Supreme Court acts against frivolous lawsuits

By Freedom Newspapers

Although two justices thought the majority didn’t go far enough in the Tellabs v. Makor Issues ruling handed down Thursday, the U.S. Supreme Court interpreted a law so it will accomplish what Congress clearly intended it to do — making it more difficult for aggressive lawyers to bring frivolous lawsuits against companies when corporate principals fail to forecast the future accurately.

Congress passed in 1995 what is called the Private Securities Litigation Reform Act. The law requires that plaintiffs filing a suit against a company state “with particularity” both the facts constituting an alleged violation and the facts evidencing the legal term of art known as “scienter.” That’s defined in an earlier court decision as the intention “to deceive, manipulate or defraud.”

The act was a response to what was becoming an increasingly common practice of filing lawsuits on behalf of shareholders when a company’s share price declined, especially if the company had issued rosy projections.

It was meant to distinguish between the common practice of trying to put the best face on things, as many companies routinely do, and outright fraud — assuring investors, for example, that share prices would rise when company officials clearly knew of factors that were likely to make shares decline.

A group of shareholders filed such a suit in 2002 against Tellabs, a manufacturer of specialized telecommunications equipment. The suit alleged that company managers intentionally defrauded investors just prior to the stock taking a nosedive.

The district court threw out the case because it didn’t establish the “strong inference” of wrongdoing required by the law, but the 7th Circuit appeals court reinstated it. By an 8-1 margin the Supreme Court ruled that the appeals court had erred because “an inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”

Justice Ruth Bader Ginsburg wrote the majority opinion.

Justices Antonin Scalia and Samuel Alito concurred but wrote separate opinions arguing that they thought Congress intended to establish a standard whereby an inference of fraudulent intent was not just as strong as an opposing inference to allow a case to go forward, but actually stronger. Both suggested that, in practice, their standard would almost always yield the same result as the majority’s but that theirs was truer to the intent of the law.

Justices Scalia and Alito were closer to right, but this opinion is still welcome. The intent of the 1995 law clearly was to discourage frivolous lawsuits that can nonetheless entail great expense and possible invasion of privacy. The court did well to recognize that.