Despite the apparent lack of a “smoking gun,” a federal appeals court is allowing a class action lawsuit to proceed against several major wireless carriers in a decision that calls to mind the maxim: “if it quacks like a duck…”

On December 29, 2010, the U.S. Court of Appeals for the 7^th Circuit rejected efforts by these carriers to seek dismissal of a class action lawsuit alleging that the carriers’ text messaging services violated antitrust laws.  In Text Messaging Antitrust Litigation, Case No. 10-8037, the three-judge panel upheld the trial court’s decision that the plaintiffs had sufficiently alleged a violation of the antitrust laws (in particular, the Sherman Act).  Defendants, Verizon Wireless, et al., had argued that plaintiffs’ allegations, even if true, did not constitute price-fixing or any other violation.  Circuit Judge Posner, however, wrote that the plaintiffs had adequately alleged a violation of law, and therefore the case should go forward to discovery.

The case revolved around the plaintiffs’ efforts to file an amended complaint stating that the major wireless carriers have conspired to fix prices and not compete against each other in the provision of text messaging services.  The defendants argued that the complaint “only” alleged that the wireless carriers do not compete with each other vis-à-vis text messaging, and the law does not prohibit companies from individually deciding not to compete.  The defendants argued that the law requires a plaintiff to allege specific actions of collusion among the defendants, in addition to the absence of competition among them.

The court agreed that the Sherman Act does not prohibit wireless carriers from each making the same decision, by coincidence, not to compete with respect to text messaging service.  However, the court disagreed that the law requires a plaintiff to allege a specific “smoking gun” at the complaint stage.  The court summarized the allegations that were in the complaint, including “a mixture of parallel behaviors, details of industry structure and industry practices, that facilitate collusion.”  As the court went on to explain:

Parallel behavior of a sort anomalous in a competitive market is thus a symptom of price fixing; though standing alone it is not proof of it; and an industry structure that facilitates collusion constitutes supporting evidence of collusion.  *  *  *  [T]he complaint in this case alleges that the four defendants sell 90 percent of U.S. text messaging services, and it would not be difficult for such a small group to agree on prices and to be able to detect “cheating” (underselling the agreed price by a member of the group) without having to create elaborate mechanisms . . .

The court went on to note that, according to the complaint, the defendants exchanged text pricing information via their trade association; defendants were all on a “leadership council” within the trade association, a leadership council whose stated mission was to “substitute ‘co-opetition’ for competition;” in the face of steeply falling costs, each defendant chose to raise prices; and finally, “all at once the defendants changed their pricing structures, which [had been] heterogeneous and complex, to a uniform pricing structure, and then simultaneously jacked up prices by a third.”

In other words, the complaint alleged that the defendants walked like a duck, swam like a duck, and quacked like a duck, and therefore must be a duck, even if there is, as yet, no photograph of the defendants to prove they are a duck.

The court held that, when taken together, the allegations in the complaint pass the laugh test for whether there might be a price-fixing violation going on.  (The court said “plausibility standard,” the legalese version of “laugh test”).  The court said the complaint does not have to allege that on a particular day, the vice president of one defendant met with/telephoned the vice president of another defendant to go over the details the price fixing, or any similar “smoking gun.”  The complaint has alleged enough detail and enough anomalous behavior on defendants’ part to make the defendants respond to discovery.

If you are a smaller wireless carrier having roaming agreements with the defendants, the rates those major carriers charge their subscribers for texting will directly affect how much those carriers will pay you to perform text services for their incoming roamers.  If you are a wireless subscriber, you are probably a co-plaintiff in this case, since it is a class action covering 90% of all domestic text messaging.  Either way, it will be interesting to see where this case goes from here.