Tellabs — A Continuing Saga
Many commentators saw the Supreme Court’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007) last year as “pro-business,” just one more in a line of rulings from the Robert’s Court favorable to business. Before that label attaches however, a review of the outcome is in order.
In Tellabs , the Court held that “a plaintiff alleging fraud in a Section 10(b) action … must plead facts rendering an inference of scienter at least as likely as any plausible opposing inference.” While many focused on the Court’s use of words such as “cogent” to describe the inference, in fact, the test is one of equipoise. Stated differently, the inference of scienter need only be equal to those which point to innocence to allow a plaintiff’s complaint to move into discovery.
The Supreme Court’s so-called pro-business decision has actually had the effect of reducing pleading standards in two circuits. Mississippi Public Employees’ Retirement System v. Boston Scientific Corp., 2008 WL 173590 (9th Cir. Apr. 16, 2008); ACA Financial Guaranty Corp. v. Advest, Inc., 512 F.3d 46 (1st Cir. 2008).
In others, the impact is debatable. Consider, for example, the Seventh Circuit, which initially ruled on the case. Prior to the Supreme Court decision, the Seventh Circuit held that plaintiffs had adequately pled a claim under the Private Securities Reform Act as to the company and defendant Notebaert. Makor Issues & Rights, Ltd. V. Tellabs, Inc. 437 F.3d 588 (7th Cir. 2005).
The Supreme Court did not apply its ruling to the facts. Rather, the Court left the application of its ruling to the Seventh Circuit. Applying the new Tellabs test, the Circuit Court reached the same conclusion as in its earlier opinion – the claims were adequate and could proceed. The case was sent back to the district court. Makor Issues & Rights, Ltd. V. Tellabs, Inc., 513 F.3d 702 (7th Cir. 2008).
Last week, the latest chapter in this long running saga was penned. In a ruling on May 23, 2008, the district court dismissed a claim for insider trading under Exchange Act Section 20A against defendant Brick, another company executive. Previously the Section 10(b) claim had also been dismissed against Mr. Brick, leaving only a Section 20(a) claim for control person liability as to him.
On the insider trading claim, the court held that to sustain a Section 20A cause of action, plaintiffs must plead a violation of “this title or the rules or regulations thereunder by purchasing or selling a security while in possession of material, nonpublic information.” Under the plain language of the Section, the court concluded the violation of the title plaintiff must plead is insider trading, not a Section 20(a) claim. Since the Section 10(b) claim had been previously dismissed as to defendant Brick, the court dismissed the Section 20A claim.
Nevertheless, the case is still in litigation. The claims which were before the Supreme Court are proceeding, leaving one to wonder whether the Supreme Court’s decision was really “pro-business.”