Joshua Ramsey v. Namm , 798 F.3d 1186 ( 2015 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
IN RE: MUSICAL INSTRUMENTS AND No. 12-56674
EQUIPMENT ANTITRUST LITIGATION,
D.C. No.
3:09-md-02121-
JOSHUA RAMSEY; DAVID LAB-DHB
GIAMBUSSO; DWAYNE WIGGINS;
JASON PARADISE; KATE
MACWILLIAMSON; NIRANJAN OPINION
PARIKH; PAULA JENNINGS; RYAN J.
BIGG; MARK O’LEARY; CYNTHIA
SEPULVEDA; RUSSELL D. MELTON;
JERRY JOST; KEVIN GAGNEPAIN;
JOSH PEARSON; JOHN PEARSON;
MARY PEARSON; COLBY GILES;
DAVID KEEL; WILLIAM S. POFF;
ALLEN HALE; DANIEL T. SMITH;
GERALD LOGSDON; AUGUSTIN
CERVANTES; BENN FELTHEIMER;
BRYAN ROACH; BRANDON
ARMSTRONG; RICHARD TABAS;
ALLEN HALE; KENNETH MANYIN;
RUSSELL D. MELTON; JON BANDISH;
MARK O’LEARY; ALEX TELLER;
SCOTT COOK; JOSHUA SEILER;
JOHAN EDWARD RIGOR; WALTER
WITHERSPOON; ROBERT LESKO;
SUZANNE ONDRE; LISA PRITCHETT,
Plaintiffs-Appellants,
2 IN RE: MUSICAL INSTRUMENTS
v.
NATIONAL ASSOCIATION OF MUSIC
MERCHANTS, INC.; GUITAR CENTER,
INC.; GUITAR CENTER STORES, INC.;
FENDER MUSICAL INSTRUMENTS
CORP.; YAMAHA CORPORATION OF
AMERICA; GIBSON GUITAR
CORPORATION; HOSHINO, U.S.A.,
INC.; KAMAN MUSIC CORPORATION,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of California
Larry A. Burns, District Judge, Presiding
Argued and Submitted
October 6, 2014—Pasadena, California
Filed August 25, 2015
Before: Harry Pregerson, Richard C. Tallman,
and Carlos T. Bea, Circuit Judges.
Opinion by Judge Bea;
Dissent by Judge Pregerson
IN RE: MUSICAL INSTRUMENTS 3
SUMMARY*
Antitrust
The panel affirmed the district court’s dismissal of a
claim under § 1 of the Sherman Act, alleging a price-fixing
conspiracy among guitar manufacturers.
A putative class of guitar and guitar amplifier purchasers
alleged that certain guitar manufacturers each adopted similar
advertising policies under circumstances suggesting that they
agreed among themselves to adopt those policies. They thus
alleged a hybrid horizontal and vertical agreement, or
“hub-and spoke” agreement. The panel held that the
respective parts of a hub-and-spoke conspiracy are analyzed
separately, the vertical components under the rule of reason
and the horizontal components as violations per se.
The panel stated that the key agreements here were those
among the defendant manufacturers. Plaintiffs’ allegations of
parallel conduct, in conjunction with several “plus” factors,
were insufficient to provide a plausible basis from which to
infer the existence of these alleged horizontal agreements.
Accordingly, plaintiffs failed to state a claim under § 1.
Dissenting, Judge Pregerson wrote that plaintiffs pleaded
enough factual matter (taken as true) to suggest that a
horizontal agreement existed between defendants.
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 IN RE: MUSICAL INSTRUMENTS
COUNSEL
Daniel C. Girard, Elizabeth C. Pritzker, Amanda Steiner,
Scott M. Grzenczyk (argued), Girard Gibbs LLP, San
Francisco, California, for Plaintiffs-Appellants.
Margaret M. Zwisler (argued), J. Scott Ballenger, Latham &
Watkins LLP, Washington, D.C.; Christopher S. Yates,
Latham & Watkins LLP, San Francisco, California, for
Defendant-Appellee Guitar Center, Inc.
Daniel A. Sasse, Chahira Solh, Crowell & Moring LLP,
Irvine, California, for Defendant-Appellee Yamaha
Corporation of America.
Paul C. Cuomo, Stephen Weissman, Baker Botts LLP,
Washington, D.C.; Robert G. Abrams, Baker & Hostetler
LLP, Washington, D.C., for Defendant-Appellee National
Association of Music Merchants, Inc.
Neil G. Epstein, Keith E. Smith, Eckert Seamans Cherin &
Mellott, LLC, Philadelphia, Pennsylvania; Christopher M.
Young, DLA Piper LLP (US), San Diego, California, for
Defendant-Appellee Hoshino (U.S.A.), Inc.
Lawrence G. Scarborough, J. Alex Grimsley, Bryan Cave
LLP, Phoenix, Arizona, for Defendants-Appellees Fender
Musical Instruments Corporation and Kaman Music Corp.
Tim Harvey, Riley Warnock & Jacobson, PLC, Nashville,
Tennessee, for Defendant-Appellee Gibson Guitar Corp.
DBA Gibson U.S.A.
IN RE: MUSICAL INSTRUMENTS 5
OPINION
BEA, Circuit Judge:
Where a large musical-instrument retailer pressures
individual guitar manufacturers to set the lowest prices at
which the manufacturers will permit any retailer to advertise
the manufacturers’ products—and each manufacturer
acquiesces—can we infer the manufacturers conspired among
themselves to fix prices?
Plaintiffs ask us to answer this question in the affirmative.
They claim it is plausible to infer a price-fixing conspiracy
based only on allegations that certain guitar manufacturers
each adopted similar advertising policies (“parallel conduct”)
under circumstances that suggest the manufacturers agreed
among themselves to adopt those policies (“plus factors”).
But plaintiffs’ plus factors are no more consistent with an
illegal agreement than with rational and competitive business
strategies, independently adopted by firms acting within an
interdependent market. Plaintiffs’ allegations of “merely
parallel conduct that could just as well be independent action”
are insufficient to state a claim under § 1 of the Sherman Act,
15 U.S.C. § 1. Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
557 (2007). And because plaintiffs’ plus factors add nothing,
we affirm the judgment of the district court dismissing
plaintiffs’ § 1 claim.
I
Plaintiffs, a putative class, purchased guitars and guitar
amplifiers from defendant Guitar Center, Inc. (“Guitar
Center”), the largest retail seller of musical instruments in the
6 IN RE: MUSICAL INSTRUMENTS
United States.1 The guitars and amplifiers were manufactured
by five major manufacturers, defendants Fender Music
Instruments Corp., Gibson Guitar Corp., Yamaha Corp. of
America, Hoshino U.S.A., Inc., and Kaman Music Corp.
(“manufacturer defendants”). In their present complaint,
plaintiffs allege that between 2004 and 2009, Guitar Center
and the manufacturer defendants—along with defendant trade
association National Association of Music Merchants
(NAMM)—conspired to implement and enforce minimum-
advertised-price policies (“MAP policies”) that fixed the
minimum price at which any retailer could advertise the
manufacturers’ guitars and guitar amplifiers. According to
plaintiffs, these MAP policies tended to raise retail prices and
restrain competition. Plaintiffs allege that each manufacturer
agreed with Guitar Center to adopt MAP policies and that the
manufacturers agreed among themselves to adopt the MAP
policies proposed by Guitar Center. Plaintiffs claim this
collection of agreements violates § 1 of the Sherman Act and
the antitrust laws of Massachusetts and California.
Prior Federal Trade Commission Investigation and
Settlement
In 2007, before plaintiffs filed any of the cases that now
constitute this consolidated litigation, the Federal Trade
Commission (FTC) initiated a nonpublic investigation into
price fixing in the music-products industry. The FTC alleged
that
1
Plaintiffs allege that Guitar Center exercises considerable market
power in the musical-instruments industry—especially the market for
guitars and guitar amplifiers—controlling nearly one third of all retail
sales in the United States; Guitar Center also serves as the largest retailer-
customer of many of its instrument manufacturers.
IN RE: MUSICAL INSTRUMENTS 7
[b]etween 2005 and 2007, NAMM organized
various meetings and programs at which
competing retailers of musical instruments
were permitted and encouraged to discuss
strategies for implementing minimum
advertised price policies, the restriction of
retail price competition, and the need for
higher retail prices. . . . At these NAMM-
sponsored events, competitors discussed the
adoption, implementation, and enforcement of
minimum advertised price policies; the details
and workings of such policies; appropriate
and optimal retail prices and margins; and
other competitively sensitive issues.
Complaint, In re National Association of Music Merchants,
Inc., No. C-4255, at ¶ 5. The FTC further alleged that the
exchange of information among NAMM members (which
include Guitar Center and the manufacturer defendants)
“served no legitimate business purpose” and “had the
purpose, tendency, and capacity to facilitate collusion and to
restrain competition unreasonably.” Id. at ¶¶ 6–7. Neither
Guitar Center nor the manufacturer defendants were parties
to this FTC proceeding.
The FTC and NAMM resolved the dispute through a
consent decree. In the consent decree, the FTC ordered
NAMM to cease and desist from “urging, encouraging,
advocating, suggesting, coordinating, participating in, or
facilitating in any manner the exchange of information
between or among Musical Product Manufacturers or Musical
Product Dealers relating to . . . Price Terms, margins, profits,
or pricing policies, including but not limited to Minimum
Advertised Price Policies.” Decision and Order, In re
8 IN RE: MUSICAL INSTRUMENTS
National Association of Music Merchants, Inc., No. C-4255,
at *4. NAMM must also file periodic compliance reports and
make a statement before each NAMM trade show informing
members of the organization’s and members’ obligations
under the antitrust laws. Id. at *5–7. NAMM neither admitted
nor denied the FTC’s allegations, and the FTC did not levy
any monetary fine.
Proceedings Below
After the FTC issued its consent decree, numerous
plaintiffs filed complaints alleging that defendants agreed to
fix the retail prices of musical instruments in violation of § 1
of the Sherman Act and state antitrust laws. The Judicial
Panel on Multidistrict Litigation centralized twenty-eight of
these cases in the Southern District of California.
Defendants moved to dismiss plaintiffs’ first consolidated
class-action complaint under Federal Rule of Civil Procedure
12(b)(6). Defendants argued that plaintiffs’ allegations were
insufficiently detailed to satisfy the requirements of
specificity and plausibility that the Supreme Court had
recently outlined in Twombly. The district court granted the
motion to dismiss in part but permitted plaintiffs to amend
their complaint. The district court found that plaintiffs failed
to identify in their complaint “who is alleged to have
conspired with whom, what exactly they agreed to, and how
the alleged conspiracy was organized and carried out.” Nor
did plaintiffs “plead enough of the [MAP policies’] terms to
show how they restrained competition.” The district court
gave plaintiffs a chance to remedy these problems by
permitting some discovery. But because the district court
agreed with defendants that “remarks at open panel
discussions attended by many people at trade shows cannot
IN RE: MUSICAL INSTRUMENTS 9
reasonably constitute the terms of an illegal agreement in
these circumstances,” the court “limited [discovery] to who
attended or participated in meetings alleged in the amended
consolidated complaint and what was said or agreed to
there.”2
Following this limited discovery, plaintiffs filed the
operative complaint. Defendants again moved to dismiss the
complaint for its failure to state a claim. The district court
granted defendants’ motion and dismissed plaintiffs’ § 1
claim with prejudice for failure to satisfy the pleading
standard set forth in Twombly. Plaintiffs timely appealed.
II
We exercise appellate jurisdiction under 28 U.S.C.
§ 1291. We review de novo the district court’s dismissal of a
complaint for failure to state a claim. See Ecological Rights
Found. v. Pac. Gas & Elec. Co., 713 F.3d 502, 507 (9th Cir.
2013). When conducting this review, we accept as true all
nonconclusory factual allegations in the complaint. Id. (citing
Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1029–30
(9th Cir. 2009)).
2
Discovery consisted of document requests and interrogatories served
on each defendant; plaintiffs also deposed NAMM’s CEO and seven
employees or former employees of the manufacturer defendants and
Guitar Center.
10 IN RE: MUSICAL INSTRUMENTS
III
A
The antitrust laws of the United States aim to protect
consumers by maintaining competitive markets. To that end,
§ 1 of the Sherman Act prohibits agreements that
unreasonably restrain trade by restricting production, raising
prices, or otherwise manipulating markets to the detriment of
consumers. See 15 U.S.C. § 1; State Oil Co. v. Khan,
522 U.S. 3, 10 (1997); Apex Hosiery Co. v. Leader, 310 U.S.
469, 493 (1940).
In analyzing the reasonableness of an agreement under
§ 1, the Supreme Court has distinguished between agreements
made up and down a supply chain, such as between a
manufacturer and a retailer (“vertical agreements”), and
agreements made among competitors (“horizontal
agreements”). The Supreme Court has recognized that certain
horizontal agreements “always or almost always tend to
restrict competition and decrease output.” Broadcast Music,
Inc. v. CBS, 441 U.S. 1, 19–20 (1979). Classic examples
include agreements among competitors to fix prices, divide
markets, and refuse to deal. See, e.g., United States v. Trenton
Potteries Co., 273 U.S. 392, 397–98 (1927) (horizontal price
fixing); United States v. Topco Assocs., 405 U.S. 596, 608
(1972) (horizontal market division); Nw. Wholesale
Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S.
284, 293–94 (1985) (concerted refusal to deal). Such
inherently anticompetitive horizontal agreements violate the
Sherman Act per se. Once the agreement’s existence is
established, no further inquiry into the practice’s actual effect
on the market or the parties’ intentions is necessary to
establish a § 1 violation. See N. Pac. Ry. v. United States,
IN RE: MUSICAL INSTRUMENTS 11
356 U.S. 1, 5 (1958). Vertical agreements, on the other hand,
are analyzed under the rule of reason, whereby courts
examine “the facts peculiar to the business, the history of the
restraint, and the reasons why it was imposed,” to determine
the effect on competition in the relevant product market.
Nat’l Soc’y of Professional Eng’rs v. United States, 435 U.S.
679, 692 (1978). That analysis takes into account the fact that
some vertical restraints may have procompetitive
justifications that benefit consumers. See Leegin Creative
Leather Prods. v. PSKS, Inc., 551 U.S. 877, 889–92 (2007)
(noting that vertical price restraints can have the
procompetitive effect of increasing interbrand competition).
But the line between horizontal and vertical restraints can
blur. One conspiracy can involve both direct competitors and
actors up and down the supply chain, and hence consist of
both horizontal and vertical agreements. Plaintiffs here allege
one such hybrid form of conspiracy, sometimes called a “hub-
and-spoke” conspiracy. Although other circuits have
recognized the existence of “hub-and-spoke” conspiracies in
the antitrust context, see, e.g., Howard Hess Dental Labs. Inc.
v. Dentsply Int’l, Inc., 602 F.3d 237, 255 (3d Cir. 2010)
(explaining the configuration of a hub-and-spoke conspiracy);
Toys “R” Us, Inc. v. FTC, 221 F.3d 928, 934 (7th Cir. 2000)
(describing a hub-and-spoke conspiracy without calling it
such), we have not. We write to clarify the analysis of such
conspiracies under § 1.
A traditional hub-and-spoke conspiracy has three
elements: (1) a hub, such as a dominant purchaser; (2) spokes,
such as competing manufacturers or distributors that enter
into vertical agreements with the hub; and (3) the rim of the
wheel, which consists of horizontal agreements among the
spokes. See Howard Hess, 602 F.3d at 255. According to
12 IN RE: MUSICAL INSTRUMENTS
plaintiffs, Guitar Center (the hub) pressured each of the
manufacturer defendants (the spokes) to adopt MAP policies,
and the manufacturer defendants, in turn, each agreed among
themselves to adopt the policies (the rim). NAMM acted to
facilitate these illegal agreements by encouraging adoption of
MAP policies—a role that may be illegal but lacks an obvious
wheel analogue (might we suggest “lug nuts”?).
Of course, homespun metaphors for complex economic
activities go only so far. Section 1 prohibits agreements that
unreasonably restrain trade, no matter the configuration they
take or the labels we give them. A hub-and-spoke conspiracy
is simply a collection of vertical and horizontal agreements.
And once the conspiracy is broken into its constituent parts,
the respective vertical and horizontal agreements can be
analyzed either under the rule of reason or as violations per
se.3 See Toys “R” Us, 221 F.3d at 933, 940 (endorsing the
3
Some courts have distinguished between “rimmed” and “rimless” hub-
and-spoke conspiracies. See, e.g., Dickson v. Microsoft Corp., 309 F.3d
193, 203–04 & n.13 (4th Cir. 2002). In Dickson, the Fourth Circuit
characterized a rimless hub-and-spoke conspiracy as 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.” Id.
at 203. The extension of the wheel metaphor here may mislead: a rimless
hub-and-spoke conspiracy is not a hub-and-spoke conspiracy at all (for
what is a wheel without a rim?); it is a collection of purely vertical
agreements. But such a conspiracy may yet unreasonably restrain trade.
See, e.g., Leegin, 551 U.S. at 898–99 (recognizing that purely vertical
restraints may unreasonably restrain trade in violation of § 1).
We note, however, one key difference between a rimless hub-and-
spoke conspiracy (i.e., a collection of purely vertical agreements) and a
rimmed hub-and-spoke conspiracy (i.e., a collection of vertical agreements
joined by horizontal agreements): courts analyze vertical agreements
under the rule of reason, see id., whereas horizontal agreements are
IN RE: MUSICAL INSTRUMENTS 13
FTC’s analysis of the vertical components of a hub-and-spoke
conspiracy under the rule of reason while treating the
horizontal agreements as violations per se).
Here, the key agreements are those among the defendant
manufacturers. Plaintiffs made it clear both before the district
court and on appeal that their theory of the case depends on
establishing those horizontal agreements.4 The question
before us is whether plaintiffs have pleaded sufficient facts to
provide a plausible basis from which we can infer the alleged
agreements’ existence. See Twombly, 550 U.S. at 556–57,
560.
B
Because plaintiffs lack direct evidence of horizontal
agreements among the manufacturers,5 they plead that the
violations per se, see United States v. Socony-Vacuum Oil Co., 310 U.S.
150, 223–24 (1940). This distinction provides strong incentives for
plaintiffs to plead a horizontal conspiracy (either alone or as part of a
rimmed hub-and-spoke conspiracy). The prospect of establishing a
violation per se is much more appealing to plaintiffs than the potential
difficulty and costliness of proving a § 1 claim under the rule of reason.
4
Plaintiffs stated at oral argument that they did not claim the vertical
agreements between the manufacturers and Guitar Center to adopt MAP
policies to be unreasonable vertical restraints under § 1, nor do they
challenge the MAP policies themselves. Plaintiffs’ other allegations (e.g.,
that Guitar Center and NAMM conspired to facilitate and keep in place
the agreements among the manufacturers) are predicated on the existence
of the horizontal agreements among the manufacturers.
5
Even after the limited discovery permitted by the district court,
plaintiffs still do not plead facts in answer to the district court’s questions:
“who is alleged to have conspired with whom, what exactly they agreed
14 IN RE: MUSICAL INSTRUMENTS
defendant manufacturers’ parallel conduct in adopting MAP
policies, in conjunction with several “plus factors,” plausibly
suggests the existence of horizontal agreements. They argue
that the plus factors “nudge[]” their allegations of horizontal
agreements “across the line from conceivable to plausible.”
Id. at 570.
Under Twombly, parallel conduct, such as competitors
adopting similar policies around the same time in response to
similar market conditions, may constitute circumstantial
evidence of anticompetitive behavior. 550 U.S. at 553–54.
But mere allegations of parallel conduct—even consciously
parallel conduct—are insufficient to state a claim under § 1.
Plaintiffs must plead “something more,” “some further
factual enhancement,” a “further circumstance pointing
toward a meeting of the minds” of the alleged conspirators.
Id. at 557, 560.
In this way, Twombly takes into account the economic
reality that mere parallel conduct is as consistent with
agreement among competitors as it is with independent
conduct in an interdependent market. See id. at 554 (“The
inadequacy of showing parallel conduct or interdependence,
without more, mirrors the ambiguity of the behavior:
consistent with conspiracy, but just as much in line with a
wide swath of rational and competitive business strategy
unilaterally prompted by common perceptions of the
market.”). In an interdependent market, companies base their
actions in part on the anticipated reactions of their
competitors. And because of this mutual awareness, two firms
may arrive at identical decisions independently, as they are
cognizant of—and reacting to—similar market pressures. In
to, and how the alleged conspiracy was organized and carried out.”
IN RE: MUSICAL INSTRUMENTS 15
other words, competitors’ behavior may be consciously
parallel. Recognizing that parallel conduct may arise on
account of independent business decisions rather than an
illegal agreement, Twombly requires that when allegations of
parallel conduct are set out to make a § 1 claim, plaintiffs
must plead enough nonconclusory facts to place that parallel
conduct “in a context that raises a suggestion of a preceding
agreement.” Id. at 557. “Allegations of facts that could just as
easily suggest rational, legal business behavior by the
defendants as they could suggest an illegal conspiracy” are
insufficient to plead a § 1 violation. Kendall v. Visa U.S.A.,
Inc., 518 F.3d 1042, 1049 (9th Cir. 2008) (citing Twombly,
550 U.S. at 553–58 & n.5); see also Iqbal v. Ashcroft,
556 U.S. 662, 668 (2009) (“Where a complaint pleads facts
that are merely consistent with a defendant’s liability, it stops
short of the line between possibility and plausibility of
entitlement to relief.” (quoting Twombly, 550 U.S. at 557)
(internal quotation marks omitted)).6
This court has distinguished permissible parallel conduct
from impermissible conspiracy by looking for certain “plus
factors.” See, e.g., In re Citric Acid Litig., 191 F.3d 1090,
1102 (9th Cir. 1999) (“Parallel pricing is a relevant factor to
be considered along with the evidence as a whole; if there are
sufficient other ‘plus’ factors, an inference of conspiracy can
be reasonable.”). Whereas parallel conduct is as consistent
with independent action as with conspiracy, plus factors are
economic actions and outcomes that are largely inconsistent
6
The requirement that plaintiffs allege nonconclusory facts means that
plaintiffs cannot plead merely parallel conduct and allege conspiracy.
Conspiracy is a legal conclusion. See Kendall, 518 F.3d at 1047. Rather,
plaintiffs must plead evidentiary facts: “who, did what, to whom (or with
whom), where, and when.” Id. at 1048.
16 IN RE: MUSICAL INSTRUMENTS
with unilateral conduct but largely consistent with explicitly
coordinated action. See Twombly, 550 U.S. at 557 n.4. If
pleaded, they can place parallel conduct “in a context that
raises a suggestion of preceding agreement.” Id. at 557; cf. In
re Citric Acid Litig., 191 F.3d at 1102.7
Plaintiffs in their briefs and at oral argument identified the
following six plus factors alleged in the operative complaint:
(1) defendants shared a common motive to conspire; (2) the
manufacturer defendants acted against their self-interest;
(3) the manufacturer defendants simultaneously adopted
substantially similar MAP policies; (4) the FTC’s
investigation and consent decree; (5) the defendants’
participation in NAMM; and (6) retail prices for guitars and
guitar amplifiers rose during the class period as the number
of units sold fell.
We consider each purported plus factor in turn and
cumulatively to determine whether plaintiffs have alleged
nonconclusory facts sufficient to state a claim under § 1.
Common Motive
Plaintiffs allege that the manufacturer defendants shared
a similar motive to collude. But common motive does not
suggest an agreement. Any firm that believes that it could
7
In In re Citric Acid Litigation, we recognized that circumstantial
evidence in the form of plus factors could support the reasonable inference
of an agreement and thus raise a genuine issue of material fact to defeat
a defendant’s motion for summary judgment. 191 F.3d at 1102, 1108
(affirming the district court’s grant of defendant’s motion for summary
judgment, in part because of a lack of plus factors). The same principle
obtains in the context of a motion to dismiss. Plus factors coupled with
parallel conduct can take a complaint from merely possible to plausible.
IN RE: MUSICAL INSTRUMENTS 17
increase profits by raising prices has a motive to reach an
advance agreement with its competitors.8 Thus, alleging
“common motive to conspire” simply restates that a market
is interdependent (i.e., that the profitability of a firm’s
decisions regarding pricing depends on competitors’
reactions). Interdependence, however, does not entail
collusion, as interdependent firms may engage in consciously
parallel conduct through observation of their competitors’
decisions, even absent an agreement. And allegations of
parallel conduct—though recast as common motive—is
insufficient to plead a § 1 violation. See Twombly, 550 U.S.
at 556–57.
Action Against Self-Interest
Plaintiffs allege that defendant manufacturers acted
against self-interest by adopting MAP policies with Guitar
Center. Again, plaintiffs fail to account for conscious
parallelism and the pressures of an interdependent market. An
action that would seem against self-interest in a competitive
market may just as well reflect market interdependence
giving rise to conscious parallelism. For example, each firm
in an interdependent market expects that a widely unfollowed
price increase will be rescinded. But so long as prices can be
easily readjusted without persistent negative consequences,
8
We note that there are (at least) two ways for firms to increase profit.
They can compete to capture greater market share, carving out a bigger
piece of the existing pie. Or they can keep their market share the same
while increasing prices. If all firms increase prices, they have managed to
grow the pie, though their individual slices remain proportionally the
same. In a competitive market, attempts to grow the pie by charging
supracompetitive prices will be tempered by price competition as
individual firms attempt to capture greater market share. But common
motive for increased profits always exists.
18 IN RE: MUSICAL INSTRUMENTS
one firm can risk being the first to raise prices, confident that
if its price is followed, all firms will benefit. By that process
(“follow the leader”), supracompetitive prices and other
anticompetitive practices, once initiated, can spread through
a market without any prior agreement.
More extreme action against self-interest, however, may
suggest prior agreement—for example, where individual
action would be so perilous in the absence of advance
agreement that no reasonable firm would make the challenged
move without such an agreement. Here, if no reasonable
manufacturer would have entered into a MAP policy without
assurances that all other manufacturers would enter into
similar agreements, that would suggest collusion. But the
complaint itself, perhaps maladroitly, provides ample
independent business reasons why each of the manufacturers
adopted and enforced MAP policies even absent an
agreement among the defendant manufacturers. Plaintiffs
allege that each manufacturer was “pressured by Guitar
Center” to adopt MAP policies that were advantageous to
Guitar Center, and the complaint concedes that each
manufacturer “responded to Guitar Center’s pressure and
coercion” by adopting MAP policies “in exchange for Guitar
Center’s agreement to purchase large volumes of the
manufacturer’s product stock.” Manufacturers’ decisions to
heed similar demands made by a common, important
customer do not suggest conspiracy or collusion. They
support a different conclusion: self-interested independent
parallel conduct in an interdependent market. See id.
Simultaneous Adoption of MAP Policies
Plaintiffs allege that the manufacturer defendants
simultaneously implemented and enforced MAP policies with
IN RE: MUSICAL INSTRUMENTS 19
similar terms. Cf. id. at 557 n.4 (“[C]omplex and historically
unprecedented changes in pricing structure made at the very
same time by multiple competitors and made for no other
discernible reason would support a plausible inference of
conspiracy.”). But according to the complaint, the
manufacturer defendants adopted the policies over a period of
several years, not simultaneously. Allegations of such slow
adoption of similar policies does not raise the specter of
collusion. Cf. In re Text Messaging Antitrust Litig., 630 F.3d
662, 628 (7th Cir. 2010) (finding persuasive plaintiffs’
allegation of parallel conduct “all at once”).
Even assuming that the progressive adoption of similar
policies across an industry constitutes simultaneity, that fact
does not reveal anything more than similar reaction to similar
pressures within an interdependent market, or conscious
parallelism. All of the manufacturer defendants were dealing
with the same important customer, Guitar Center, which
ostensibly exercised its considerable market power to demand
similar terms from each manufacturer for its own benefit.9
The manufacturers’ similar response to this market pressure
is a hallmark of independent parallel conduct—not collusion.
The FTC’s Investigation of NAMM
Plaintiffs argue that the FTC’s investigation of NAMM
suggests an agreement was made. The FTC alleged violations
of § 5 of the Federal Trade Commission Act (FTC Act),
9
The operative complaint does not allege Guitar Center violated § 2 of
the Sherman Act (or any provisions of the Federal Trade Commission Act)
in any attempted monopolization of the retail guitar and amplifier market;
nor do plaintiffs allege that the MAP policies themselves are illegal
vertical agreements in restraint of trade under § 1.
20 IN RE: MUSICAL INSTRUMENTS
15 U.S.C. § 45, which prohibits “unfair methods of
competition.” But unlike § 1 of the Sherman Act, a violation
of § 5 of the FTC Act does not require allegation and proof of
a contract, combination, or conspiracy. An organization may
violate § 5 of the FTC Act without violating § 1 of the
Sherman Act. See FTC v. Sperry & Hutchinson Co., 405 U.S.
233, 239–44 (1972).10 And neither the FTC complaint nor the
consent decree alleged that any company or group actually
conspired or agreed to adopt MAP policies, nor do they
suggest such an agreement was made.
Defendants’ Attendance of NAMM Meetings
Plaintiffs allege that Guitar Center advocated for the
concerted adoption of anticompetitive MAP policies at
NAMM meetings. But mere participation in trade-
organization meetings where information is exchanged and
strategies are advocated does not suggest an illegal
agreement. As we recognized in In re Citric Acid Litigation:
Gathering information about pricing and
competition in the industry is standard fare for
trade associations. If we allowed conspiracy
to be inferred from such activities alone, we
would have to allow an inference of
conspiracy whenever a trade association took
almost any action. As the Supreme Court has
10
The cases plaintiffs cite as supporting their assertion that government
investigations “bolster the plausibility analysis,” all involved ongoing
criminal investigations into alleged conspiratorial price fixing under § 1
of the Sherman Act. See, e.g., In re Packaged Ice Antitrust Litig., 723 F.
Supp. 2d 987, 1009 (E.D. Mich. 2010). Those cases are inapposite here,
where the FTC complaint was based on § 5 of the FTC Act, 15 U.S.C.
§ 45, which does not require allegation of an agreement or conspiracy.
IN RE: MUSICAL INSTRUMENTS 21
recognized, however, trade associations often
serve legitimate functions, such as providing
information to industry members, conducting
research to further the goals of the industry,
and promoting demand for products and
services.
191 F.3d at 1098.11
Moreover, plaintiffs allege that the industry had
encouraged the adoption of MAP policies as in each
manufacturer’s self-interest for years before the class period.
Such an allegation does not suggest agreement; it provides a
context for “merely parallel conduct that could just as well be
independent action.” Twombly, 550 U.S. at 557.
Rising Prices
Plaintiffs allege that the average retail price of guitars and
guitar amplifiers rose during the class period as the total
number of units sold fell. The dissent asserts that these
“allegations that prices rose despite falling demand” are
“perhaps most suggestive of collusion.” Dissent at 27–28. We
are not convinced.
First, plaintiffs do not allege that the average retail price
of guitars and amplifiers manufactured by defendants rose
11
In this our law differs from the suspicions of Adam Smith, written at
a time before the enactment of the Sherman Act: “People of the same trade
seldom meet together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public, or in some
contrivance to raise prices.” Adam Smith, An Inquiry into the Nature and
Causes of the Wealth of Nations, vol. 1, bk. 1, ch. 10 (1776).
22 IN RE: MUSICAL INSTRUMENTS
during the class period. They allege an increase in the average
retail price of all guitars and guitar amplifiers sold, including
products outside the relevant product market, like low-cost
imports. The same can be said of the alleged drop in sales.12
But even if plaintiffs had alleged that retail prices of
defendants’ guitars and amplifiers rose in tandem as sales
dropped, such a price increase is no more suggestive of
collusion than it is of any other potential cause.13 Plaintiffs do
not allege any facts connecting the purported price increase
to an illegal agreement among competitors. And without such
a connection, there is simply no basis from which we can
infer an agreement. In this regard, parallel price increases,
without more, are no different from other forms of parallel
conduct. They are “merely consistent with a defendant’s
liability” but “stop[] short of the line between possibility and
plausibility of entitlement to relief.” Iqbal, 556 U.S. at 668
12
Plaintiffs admitted in their initial complaint that the data recited by the
dissent is—to put it mildly—“over-inclusive.” Whereas the complaint
defines the relevant product market as the market for “High-end Guitars
and Guitar Amplifiers,” plaintiffs’ data “include[] products outside of the
relevant product market(s), such as low-cost imports.” As far as we can
tell from the complaint, retail prices of defendants’ products actually
might have fallen during the class period as the average retail price for all
guitars and guitar amplifiers rose. Plaintiffs make no allegation either way.
13
Plaintiffs make no allegation as to the cause of the increase in price or
the decrease in units sold, aside from noting the data recited are
“[c]onsistent with the formation of the alleged conspiracy.” But
allegations that are merely consistent with conspiracy are not enough. See
Twombly, 550 U.S. at 557. Any manner of economic variables may have
contributed to these fluctuations in prices and sales, from external market
pressures to permissible conscious parallelism. For example, if the cost of
materials or labor rose, prices could rise irrespective of a decrease in units
sold. Indeed, in such a scenario, we would expect a price hike to be
accompanied by a drop in sales.
IN RE: MUSICAL INSTRUMENTS 23
(quoting Twombly, 550 U.S. at 557) (internal quotation marks
omitted).14
* * *
The dissent urges that, “when analyzed together,”
plaintiffs’ purported plus factors provide a context that
plausibly suggests that “an illicit horizontal agreement was
made between the manufacturer defendants.” Dissent at 29.
We disagree. Plaintiffs have indeed provided a context for the
manufacturers’ adoption of MAP policies, but not one that
plausibly suggests they entered into illegal horizontal
agreements. Instead, the complaint tells a different story, one
in which Guitar Center used its substantial market power to
pressure each manufacturer to adopt similar policies, and
each manufacturer adopted those policies as in its own
interest. Such conduct may be anticompetitive—and perhaps
even violate the antitrust laws—but it does not suggest the
manufacturers illegally agreed among themselves to restrain
competition.
14
We find plaintiffs’ allegations here to be readily distinguishable from
those considered by the Seventh Circuit in In re Text Messaging Antitrust
Litigation. There, the four defendants operated in an extremely
concentrated market, in which they controlled 90% of text-messaging
services in the United States. 630 F.3d at 628. Plaintiffs in that case
alleged not merely that prices had risen; they alleged that “all at once the
defendants changed their pricing structures, which were heterogeneous
and complex, to a uniform pricing structure, and then simultaneously
jacked up their prices by a third.” Id. Such uniformity and simultaneity are
lacking here. Plaintiffs do not allege that defendants’ prices rose (in
concert or otherwise); they allege the average price of all guitars and
guitar amplifiers rose. And plaintiffs do not allege these changes occurred
“all at once”; they allege defendants adopted MAP policies over the
course of three years.
24 IN RE: MUSICAL INSTRUMENTS
IV
Plaintiffs have failed to allege enough nonconclusory
facts to support the plausible inference that any agreement
among the manufacturers was made. For that reason, their § 1
claim must be dismissed.
AFFIRMED.
PREGERSON, Circuit Judge, dissenting:
I respectfully dissent. Bell Atlantic Corp. v. Twombly
requires plaintiffs in an antitrust action to plead “enough
factual matter (taken as true) to suggest that an agreement
was made.” 550 U.S. 544, 556 (2007) (emphasis added). In
the “hub-and-spoke” conspiracy alleged here, plaintiffs
pleaded enough factual matter (taken as true) to suggest that
a horizontal agreement existed between defendants Fender
Musical Instruments Corp.; Gibson Guitar Corp.; Hoshino
U.S.A., Inc.; Kaman Music Corp.; and Yamaha Corporation
of America (“manufacturer defendants”).
Plaintiffs point to six different “plus factors” to support
their claim of an agreement among the manufacturer
defendants: (1) the manufacturer defendants shared a
common motive to conspire; (2) the manufacturer defendants
acted against their own individual self-interest; (3) the
manufacturer defendants adopted substantially similar
Minimum Advertised Price (“MAP”) policies; (4) the Federal
Trade Commission (“FTC”) investigation of the National
Association of Music Merchants, Inc. (“NAMM”) for price
fixing; (5) the manufacturer defendants participated in
IN RE: MUSICAL INSTRUMENTS 25
NAMM functions; and (6) the retail prices for guitars and
guitar amplifiers climbed despite falling demand.
“[W]hen allegations of parallel conduct are set out in
order to make a [Sherman Act] § 1 claim, they must be placed
in a context that raises a suggestion of a preceding argument.”
Twombly, 550 U.S. at 557. Although the majority opinion
purports to address the six plus factors as a whole, it actually
focuses on each factor individually. Maj. Op. 16–23. After
dissecting each factor individually, the majority opinion
summarily concludes that, though the plaintiffs “provided a
context for the manufacturers’ adoption of MAP policies,”
that context does not “plausibly [suggest that the
manufacturer defendants] entered into illegal horizontal
agreements.” Maj. Op. 23.
When truly analyzed together, the six plus factors
strongly suggest that the manufacturer defendants reached an
illegal horizontal agreement, which “nudge” plaintiffs’
allegations “from conceivable to plausible.” Twombly,
550 U.S. at 570.
First, although a common motive to conspire does not by
itself suggest an agreement, this motive combined with the
other plus factors suggests the manufacturer defendants made
an illegal agreement.
Second, the manufacturer defendants adopted policies
such as limiting online advertisement of prices and discounts,
all while increasing prices and conditioning dealer
authorizations upon strict compliance with the MAP terms.
These policies increased prices even though demand for their
products decreased, which went against each company’s
individual self-interest. Although this factor alone may be
26 IN RE: MUSICAL INSTRUMENTS
insufficient to plead a violation, when viewed together with
the other plus factors, this suggests an agreement was made
between the manufacturer defendants.
Third, the manufacturer defendants adopted substantially
similar MAP policies. The majority opinion correctly notes
that the manufacturer defendants adopted MAP policies over
the course of several years, but the majority opinion fails to
appreciate that the manufacturer defendants adopted
substantially similar MAP policies over the course of this
relatively short—three-year—period. Both the district court
and the majority opinion fault plaintiffs for being unable to
show agreement between the manufacturer defendants by
pinpointing the exact terms of the MAP policies and the exact
timing of their adoption. Because plaintiffs have not been
afforded an opportunity to discover these confidential and
proprietary policies, it is unfair to require this level of
specificity at the pleading stage.1 While the specific terms
and exact timing of the MAP policies may be an issue at the
summary judgment stage, a plaintiff at the pleading stage is
not required to “allege ‘specific facts’ beyond those necessary
to state his claim and the grounds showing entitlement to
relief.” Id.
Fourth, the FTC investigation and settlement regarding
alleged price fixing in the music-products industry,
specifically at NAMM-sponsored events, during the time
period at issue here, tends to suggest that an illegal agreement
was made between the manufacturer defendants. The FTC
complaint stated that “[t]he exchange of information between
1
While plaintiffs were allowed limited discovery on the “closed door”
meetings at NAMM-sponsored events, they were explicitly barred from
inquiring about specific terms of the MAP policies.
IN RE: MUSICAL INSTRUMENTS 27
NAMM members [including the manufacturer defendants],
as alleged herein, had the purpose, tendency, and capacity to
facilitate collusion and to restrain competition unreasonably.”
In the Matter of National Association of Music Merchants,
Inc., No. C-4255, at ¶ 7. Although the FTC investigation and
settlement concerned violations of Section 5 of the Federal
Trade Commission Act, 15 U.S.C. § 45, which does not
require allegations of an illegal agreement, the FTC
investigation and settlement make it more plausible that there
was an illegal agreement between the manufacturer
defendants. In general, mere involvement with a trade
organization does not necessarily suggest the existence of
illegal activity; however, allegations by the FTC that a certain
trade association’s meetings “had the purpose, tendency, and
capacity to facilitate collusion” makes it more
plausible—especially when considering all six plus factors—
that an illegal agreement was made.
Fifth, representatives of the manufacturer defendants
attended NAMM-sponsored events where they discussed and
promoted specific MAP pricing structures. In In Re Text
Messaging Antitrust Litigation, 630 F.3d 622, 628 (7th Cir.
2010), the Seventh Circuit held that the defendants—four
United States telecommunications companies accounting for
90% of the text messaging services in the United States—
participated in trade association meetings where specific
pricing structures were discussed, which, among other
allegations, suggested collusion. Similarly here, discussions
at NAMM-sponsored events of specific mutually agreeable
terms are a “circumstance pointing toward a meeting of the
minds[.]” Twombly, 550 U.S. at 557.
Sixth—and perhaps most suggestive of collusion—
despite falling demand for guitars and guitar amplifiers, the
28 IN RE: MUSICAL INSTRUMENTS
average retail price of these items increased substantially
from 2005 to 2007. In 2006, for example, the number of
electric and acoustic guitars sold decreased 9.62% from the
year before. Yet, despite the decline in demand, the average
retail price for each unit rose 6.13% from the year before.
Similarly, despite a decline of 12% in the number of amplifier
units sold in 2006 from the previous year, the average retail
price of each unit increased 3.13%. The majority opinion
attributes these statistics to “[a]ny manner of economic
variables.” Maj. Op. at 22 n.13. Nevertheless, the allegations
that prices rose despite falling demand demonstrates that it is
plausible that something outside normal market conditions
was at work: in this case, collusion. See In Re Text
Messaging, 630 F.3d at 628–29 (finding the allegations that
defendant communications companies’ anomalous behavior
of rapidly increasing prices despite falling costs, among other
things, suggested collusion was plausible).
The majority opinion found that each of these plus factors
can be attributed to permissible parallel conduct and that, in
“context,” they do not plausibly suggest that an illegal
horizontal agreement was made. Maj. Op. at 23. Yet the
standard under Twombly requires that the plaintiffs’
allegations must only raise “plausible grounds to infer an
agreement,” which “simply calls for enough facts to raise a
reasonable expectation that discovery will reveal evidence of
illegal agreement.” 550 U.S. at 556 (emphasis added). I
simply cannot agree with the majority opinion that the
plaintiffs’ inference of an agreement is implausible,
especially where the litigation is at the motion to dismiss
stage, not the summary judgment stage.
Moreover, the majority opinion is based on numerous
assumptions of the guitar and guitar amplifier retail market.
IN RE: MUSICAL INSTRUMENTS 29
For example, the majority opinion states that “so long as
prices can be easily readjusted without persistent negative
consequences, one firm can risk being the first to raise prices,
confident that if its price is followed, all firms will benefit.
By that process (‘follow the leader’), supracompetitive prices
and other anticompetitive practices, once initiated, can spread
through a market without any prior agreement.” Maj. Op. at
17–18. This assumes that (1) retail prices in the guitar and
guitar amplifier business can be easily readjusted,
(2) competent business firms are willing to place their
products at a competitive disadvantage in a highly
competitive market, (3) competitive business firms are
independently confident that price increases will be followed
by competitors, and (4) no agreement (either tacit or express)
was ever reached between the manufacturer defendants.
These are a lot of assumptions to make without providing
plaintiffs the opportunity to conduct full discovery.
Here, plaintiffs’ allegations of parallel conduct raise
plausible grounds to infer that an illicit horizontal agreement
was made between the manufacturer defendants. Plaintiffs
allege six plus factors which, when analyzed together,
“nudge[] their [allegations of a horizontal agreement] across
the line from conceivable to plausible[.]” Twombly, 550 U.S.
at 570. Therefore, I would reverse the district court’s
dismissal of plaintiffs’ Sherman Act claim and remand for
further proceedings.