PART I: PLEADING REQUIRMENTS UNDER DURA — INTRODUCTION
Today begins a new occasional series on the pleading requirements under the Supreme Court’s opinion in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005). That decision held that plaintiffs in private securities damage actions must plead and prove loss causation.
A key question in applying the teachings of Dura is the applicable pleading standard. Under the PSLRA, allegations of fraud must be pled with particularity. Under Federal Civil Rule 9(b) fraud also must be pleaded with particularity. Dura loss causation is an element of a cause of action for fraud. Accordingly, some argue that it should be pled in accord with Rule 9(b). Others however, claim that neither the PSLRA pleading standards nor Rule 9(b) should apply.
Whether either contention is correct is a matter of debate. It is beyond dispute at this point however, that the Dura Court discussed a pleading standard in its opinion. In this regard the Court stated: “And we assume, at least for argument’s sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss. But, even so, the ‘short and plain statement’ must provide the defendant with ‘fair notice of what the plaintiff’s claim is and the grounds upon which its rests,’ quoting Conley v. Gibson, 355 U.S. 41 (1957). Dura, 544 U.S. at 346. Accordingly, the Court “assumed,” without deciding that Rule 8(a) applies.
The oral arguments at the time of Dura do little to clarify the point. The Solicitor General argued in favor of applying Rule 9(b) and its particularity requirement to the element of loss causation. Brief of the United States as Amicus Curie, supporting Petitioner, Dura Pharmaceuticals, v. Broudo, 544 U.S. 336 (2005) (No. 03-932), 2004 WL 2069564, at *14-*16. This position is apparently based on the theory that, as an element of a cause of action for fraud, the particularity requirements should apply. The Court clearly did not adopt the Solicitor’s suggestion. It also did not however, specifically reject the point.
During the oral arguments, Justice Ginsburg indicated that Rule 9(b) does not apply: “I thought you pointed to the 9(b) pleading rule because fraud must be pleaded with particularity, but causation does not, under the rules and not under the statute.” Dura Pharm., Inc. v. Broudo, No. 03-932, 2005 U.S. TRANS LEX 4, at * 19 (Jan. 12, 2005). Like the Solicitor’s contention, this position is not specifically stated in the Court’s opinion.
The applicable pleading standard has been further clouded by the recasting of the Rule 8(a) pleading requirements and the reinterpretation of Conley v. Gibson by the Supreme Court. Beginning in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and then again this year in Ashcroft v. Iqbal, 127 S.Ct. 1937 (2009), the Court essentially rewrote the meaning of Rule 8(a) and the pleading requirements for a civil complaint, increasing the requirements to include a plausibility standard without specifically acknowledging that fact. Interestingly, the High Court cited Dura as the predicate for its reinterpretation of Rule 8(a) pleading standards in Twombly. And, Iqbal briefly mentions Rule 9(b) in discussing pleading standards, in addition to reaffirming and broadening Twombly.
Last term, the Supreme Court declined to hear a case from the Ninth Circuit which specifically presented the question of what pleading standard must be met when alleging Dura loss causation. Petition for a Writ of Certiorari in Gilead Sciences, Inc. v. Trent St. Clare, Case No. 08-1921 (S.Ct. Filed Feb. 6, 2009). Specifically, the petition argued that there is a split in the circuits regarding the applicable pleading standards for loss causation. Some circuits, the petition claims, require compliance with Rule 8(a) while others hold that the particularity requirement of Rule 9(b) applies, or at least a heightened pleading standard.
A split over the pleading standards for Dura loss causation is significant. In many instances, securities fraud complaints have been dismissed for failing to adequately plead loss causation. See, e.g., Catogas v. Cyberonics, Inc., 292 Fed. Appx. 311 (5th Cir. 2008). If the element must be pled with particularity under Rule 9(b), Dura would have an even greater impact on securities damage actions, adding to the requirements already imposed by Congress and the courts to weed out suits.
This series will examine the debate over Dura pleading standards. In the coming weeks four key points will be considered: 1) A brief overview of Dura and its origins; 2) Theories of pleading loss causation under Dura; 3) Pleading loss causation, an analysis of key circuit court decisions construing the pleading standards for Dura loss causation; and 4) Analysis and conclusions.
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Webinar: On Thursday July 9, 2009 there will be a webcast titled “2009 Mid-Year Review-Securities Litigation and Enforcement” beginning at 2:00 p.m. There is no charge for listing to this program on SEC enforcement trends. It is available here. Speakers include Bruce Carton, Kevin LaCroix, Francine McKenna, Lyle Roberts and Tom Gorman