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Anderson News, L.L.C., Lloyd T. Whitaker, As the Assignee Under An v. American Media

April 3, 2012


Appeal from a judgment of the United States District Court for the Southern District of New York, Paul A. Crotty, Judge, granting defendants' motion to dismiss for failure to state a claim under § 1 of the Sherman Act, 15 U.S.C. § 1, and denying leave to file an amended complaint. See The opinion of the court was delivered by: Kearse, Circuit Judge:


Anderson News, L.L.C. v. American Media, Inc.

Argued: October 19, 2011

Before: KEARSE, LEVAL, and CHIN, Circuit Judges.

Vacated and Remanded.

2 Plaintiffs Anderson News, L.L.C., and Lloyd T. Whitaker, as assignee for the benefit 3 of creditors for Anderson Services, L.L.C. (collectively "Anderson"), appeal (1) from a judgment of 4 the United States District Court for the Southern District of New York, Paul A. Crotty, Judge, 5 dismissing their complaint alleging that defendants-appellees, who were suppliers and business 6 competitors of Anderson, conspired to drive Anderson out of business, in violation of § 1 of the 7 Sherman Antitrust Act, 15 U.S.C. § 1, and New York law, and (2) from an order denying Anderson's 8 motion for reconsideration and for leave to file a proposed amended complaint. The district court 9 granted the motions of defendants-appellees ("defendants") to dismiss the complaint under Fed. R. 10 Civ. P. 12(b)(6) for failure to state a claim on which relief can be granted, and denied reconsideration, 11 ruling that the alleged conspiracy was facially implausible under the standards set by Bell Atlantic 12 Corp. v. Twombly, 550 U.S. 544 (2007) ("Twombly"), and Ashcroft v. Iqbal, 129 S.Ct. 1937');">129 S. Ct. 1937 (2009) 13 ("Iqbal"); the court denied Anderson's request for permission to file an amended complaint, ruling that 14 the defects in the original complaint were incurable and that the proposed new complaint added only 15 allegations that were conclusory. On appeal, Anderson contends principally that its complaint 16 contained sufficient factual allegations to plead an antitrust violation under the standards set by 17 Twombly and Iqbal, and that it should have been allowed to file its proposed amended complaint 18 which contained additional factual allegations. We conclude that even if the original complaint did 19 not meet the Twombly/Iqbal standard, Anderson's proposed amended complaint, which contains 20 additional factual allegations, meets that standard and should have been allowed. Accordingly, we 21 vacate the judgment of dismissal and remand for further proceedings.


2 The present action involves the single-copy magazine industry, i.e., the business of 3 selling magazines for purchase by consumers at retail outlets such as newsstands, bookstores, and 4 mass merchandise retailers, as contrasted with the subscription-sales industry which involves shipping 5 magazines directly to consumers. The following description of the single-copy magazine industry (or 6 "magazine industry") and the events leading to this litigation is taken principally from Anderson's 7 original complaint ("Complaint") and/or from its proposed amended complaint (or "PAC"), taking as 8 true all material factual "allegations of the . . . complaint and proposed . . . amended complaint," and 9 "draw[ing] all reasonable inferences and resolv[ing] all conflicts and ambiguities in favor of 10 plaintiffs," Papelino v. Albany College of Pharmacy of Union University, 633 F.3d 81, 85 n.1 (2d Cir. 11 2011).

A. The Parties

13 Anderson, whose creditors forced it into bankruptcy liquidation proceedings in March 14 2009, had been a wholesaler in the magazine industry since 1917. Wholesalers are responsible for, 15 inter alia, the delivery of magazines to retailers. As a wholesaler, Anderson purchased magazines 16 from their respective publishers at prices in the range of 50-60 percent of the cover prices and resold 17 the magazines to retailers at 70-80 percent of the cover prices. (See Complaint ¶ 30; PAC ¶ 33.) Prior 18 to February 2009, Anderson had become the second largest magazine wholesaler in the United States, 19 with a 27-percent market share, servicing 30,000 retail customer locations in 37 states. (See 20 Complaint ¶¶ 19, 30; PAC ¶¶ 22, 37.)

21 The 10 defendants are, principally, national magazine publishers and their distribution 22 representatives. The five magazine publisher defendants are: 1 American Media, Inc. ("AMI"), the fourth largest publisher of consumer magazines, including 2 six of the 15 best-selling weekly newsstand magazines; 3 Bauer Publishing Co. ("Bauer"), the largest publisher of newsstand magazines; 4 Hachette Filipacchi Media, U.S. ("Hachette"), publisher of, inter alia, HOME, Car and 5 Driver, Road and Track, Popular Photography, Woman's Day, and ELLE; 6 Rodale, Inc. ("Rodale"), publisher of, inter alia, Prevention, Men's Health, Women's 7 Health, and Runner's World; and 8 Time, Inc. ("Time"), the largest publisher of magazines overall in the United States, 9 publishing more than 120 magazines including Time, People, Sports 10 Illustrated, Golf, Fortune, and Money. 11 Approximately 80 percent of the magazines distributed by Anderson were published by the defendant 12 publishers. (See, e.g., Complaint ¶ 64; PAC ¶ 84.) 13 The so-called "distributor[]" defendants are companies that "perform no physical 14 distribution activities like warehousing, order assembly, delivery or in-store merchandising" (PAC 15 ¶ 16) but rather are retained by publishers to, inter alia, broker and manage the publishers' 16 relationships with wholesalers (see, e.g., Complaint ¶ 13; PAC ¶ 16). The four distributor defendants 17 are: 18 Distribution Services, Inc. ("DSI"), a subsidiary of AMI that provides marketing 19 services to publishers, including AMI, Bauer, Hachette, and Rodale; 20 Curtis Circulation Co. ("Curtis"), an affiliate of Hachette; the largest national 21 magazine distributor in the United States by volume, representing at least 400 22 publishers, including Hachette, Rodale, and AMI, with respect to hundreds of 23 national titles; 24 Kable Distribution Services, Inc. ("Kable"), the second largest national distributor in 25 the United States, representing more than 250 publishers, including Bauer, 26 with respect to more than 650 magazines, annuals, and digests; and 27 Time/Warner Retail Sales & Marketing, Inc. ("TWR"), a national magazine distributor 28 whose clients include Time, its corporate parent.

1 Curtis, Kable, and TWR, along with non-party Comag Marketing Group LLC ("Comag"), are the four 2 national distributors in the United States. 3 The remaining defendant, Hudson News Distributors LLC ("Hudson"), is a major 4 wholesaler. In 2008, four wholesalers accounted for 90 percent of single-copy magazine distribution: 5 Hudson, with a market share of 11 percent; The News Group, LP ("News Group"), with 21 percent; 6 Anderson with 27 percent; and Source Interlink Distribution, L.L.C. ("Source"), with 31 percent. (See 7 Complaint ¶ 30; PAC ¶ 37.) News Group was originally named a defendant in this action but was 8 shortly dismissed as part of a settlement. (See PAC ¶ 25.) The Complaint alleged that Source, like 9 Anderson, was a target of defendants' alleged conspiracy, which aimed to eliminate the two largest 10 magazine wholesalers; Source, however, obtained a restraining order, and after "defendants produced 11 documents in discovery, they agreed to enter into settlements with Source for the multi-year supply 12 of magazines." (PAC ¶ 26.)

B. The Single-Copy Magazine Sales Industry

14 Magazine wholesalers are responsible not only for delivering the magazines to retailers 15 but also for thereafter picking up from the retailers, tabulating, and destroying any copies that remain 16 unsold. (See, e.g., Complaint ¶¶ 29-30; PAC ¶ 33.) However, publishers have an incentive to see that 17 each retailer is overstocked, in order to ensure maximum sales and thereby maximize advertising 18 revenues (see, e.g., Complaint ¶ 31; PAC ¶¶ 34, 41); "[i]ndeed, nearly half of all newsstand magazine 19 titles have a 'sell-through' percentage as low as 80%--meaning that, of five magazines distributed by 20 the wholesaler, only one is actually sold to a consumer" (PAC ¶ 41). The cost of such overstocking 21 is borne not by the publishers that desire it, however, but rather by the wholesalers, for wholesalers 22 historically have been compensated only for the copies that retailers actually sold. (See, e.g., id.)

1 Thus, when only one of five copies distributed is sold to a consumer, the wholesaler must bear the 2 expense of retrieving the four unsold copies and transporting them back to its facilities for disposal 3 or destruction, while being paid for only the one sold copy.

4 Accordingly, Anderson and Source had advocated adoption of a different system, 5 under which the retailers would automatically report their sales to the publishers through use of 6 electronic checkout scanners, dubbed "scan-based trading," and the retailers themselves would destroy 7 all magazines they had not sold. Wholesalers would thereby be spared the unreimbursed cost of 8 picking up, counting, reporting, and destroying unsold copies. (See, e.g., Complaint ¶¶ 32-33; PAC 9 ¶ 42.) Publishers, however, opposed scan-based trading, citing fears of mistaken underreporting of 10 sales due to machine error (estimated to be some five percent of all sales); underreporting would 11 negatively affect the publishers' revenues from both sales and advertising. (See, e.g., Complaint ¶ 34; 12 PAC ¶ 43.)

13 In early January 2009, Anderson decided that it would announce the imposition on 14 publishers, as of February 1, 2009, of a $.07 distribution surcharge (the "Surcharge") for each 15 magazine copy Anderson received and distributed, regardless of whether the retailer sold the copy. 16 (See Complaint ¶ 39; PAC ¶ 49.) Some paragraphs of Anderson's Complaint and proposed amended 17 complaint allege that the Surcharge was "a temporary, stop-gap measure" (Complaint ¶ 39; PAC ¶ 49) 18 and characterize it as a "proposed . . . surcharge" (e.g., Complaint ¶ 40 (emphasis added); PAC ¶ 50 19 (emphasis added)); and the proposed amended complaint asserts that the Surcharge was "not . . . non- 20 negotiable" (PAC ¶ 51; see also id. ¶ 4 ("As defendants well know, the proposed surcharge itself was 21 negotiable.")). However, other paragraphs of the Complaint (unlike the PAC) cast the Surcharge in 22 a more intractable light. For example, the Complaint alleged that on January 12 and 13 Charles 23 Anderson, Anderson's chief executive officer ("CEO"), met with some of its largest publisher clients, 1 including Time, AMI, and Bauer, and "informed the publishers of Anderson's decision to impose the 2 $.07 per copy surcharge." (Complaint ¶ 41 (emphasis added); compare id. with PAC ¶ 51 3 (substituting "proposed temporary stop-gap measure" for "decision to impose the $.07 per copy 4 surcharge").) And the Complaint alleged that on "January 14, 2009, Mr. Anderson had a call-in 5 interview with the representative of an industry publication, The New Single Copy, during which he 6 publicly announced the surcharge and explained the industry constraints compelling that measure." 7 (Complaint ¶ 42 (emphasis added); compare id. with PAC ¶ 52 (substituting "underlying" for 8 "compelling").)

9 C. The Alleged Conspiracy

10 Anderson alleged that shortly after the mid-January announcement of its $.07 11 Surcharge, Source announced that Source too would impose a $.07-per-distributed-copy surcharge 12 on publishers (see Complaint ¶ 50; PAC ¶ 54), and that defendants decided to attempt to eliminate 13 Anderson or Source, or both, as wholesalers. It alleged that on at least two occasions in late January, 14 defendants invited Anderson to join their effort to eliminate Source. Thus, Michael Duloc, Kable's 15 president and CEO, in a telephone call with Frank Stockard, Anderson's president, discussed offering 16 Anderson exclusivity in certain geographic territories in exchange for Anderson's dropping its 17 proposed Surcharge; and Robert Castardi, Curtis's president, told Charles Anderson, "in words or 18 substance," that "[o]nce Source was excluded from the market and its business destroyed, . . . 19 Anderson could use its regional market power to 'get all your [Anderson's] profits from the retailers,'" 20 but, Castardi said, "'you need to let Source go out first,'" (Complaint ¶ 50; PAC ¶ 58). Anderson 21 declined the invitations to join in the elimination of Source.

1 Anderson alleged that Curtis (on behalf of Hachette, Rodale, and AMI) and Kable (on 2 behalf of Bauer), refused to enter into any legitimate substantive negotiations with Anderson. (See 3 PAC ¶ 66.) It alleged that Comag negotiated for a modified arrangement. And it alleged that TWR, 4 with respect to Time's magazines, met with Anderson to discuss alternatives to the Surcharge and 5 purported to agree to adjustments in the allocation of magazine distribution expense, asking Anderson 6 to make immediate payments on its accounts with them (see Complaint ¶¶ 52-53; PAC ¶ 65), but that 7 "Time and TWR never had any intention of honoring their commitment to continue to work with 8 Anderson" (PAC ¶ 69; see Complaint ¶ 55). Anderson alleged that in late January 2009, defendants 9 met or communicated with each other--in various combinations (see, e.g., PAC ¶¶ 56, 57, 59, 60, 61, 10 62, 63, 66)--and agreed that each of them would reject Anderson's proposed Surcharge, would refuse 11 any other accommodation, and would stop supplying Anderson with magazines. 12 Defendants understood that joint action was needed because in 2008 Curtis, the leading 13 national magazine distributor, representing publishers of some of the most popular magazines, had 14 tried to eliminate Anderson unilaterally and had failed. In that attempt, Curtis informed Wal-Mart, 15 one of Anderson's major retail clients, that Curtis's publisher clients would no longer supply 16 magazines to Anderson; Wal-Mart, preferring to use a single wholesaler to supply a given store, 17 responded that it would continue to purchase magazines only from Anderson even if that meant not 18 carrying the magazines of Curtis's publishers; and Curtis thus reversed course and resumed supplying 19 Anderson. (See Complaint ¶ 45; PAC ¶ 46.) "Curtis's failed unilateral attempt to eliminate Anderson 20 as a wholesaler confirmed to Curtis that concerted action among the major publishers and national 21 distributors was essential to achieve" the elimination of Anderson and to force retailers to deal with 22 wholesalers chosen by the publishers. (PAC ¶ 46; see Complaint ¶ 45.) Accordingly, the Complaint 23 alleged, 1 throughout the latter part of January [2009] and the early days of February, 2 defendants--ostensibly each others' competitors--held numerous meetings 3 during which they discussed dividing the U.S. distribution territory into two 4 regions--one controlled by Hudson and the other controlled by News Group. 5 For example, in furtherance of their conspiracy to cut off supply to Anderson 6 and Source, defendants Curtis and Hudson met with their respective 7 competitors, TWR and News Group, in January 2009 at Hudson's offices in 8 North Bergen, New Jersey. 9 56. Moreover, [TWR's CEO Rich] Jacobsen made clear in a 10 conversation with Source's CEO, Greg Mays, at a February 2 dinner meeting 11 in New York, why Source and Anderson were being terminated. When 12 Jacobsen told Mays that TWR would not be supplying any magazines to 13 Source, Mays asserted to Jacobsen that with the distribution system being 14 created by defendants, there would be no scan-based trading, the two 15 remaining wholesalers would force reduced margins down to the retailers 16 rather than to the publishers, and there would be absolute control over the 17 market. Jacobsen's response, in words or substance, was: "Exactly--we now 18 control this space."

19 (Complaint ¶¶ 55-56; see PAC ¶¶ 63, 81.) The Complaint alleged that 20 in late January, national distributor defendants Curtis, Kable, and TWR, and 21 publisher defendants AMI, Bauer, Hachette, Rodale, and Time--acting in 22 concert--cut off Anderson from its supply of magazines--including the most 23 popular titles, like People and Sports Illustrated. 24 (Complaint ¶ 47; see, e.g., PAC ¶¶ 66-67.) 25 Anderson, deprived of 80 percent of the magazines it normally distributed, was forced 26 to suspend its magazine wholesale business on February 7, 2009. (See Complaint ¶¶ 64-66; PAC 27 ¶¶ 84-86.) On March 2, 2009, creditors of Anderson forced the company into bankruptcy liquidation 28 proceedings.

29 Anderson alleged that "[d]efendants' conduct has reduced the output of magazines 30 through the wholesale market." (Complaint ¶ 73; PAC ¶ 93.) It alleged that that conduct has 31 "permanently reduced the choices available to retailers and their customers" (Complaint ¶ 74; PAC 32 ¶ 94) and that in some areas "wholesale distributors were temporarily unavailable to serve retailers" 33 (PAC ¶ 93), so that "for a significant period of time the retailers' customers had access to fewer 1 magazines as well" (id.). Further, the elimination of Anderson as a wholesaler allowed News Group 2 and Hudson to increase the prices charged to approximately 80 percent of the retailers that had 3 previously purchased magazines from Anderson. (See PAC ¶¶ 82, 95.) 4 Anderson commenced the present action on March 10, alleging principally that 5 defendants' agreement to boycott Anderson violated § 1 of the Sherman Act, 15 U.S.C. § 1; it also 6 alleged tortious interference with business relations and civil conspiracy in violation of state law.

7 Those originally sued included News Group, which, two days after the Complaint was filed, was 8 voluntarily dismissed in accordance with a release executed by Anderson, which had been forced to 9 sell certain distribution assets to News Group in February 2009. The remaining defendants eventually 10 moved pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the Complaint for failure to state a claim on 11 which relief can be granted; they argued, relying principally on Twombly, that the Complaint did not 12 set forth a plausible basis for finding a conspiracy in violation of the antitrust laws. Anderson 13 opposed ...

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