. The Ninth Circuit in Flextronics faulted the court below for requiring the plaintiff to allege facts “tending to exclude the possibility that defendants acted independently,” which is only appropriate at the motion for summary judgment stage.[57] Plaintiffs should make it clear in their briefing that the plus factors alleged in the complaint need only plausibly allege a price-fixing conspiracy.

Present plus factors as integral chapters of a single story: District courts evaluating whether to dismiss price-fixing conspiracy claims at the motion to dismiss stage where there is no direct evidence of a conspiracy must review the complaint holistically. Plaintiffs should include as many plus factors as possible in their complaint. The Ninth Circuit’s decision provides useful examples of factors you might develop in your complaint. Some appear insignificant in isolation, which may tempt the trial court to discount them. However, careful complaint and brief drafting can weave the plus factors together into a plausible conspiracy theory that can survive a motion to dismiss. 

*Marcus "Hill" Brakefield is an Associate in the Washington, D.C. office. 

Footnotes

[1] Flextronics Int’l USA, Inc. v. Panasonic Holdings Corp., No. 22-15231, 2023 WL 4677017 (9th Cir. July 21, 2023).
[2] Flextronics Int’l USA, Inc. v. Murata Mfg. Co., No. 22-15231, 2020 WL 5106851, at *1 (N.D. Cal. Aug. 31, 2020)
[3] Id.
[4] Id. at *2.
[5] Id. (citation and internal quotation marks omitted).
[6] Id. (citation and internal quotation marks omitted).
[7] Id.
[8] Id.
[9] Id. (citation and internal quotation marks omitted).
[10] Id. at *3.
[11] Id. at *15.
[12] Id. at *13. Flextronics’s Third Amended Complaint alleged two price-fixing theories: (1) “a ‘broad directional agreement’ between all Defendants to fix current and future pricing levels,” and (2) price agreement amongst some of the defendants to “target Original Equipment Manufacturers’ (‘OEM’) supply chains by rigging bids and implementing specific prices.” Id. at *9. According to Flextronics, its OEM-specific theory of price fixing supported an inference that the broader conspiracy existed among all the defendants. Id. at *10. This article omits discussion of the OEM-specific claims because the defendants allegedly involved in that scheme were dismissed from the case before it reached the Ninth Circuit. See In re Inductors Antirust Litig., 2022 WL 327708, at *1 (noting dismissal of the TDK, Murata, and Taiyo Yuden defendants before the other defendants moved to dismiss Flextronics’s Fourth Amended Complaint).
[13] Flextronics Int’l USA, Inc. v. Murata Mfg. Co., 2020 WL 5106851, at *14.
[14] Id. at *15.
[15] Id. at n.6.
[16] Id.
[17] Id.
[18] Id. at *15.
[19] In re Inductors Antirust Litig., No. 5:18-cv-00198-EJD, 2022 WL 327708 (N.D. Cal. Feb. 3, 2022).
[20] Id. at *3.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id. (quoting In re Musical Instruments and Equipment Antitrust Litig., 798 F.3d 1186, 1196 (9th Cir. 2015)).
[30] Id. (quoting Kelsey K. v. NFL Enters., LLC, 254 F. Supp. 3d 1140, 1144 (N.D. Cal. 2017)).
[31] Flextronics Int’l USA, Inc. v. Panasonic Holdings Corp., 2023 WL 4677017, at *1.[32] Id.
[33] Id. at *2.
[34] Id. at *1.
[35] Id.
[36] Id.
[37] Id.
[38] Id. (quoting Musical Instruments, 798 F.3d 1186 at 1194).
[39] Id. at *2 (quoting SmileDirectClub, LLC v. Tippins, 31 F.4th 1110, 1118 (9th Cir. 2022)).
[40] Id.
[41] Id.
[42] Id.
[43] Id.
[44] Id.
[45] Id.
[46] Id.
[47] Id.
[48] Id. at 3.
[49] Id.
[50] Id.
[51] Id.
[52] Id. (quoting Federal Trade Commission & U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors 15–16 (April 2000)).
[53] Id. (quoting Musical Instruments, 798 F.3d 1186 at 1194).
[54] Id. at *4.
[55] Id.
[56] Id. (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 550 (2007)).
[57] Id. at *2.