PART II: PLEADING REQUIREMENTS UNDER DURA — THE DECISION
The question of what pleading standards apply to Dura loss causation begins with an analysis of the Supreme Court’s opinion. Dura resolved a split in the circuits about whether loss causation is a required element of a cause of action for damages under Section 10(b), answering the question in the affirmative. The Court however, gave little affirmative guidance about the requirements of the new element either in terms of theory or pleading standards.
The complaint dismissed by the district court alleged that Dura Pharmaceuticals and its officers made two false statements. One related to profits, while the other was about future FDA approval for a new spray device. When the company subsequently announced lower than expected earnings from slow drug sales, the share price fell almost 50%. Eight months later, Dura announced that the FDA would not approve its spray device. The share price fell temporarily, but for the most part recovered within a week. Plaintiffs claimed they purchased shares at artificially inflated prices.
The Supreme Court, considering only the claim about the spray device, held that, to state a cause of action in a securities damage suit, the plaintiff must plead and prove loss causation, a link between the claimed fraud and injury. The Court based its decision on five key points. First, as a matter of logic, price inflation does not equate to a loss — it means there might be a loss, the Court noted. The longer period between the purchase and sale however, the more likely it is that other factors caused the loss. Second, the PSLRA requires that loss causation be established, although the Act did not define the element. Third, the circuit court’s decision lacked precedent, since at common law a fraud claim required proof of loss causation. Fourth, the plaintiff should afford the defendant fair notice of its claim by identifying the link between the alleged fraud and claimed injury. Finally, as a matter of policy, loss causation should be required to facilitate weeding out baseless claims.
While the Court concluded that a securities law plaintiff must plead and prove loss causation it did not define the element. Likewise, the Court did not specify the pleading standard — simple notice pleading or is it an “averment of fraud” and thus subject to the particularity requirement of Rule 9(b).
In its opinion however, the Court discussed the element in terms of Rule 8(a) notice pleading. In discussing “fair notice” to the defendant, the Court cited Rule 8(a) of the Federal Rules of Civil Procedure, but did not decide that the pleading Rule governed. Rather, the Court stated that “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 it rests,’” quoting Conley v. Gibson, 355 U.S. 41, 47 (1957).
During the arguments, the Court was presented with alternate views as to what pleading standard should apply to loss causation. The Solicitor General argued in favor of applying the Rule 9(b) to pleading loss causation. Brief for the United States as Amicus Curie, supporting Petitioner, Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005) (No. 03-932), 2004 WL 2069564, at*14-15. Justice Ginsburg took the opposition position during oral argument noting: “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 statutes.” Dura Pharms., Inc., v. Broudo, No. 03-932, 2005 U.S. TRANS LEX 4, at * 19 (Jan. 12, 2005). The Court did not specifically adopt either position.
Nevertheless, Dura did become the predicate for a revised Rule 8(a) pleading standard. Two years after the decision the Supreme Court cited Dura as the predicate for its reinterpretation of Conley and Rule 8(a) in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). That decision requires that a civil complaint set forth sufficient facts demonstrating that the cause of action is plausible, giving the district court a gatekeeper function which is similar to that created by PSLRA where pleading and other requirements are used to weed out non-meritorious suits at the outset. This year the Court reiterated and reaffirmed the teachings of Twombly in Ashcroft v. Iqbal, 127 S. Ct. 1937 (2009) which rejected a ruling by the second circuit using a “flexible plausibility.”
Next: Basic theories of loss causation following Dura.