Pleading requirements are often critical in securities litigation. The PSLRA, for example, employs stringent pleading requirements in conjunction with other requirements to help eliminate frivolous complaints. While many thought that Dura resolved the question of whether loss causation could be pleaded under Rule 8(a) or the fraud particularity requirements of Rule 9(b), a split appears to be emerging among the circuit courts on this question.

In Dura, the court discussed pleading loss causation under Rule 8(a) without specifically adopting that pleading standard. As the court stated: “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). Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 346 (2005).

During the arguments on Dura, different views were expressed as to the applicable pleading requirements. The Solicitor General contended that Rule 9(b) and its fraud particularity requirements should apply. Brief for the United States as Amicus Curie, supporting Petitioner, Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (No. 03-932), 2004 WL 2069564, at *14-15. The solicitor’s position clearly was not adopted by the court.

On the other hand, it is unclear if the comments of Justice Ginsburg were accepted by the court. During argument, the Justice stated “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 Pharmaceuticals, Inc. v. Broudo, (No. 03-932), 2005 U.S. TRANS. LEX 4, at *19 (Jan. 12, 2005).

Following the Supreme Court’s decision in Dura, the circuit courts have adopted two and perhaps three positions on pleading loss causation. First, some courts have held that the requirements of Federal Civil Rule 8(a) govern. The Second Circuit reached this conclusion in ATSI Communications, Inc. v. The Shaar Fund, Ltd., 493 F.3d 87 (2nd Cir. 2007). There, the court applied its interpretation of the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). In that case, the Supreme Court concluded that Rule 8(a) requires a complaint to have “plausibility” — that is, facts must be plead demonstrating that plaintiff has a plausible cause of action. This, according to the court, has always been the meaning of Conley v. Gibson when the case is properly read. Interestingly, the court cited Dura as the source of its plausibility requirement noting “[w]e alluded to the practical significance of Rule 8 entitlement requirements in Dura . . .” when it discussed the necessity for loss causation as way to help eliminate baseless claims. The court supported this statement with a citation to the discussion of the in terrorem effect of securities litigation in Blue Chip Stamps v. Manor Drug Stores, 411 U.S. 723 (1975).

In an ironic twist, when applying the Twombly standard, the ATSI Communications court cited the circuit’s prior decision in Iqbal v. Hasty, 490 F.3d 143, 157 (2nd Cir. 2007). That decision interpreted Twombly to employ a “flexible plausibility” standard. While the Supreme Court reversed Iqbal in Ashcroft v. Iqbal, 127 S.Ct. 1937 (2009) concluding that the standard used by the circuit was insufficient under Twombly, it seems clear that the second circuit is following the Rule 8(a) pleading standards for Dura.

The fourth and seventh circuits however require that loss causation be pleaded under Rule 9(b). The fourth circuit evolved this position beginning with Teachers’ Retirement System of L.A. v. Hunter, 477 F.3d 162 (4th Cir. 2007). There, the court noted that “Neither the PSLRA nor the Supreme Court has established whether loss causation is a sufficient part of an ‘averment of fraud’ to fall within the requirements of . . . Rule 9(b). A strong case can be made that . . .” it does. The court reiterated this view in In re Mutual Funds Invest. Litig., 566 F.3d 111, 119 (4th Cir. 2009) and went on to hold that, while the pleading requirements of the PSLRA do not apply to the element, Rule 9(b) is applicable.

The seventh circuit appears to concur. In Tricontinental Industries, LLC v. PriceWaterhouseCoopers, LLC, 475 F.3d 824 (7th Cir. 2007), the court specifically stated that Rule 9(b) applied to the pleading loss causation for a common law fraud claim. When discussing that element as part of the federal securities claim however, the court did not specifically state what pleading standard should be used. The opinion suggests that Rule 9(b) was used although it is less than clear.

Finally, the ninth circuit appears to have adopted a “not implausible” standard for pleading Dura loss causation in In re: Gilead Sciences Sec. Litig., 536 F.3d 1049 (9th Cir. 2008), cert. denied, 129 S.Ct. 1993 (2009). There, the court reversed the dismissal of a securities class action complaint where there was a significant time delay between the events plaintiffs claimed established loss causation. In reaching its conclusion, the ninth circuit chided the district court for expressing skepticism about the plausibility of plaintiffs’ claims, noting that “the district court ruling on a motion to dismiss is not sitting as a trier of fact. It is true that the court need not accept as true conclusory allegations nor make unwarranted deductions or unreasonable inference . . . But so long as the plaintiff alleges facts to support a theory that is not facially implausible, the court’s skepticism is best saved for later stages of the proceedings . . .” The court went on to note that loss causation is more important at trial than at the pleading stage.

Next: The final segment of the series — Analysis and Conclusions