THE NEW LAW OF PLEADING BAD FAITH IN FEDERAL COURT

In 2007, the U.S. Supreme Court reinterpreted the standards for pleading under Rule 8(a), making it harder for a plaintiff to survive a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted.

In deciding a motion to dismiss under Federal Rule of Civil Procedure12(b)(6), trial courts are still required to accept as true all of the factual allegations in the complaint. Federal Rule of Civil Procedure 8(a)(2) further requires, however, that a plaintiff proffer “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Co. v. Twombly, 127 S. Ct. 1955, 1974 (2007) (emphasis added). “Factual allegations must be enough to raise a right to relief above the speculative level.” As interpreted by the United States Court of Appeals for the Third Circuit: “That is to say, there must be some showing sufficient to justify moving the case beyond the pleadings to the next stage of litigation.” Phillips v. County of Allegheny, 515 F.3d 224 (3d Cir. 2008).

Further, a plaintiff is required to do more that assert “labels and conclusions”; and “a formulaic recitation of the elements of a cause of action will not do.” Twombly, 127 S. Ct. at 1964-65. In light of Twombly, “it is no longer sufficient to allege mere elements of a cause of action; instead ‘a complaint must allege facts suggestive of [the proscribed] conduct.’” Phillips, 515 F.3d at 233 (quoting Twombly, 127 S. Ct at 1969 n. 8).

In Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), the Supreme Court appears to have taken this test further, making it harder to plead a complaint that will withstand a motion to dismiss. As with Twombly, there must be allegations of sufficient facts to meet the now stricter standards of Rule 8(a). Ashcroft makes clear that “[t]he plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully. … 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.”’”

Further, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Thus, consistent with Twombly, fill-in-the-blank boilerplate statements of the elements of a cause of action will not work in making out a complaint.

The Supreme Court is directing trial judges to accept the truth of well-pleaded facts, though not legal conclusions; but then there is another step to follow: whether these facts taken as true can show there is an actionable wrong. Then comes something new from the Court. Determining whether there is a plausible claim is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” This appears to leave open the very real possibility that different judges might find the very same claims in a complaint plausible — vs. merely possible — depending on their different experiences and the thinking arising therefrom. Paying careful attention to the judge in a case, and his/her history, becomes even more important.

Though the Court does not say it, when it refers to the concept of “showing” in Rule 8(a), it appears to be telling the trial court judge to determine in his/her own judgment when, taking the complaint’s factual allegations as true, these allegations can then meet the burden of proof of the claim asserted — or whether they cannot get over the barrier of a 50/50 guess. If this reading is correct, then a “possible” claim in the Court’s new nomenclature means 50% or less likelihood — and dismissal; while “plausible” means more than 50% — and the case may proceed to the discovery stage.

However, this reading becomes subject to more scrutiny in a bad faith case, where the plaintiff has to show bad faith by clear and convincing evidence, an even higher standard of proof. The bad faith plaintiff must show that there is no reasonable basis to deny benefits, and that the insurer consciously or recklessly disregarded the absence of a reasonable basis. If facts are pleaded that can be interpreted just as easily for a reasonable basis as against, the issue will become whether a bad faith claim even survive a 12(b)(6) motion.

The Ashcroft Court states that the Twombly Court found that the conduct pleaded in that case, which may have been reflective of an illicit conspiracy by the defendants, failed to set out a claim “because [the conduct pleaded] was not only compatible with, but indeed was more likely explained by, lawful, unchoreographed free-market behavior.” In Ashcroft itself, the court found that “respondent’s complaint has not ‘nudged [his] claims’ of invidious discrimination ‘across the line from conceivable to plausible.’”

In deciding the motion to dismiss, the Ashcroft Court had first identified all of the boilerplate legal allegations that it did not have to accept as true under Twombly. The facts of the case are so unusual that they do not necessarily provide a good example of the second prong of possible vs. plausible.

Of specific interest in that case, however, is the reading that Rule 8(a) controls Rule 9. Rule 9 allows intent to be pleaded generally. Thus, there now apparently have to be facts pleaded that give a context to support a knowing or reckless intent; and a defendant’s knowledge can no longer be baldly pleaded or accepted without such a factual context. The import for pleading a bad faith claim’s second element is clear. There must be some factual context pleaded as a basis for asserting the insurer’s knowing or reckless disregard of the reasonable course of conduct that the insurer should have taken.

As to what will happen if a trial court dismisses a case on a Twombly/Ashcroft motion, the Third Circuit has issued a strong directive to a trial judge who properly dismissed the claims under Twombly, but did not give the plaintiff leave to amend: “Nonetheless, the District Judge erred when he dismissed the complaint without offering Phillips the opportunity to amend her complaint. It does not matter whether or not a plaintiff seeks leave to amend. We have instructed that if a complaint is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an amendment would be inequitable or futile.” Phillips v. County of Allegheny, 515 F.3d at 236. This is the likely course that will be followed by federal trial courts in Pennsylvania, at least on a first dismissal.