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, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). And because plaintiffs' plus factors add nothing, we affirm the judgment of the district court dismissing plaintiffs' § 1 claim.
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 United States.
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
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 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.
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
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.
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)).
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, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997); Apex Hosiery Co. v. Leader, 310 U.S. 469, 493, 60 S.Ct. 982, 84 L.Ed. 1311 (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, 99 S.Ct. 1551, 60 L.Ed.2d 1 (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, 47 S.Ct. 377, 71 L.Ed. 700 (1927) (horizontal price fixing); United States v. Topco Assocs., 405 U.S. 596, 608, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972) (horizontal market division); Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 293-94, 105 S.Ct. 2613, 86 L.Ed.2d 202 (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, 356 U.S. 1, 5, 78 S.Ct. 514, 2 L.Ed.2d 545 (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
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 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.
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.
Because plaintiffs lack direct evidence of horizontal agreements among the manufacturers,
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, 127 S.Ct. 1955. 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, 127 S.Ct. 1955.
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, 127 S.Ct. 1955 ("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 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
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 with unilateral conduct but largely consistent with explicitly coordinated action. See Twombly, 550 U.S. at 557 n. 4, 127 S.Ct. 1955. If pleaded, they can place parallel conduct "in a context that raises a suggestion of preceding agreement." Id. at 557, 127 S.Ct. 1955; cf. In re Citric Acid Litig., 191 F.3d at 1102.
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 non-conclusory facts sufficient to state a claim under § 1.
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 increase profits by raising prices has a motive to reach an advance agreement with its competitors.
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, 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.
Plaintiffs allege that the manufacturer defendants simultaneously implemented and enforced MAP policies with similar terms. Cf. id. at 557 n. 4, 127 S.Ct. 1955 ("[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
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.
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), 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, 92 S.Ct. 898, 31 L.Ed.2d 170 (1972).
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:
191 F.3d at 1098.
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 1199-1200. We are not convinced.
First, plaintiffs do not allege that the average retail price of guitars and amplifiers manufactured by defendants rose 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.
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.
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, 127 S.Ct. 1955, 167 L.Ed.2d 929 (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 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, 127 S.Ct. 1955. Although the majority opinion purports to address the six plus factors as a whole, it actually focuses on each factor individually. Maj. Op. 1194-98. 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. 1198.
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
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 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.
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 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
Sixth — and perhaps most suggestive of collusion — despite falling demand for guitars and guitar amplifiers, the 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 1197 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 1198. 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, 127 S.Ct. 1955 (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. 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 1194-95. 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]
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 violations per se, see United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223-24, 60 S.Ct. 811, 84 L.Ed. 1129 (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.