U.S. Supreme Court Raises Pleading Bar For Securities Fraud

When Congress enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”), it appeared to resolve a circuit split regarding the threshold required for pleading a securities fraud cause of action. The courts of appeal agreed that securities fraud required scienter, but disagreed over whether a plaintiff must allege more than the conclusion that scienter existed. Congress adopted the most stringent approach, as expressed by the Second Circuit, that a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the requisite state of mind,” 15 U.S.C. § 78u-4(b)(1). However, Congress did not codify the Second Circuit’s jurisprudence concerning the meaning of the term “strong inference,” and as a result courts diverged regarding the construction of that term.

In resolving that split in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (June 21, 2007), the U.S. Supreme Court said its task was “to prescribe a workable construction of the ‘strong inference’ standard, a reading geared to the PSLRA’s twin goals: to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims.” Its solution was to require a three-step process: (1) accept all factual allegations as true; (2) consider the complaint in its entirety plus documents incorporated into the complaint by reference or available through judicial notice; and (3) determine the plausible opposing inferences regarding scienter and dismiss the complaint unless “a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” The Court rejected the argument that weighing competing inferences impinged upon the jury’s role, finding that Congress had the power to establish any special pleading requirements, as it had done in the PSLRA.

Tellabs does not represent a further application of the new fact-pleading rules emerging under Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (May 21, 2007) (see previous post), because it involved interpretation of heightened pleading requirements specifically codified into statute, rather than the federal rules of civil procedure or common law.

U.S. Supreme Court Rejects “Post-Removal Event” Theory for Appealing Remands

The U.S. Supreme Court has given a strict reading to 28 U.S.C. § 1447(d) to bar appellate consideration of the substance of most remand orders, rejecting an exception that had developed in some of the circuits.

In Powerex Corp. v. Reliant Energy Services, Inc., 127 S. Ct. 2411 (U.S. June 18, 2007), one of the defendants removed the case based on the theory that it was a “foreign state” for purposes of the Foreign Sovereign Immunities Act (“FSIA”) and 28 U.S.C. § 1441(d) (which permits foreign states under the FSIA to remove). Plaintiffs successfully moved to remand, challenging whether that defendant really was a “foreign state.” Defendant appealed the remand order, and all parties and the Ninth Circuit apparently agreed that appellate jurisdiction existed because the bar to appeal of remand orders contained in 28 U.S.C. § 1447(d) only applied to remands based on a defect in subject-matter jurisdiction at the time of removal. Here, several other removing defendants had proper grounds to remove the whole case that were not part of the FSIA ruling, so the original removal was not defective.

After the Ninth Circuit reached the merits and affirmed, the Supreme Court granted certiorari but dismissed the case for lack of appellate jurisdiction. It held that there was no textual support in the statute for allowing appellate review of removals that were initially proper, and found that Congress specifically intended to bar review of remands even if based on defects in subject-matter jurisdiction that developed later. The Court found that the only task for an appellate court in this type of case is to determine whether the remand was colorably based on a defect in subject-matter jurisdiction, in which case it must dismiss the appeal.

Third Circuit Finds One Panel May Overrule Another When Predicting State Rulings

In Jaworowski v. Ciasulli, 490 F.3d 331 (3d Cir. June 18, 2007), a panel of the Third Circuit took the unusual step of overruling a prior decision of the same court. It acknowledged that ordinarily the only way for the court to overrule its own precedent is for the court to act en banc, but it found that an exception exists for cases based on diversity jurisdiction in which the court predicts how a state’s highest court would decide an issue.

The panel said that in such circumstances an appellate court should be free to reexamine the validity of a previous prediction in light of subsequent decisions of the state’s highest court. It concluded that, although the New Jersey Supreme Court still had not decided the particular matter at issue, there were sufficient new decisions to reveal a “change in the legal landscape” and a clear direction for the Third Circuit to follow to change its prediction.

Federal District Court Examines Evidentiary Issues Concerning Electronic Records

The Chief Magistrate Judge of the federal court in Maryland has issued an important opinion analyzing a myriad of evidentiary issues that parties using electronic documents face in summary judgment and trial situations.

In Lorraine v. Markel American Ins. Co., 241 F.R.D. 534 (D. Md. May 4, 2007), the court denied the parties’ cross-motions for summary judgment on the grounds that courts may only consider on summary judgment those materials that are in the form of admissible evidence, and the electronic evidence offered here was not shown to be admissible. In analyzing the motions, the court published a lengthy opinion studying in detail a variety of means to satisfy federal evidentiary requirements for the admission of electronically stored information (“ESI”).

Of particular interest is the court’s discussion of the need to properly authenticate various forms of ESI, which the movants did not even attempt to do, thereby causing what the court termed “self-inflicted wounds.”

Compliance With Detailed Regulations Does Not Give Rise To Removal Jurisdiction

In a unanimous opinion, Watson v. Philip Morris Cos., Inc., 127 S. Ct. 2301 (June 11, 2007), the Supreme Court rejected application of the “Federal Officer” removal statute to private parties other than govern­ment contractors.

Plaintiffs had filed a state-court class action claiming that Philip Morris violated Arkansas unfair business practice laws in selling so-called “light” cigarettes. Philip Morris removed, citing 28 U.S.C. § 1442(a)(1), which permits removal by any officer of the United States “or any person acting under that officer.” The district court and the Eight Circuit agreed that in following the FTC’s detailed instructions governing cigarette testing and tar/nicotine disclosures in advertising, defendants were “acting under” the agency’s orders for purposes of the removal statute.

However, the Supreme Court found that Congress did not intend to encompass private parties whom a federal regulatory agency directs, supervises, and monitors, even if very closely and in considerable detail. In the Court’s view, such activities amount to nothing more than regulation and compliance, as opposed to “acting under” the direction of a federal officer, and mere com­pliance with regulations does not open the door to federal jurisdiction. It distinguished cases in which removal was permitted by private government contractors, finding that such cases involve helping federal officers fulfill tasks that the government otherwise would have to perform itself.

New York Declines To Extend “Continuous Representation Doctrine” To Auditor

In a matter of first impression, New York’s highest court has held that the statute of limitations applicable to accounting malpractice actions was not tolled under the “continuous representation doctrine” where the parties’ course of dealing was to enter into a separate contract for each year’s annual audit. Williamson v. PricewaterhouseCoopers LLP, 9 N.Y.3d 1, 872 N.E.2d 842, 840 N.Y.S.3d 730 (June 7, 2007).

The court noted that the “continuous representation doctrine” originated in its medical and legal malpractice jurisprudence, and was based on the fact that such actions accrue when the malpractice is committed and not when the client discovers it. Concerned that a cause of action might expire while the plaintiff was still receiving treatment or advice related to the conditions produced by the earlier wrongful acts and omissions, the court developed the doctrine to allow tolling of the statute of limitations for as long as “the course of treatment which includes the wrongful acts or omissions has run continuously and is related to the same original condition or complaint.”

In Williamson, the court held that the doctrine was not available under the circumstances present, but it did not appear to reject its application to accountants altogether. Rather, it emphasized that the doctrine requires a “mutual understanding” between the parties that the relationship with the client would be ongoing, and that no such understanding was present here.