Otterbourg Wins in Third Circuit Antitrust Action

October 24, 2011

In a decision on October 24, 2011, the United States Court of Appeals for the Third Circuit unanimously affirmed the dismissal of an antitrust action brought by the Trustee of Factory 2-U, a clothing retailer currently in Chapter 7 bankruptcy, against eight commercial finance companies and affirmed the lower court's denial of the Trustee’s motion to replead.  The Third Circuit found that both the Trustee’s complaint and its proposed amended complaint failed to sufficiently state claims under the pleading standards established by the United States Supreme Court and the Third Circuit.  Otterbourg prevailed in the lower court on behalf of Wells Fargo Trade Capital Services, GMAC Commercial Finance and Sterling Factors, and successfully argued the appeal.     

The Third Circuit determined that the complaint (and proposed amended complaint) failed to state a claim under Section 1 of the Sherman Antitrust Act arising from an alleged agreement among the defendants to deny credit to Factory 2-U and from the defendants' alleged sharing of credit history information.  According to the Third Circuit's opinion, the Trustee’s allegations of an illegal agreement between the defendants was not plausible, even though the complaint described a number of telephone conversations among the defendants during which the defendants allegedly exchanged information about existing client limits as well as “their individual decisions to decline credit or withhold orders.”     

The Court engaged in a detailed factual analysis and observed that, notwithstanding the Trustee’s allegations that defendants had engaged in weekly meetings and participated in numerous telephone conversations, the complaint failed to support the Trustee’s contention that the defendants had colluded to deny credit, or even engaged in conscious parallelism.  The opinion describes the separate and changing credit policies allegedly employed by the defendants toward Factory 2-U, and notes that Factory 2-U’s chief executive officer had publicly commented on the company’s poor performance, which  provided an alternative explanation for Factory 2-U’s woes.

The Third Circuit held that the exchange of credit history information among the defendants did not give rise to a claim for price-fixing and did not constitute an illegal exchange of price information.