Stephanie Habelow of Smith, Katzenstein & Jenkins submits the following observations on the fallout from the Delaware Supreme Court’s 2011 opinion in Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531 (Del. 2011):

The standard on a motion to dismiss is a familiar one, well-known to virtually all Delaware lawyers: Well-pleaded allegations shall be accepted as true. Conclusory allegations shall not be. Only allegations that suggest recovery under a reasonably conceivable set of circumstances survive. Or is the standard plausibility?

In its decision in Central Mortgage Company v. Morgan Stanley Mortgage Capital Holdings LLC, the Delaware Supreme Court emphasized that reasonable conceivability is the only standard Delaware courts should apply in reviewing a motion to dismiss: “the governing pleading standard in Delaware to survive a motion to dismiss is reasonable ‘conceivability.’” This decision reviewed the Court of Chancery’s application of what appeared to be a plausibility standard in dismissing a complaint.

Chancellor Strine, whose use of just such a standard provided the impetus for the decision, explained his perspective on this issue in a detailed footnote in Winshall v. Viacom International, Inc. Seeing little difference between “conceivability” and “plausibility”, the Chancellor questioned the utility of the Supreme Court’s decision and puzzled over the direction of Delaware’s procedural law on this point. The Supreme Court, perhaps by way of tacit reply, released an order recently in Cambium Ltd. v. Trilantic Capital Partners III LP, in which the Court again emphasized that the standard to be applied on a motion to dismiss is one of conceivability. This order reversed Vice Chancellor Laster’s apparent application of a plausibility standard in dismissing a complaint (the order notes that the Vice Chancellor ruled from the bench and used the word plausibility nine times during the hearing). These two judges are not the only ones applying a “plausibility” standard – other members of the Court have done so, as well, and on several occasions, the Court has cited to Bell Atlantic Corp. v. Twombly when setting forth the standard. So how did we get here?

The Court of Chancery’s use of a plausibility standard (or at least, the Court’s use of the word “plausibility”) can be traced back to 2007 in Desimone v. Barrows which cited Twombly and made the following observation: “our nation’s high court has now embraced the pleading principle that Delaware courts have long applied, which is that a complaint must plead enough facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks.” This suggests that plausibility has always been the standard Delaware courts apply on a motion to dismiss – at the very least it suggests that the Court of Chancery does not distinguish between a conceivability standard versus a plausibility standard. According to the Delaware Supreme Court, the standard has always been one of conceivability and Delaware courts should continue to apply this standard until the Supreme Court has the occasion to determine whether Twombly and Ashcroft v. Iqbal have any bearing on Delaware’s standard. That said, there seems to be a disconnect between the Delaware Supreme Court’s and the Court of Chancery’s view of the direction of Delaware law in this area. As noted, the Court of Chancery had seemed to recognize the federal plausibility standard as following in Delaware’s footsteps (as noted in Desimone). However, in Central Mortgage, the Delaware Supreme Court seemed to find that the opposite was true – that Delaware courts were following their federal counterparts and that they should not be, absent some express affirmation of that standard articulated in Twombly and Iqbal.

Does any of this matter? Is there anything really wrong with applying a slightly higher plausibility standard than a conceivability standard? First, this matters for the obvious reason: lawyers and judges alike appreciate knowing that Delaware Supreme Court’s position and having known standards to apply. However, the Chancellor has a point: there does not seem to be a significant difference between conceivability and plausibility. Admittedly, there does seem to be a perceptible difference between the two (not everything that is conceivable is plausible), however, the Supreme Court’s distinction of the two words seems to elevate conceivability a bit (Central Mortgage described conceivability as similar to “possibility” whereas plausibility is somewhere between possibility and probability). Second, the Central Mortgage opinion stated that vague allegations will be considered well-pleaded if they give the defendant notice of the claim. Although Delaware’s notice pleading standard is clear and well-established, the use of “vague” allegations to accomplish this seems to be a departure. How can vague allegations be considered well-pleaded? Well-pleaded allegations are non-conclusory allegations grounded upon facts that state a cause of action. It seems that because a vague allegation would likely lack any specificity, this would means that a conclusory allegation might in fact be a step up from a vague allegation. Yet, conclusory allegations are not accepted as well-pleaded for purposes of a motion to dismiss.

It is hard to see the import and practicality of applying a standard of reasonable conceivability – if anything, this somewhat lower standard may allow more cases –possibly weak cases – to survive a motion to dismiss, progress farther in litigation, and expend limited judicial resources. Moreover, the Court of Chancery’s apparent use of a plausibility standard on several occasions may have just been a semantic difference instead of a true misapplication of a different standard.