By Robert Barnes and Carrie Johnson
Washington Post Staff Writers
Friday, June 22, 2007
The Supreme Court set down strict guidelines yesterday for investors who want to sue company officials for fraud, another victory for business in what has been a resoundingly successful year before the nation's highest court.
Yesterday's decision in favor of a high-tech company being sued by shareholders is part of a pattern by which the justices have made it more difficult for plaintiffs to sue corporations or win substantial damage awards.
The reconstituted court, headed by Chief Justice John G. Roberts Jr., has devoted more of its docket to business cases. And, for the most part, the justices have embraced industry's viewpoint without the deep ideological divisions that split them on social issues.
"I always thought that the Rehnquist court was really quite a good forum for business," said Maureen E. Mahoney, a Washington lawyer, referring to the previous court, under Chief Justice William H. Rehnquist. "But I think we now know that the Roberts court is even better."
Robin S. Conrad, executive vice president of the legal arm of the U.S. Chamber of Commerce, declared it "our best Supreme Court term ever." Her organization has prevailed in 12 of 14 cases in which it took a position, with one still to be decided before the court finishes its work next week.
During the term that began in October, the court has thrown out an $80 million punitive-damages verdict for a widow who had sued cigarette manufacturer Philip Morris; found that the Civil Rights Act doesn't allow lawsuits by women and minorities alleging past discrimination; and ruled that the mortgage-lending subsidiaries of national banks cannot be regulated by states.
It has taken a keen interest in patent law, where there was "virtual unanimity," in the words of Supreme Court practitioner Beth S. Brinkmann, that the lower courts had made it too easy to obtain patents.
Mahoney, who argued more cases before the court this year than any other private attorney, said the court has moved to "update" antitrust jurisprudence "to conform with more modern understanding of economic principles."
In most of those cases, the court's conservative-liberal split was missing. "While I think there's more division this term, it's not in the business area," Brinkmann said.
For example, liberal Justice Stephen G. Breyer wrote Monday's majority opinion in Credit Suisse Securities v. Billing, in which the court refused to allow a private antitrust case over Wall Street initial public offering practices. Justice David H. Souter wrote for a seven-member majority in Bell Atlantic v. Twombly, which raised the bar for plaintiffs in pursuing an alleged antitrust conspiracy.
The chamber, the chief trade organization for the securities industry and lawyers who defend companies against investor lawsuits, praised Justice Ruth Bader Ginsburg's opinion yesterday in Tellabs v. Makor Issues & Rights as a significant affirmation of a 1995 law that Congress passed to weed out frivolous cases.
At issue in the case, which centered on optimistic statements made by executives of Illinois equipment maker Tellabs, was the law's requirement that shareholders show a "strong inference" of wrongdoing during the early stages of a securities-fraud lawsuit in order to survive motions to dismiss it.
Ginsburg wrote in an 8 to 1 decision that plaintiffs needed to put forth facts that executives had acted with intent to defraud that were "cogent and at least as compelling" as explanations to the contrary.
In essence, she said that before deciding whether lawsuits should proceed, judges must consider the alleged wrongdoing and innocent explanations. That "generally will make it harder for plaintiffs to defeat a motion to dismiss," New York defense lawyer Gregg L. Weiner said.
But John C. Coffee Jr., a securities law professor at Columbia University, said plaintiff lawyers can take comfort in the fact the standard was more modest than what the government had wanted. "I think what the plaintiff's bar will say when they read this is, 'We dodged a bullet,' " he said.
The court sent the case back to lower courts to consider with the new guidelines. Justices Antonin Scalia and Samuel A. Alito Jr. concurred with the outcome, but would have imposed an even stricter standard. Justice John Paul Stevens dissented.
Business interests have closely watched the two newest justices -- Roberts and Alito -- and like what they have seen.
"The Philip Morris case was quite a significant win because we didn't know what the position of Roberts and Alito was going to be as to punitive damages," said Quentin Riegel, vice president of litigation for the National Association of Manufacturers.
The question of limiting such damages, a key issue for big business, is one on which the court's usual conservative-liberal division does not hold; Ginsburg and Stevens joined Scalia and Justice Clarence Thomas in dissenting in Philip Morris v. Williams.
Alito's replacement of Justice Sandra Day O'Connor was likely the key to the 5 to 4 majority in the civil rights case, Ledbetter v. Goodyear Tire & Rubber. Alito wrote the opinion that said Title VII of the Civil Rights Act set a strict time limit for suits alleging pay discrimination, and that Lilly Ledbetter, a supervisor who found out at the end of her career that she was paid less than every man in a similar position, hadn't met the 180-day deadline.
There was an ideological divide on the one big case business lost this year, Massachusetts v. EPA. Justice Anthony M. Kennedy joined the liberal members of the court to reject industry's position and the Bush administration and rule that the EPA must address the issue of greenhouse-gas emissions.
Robert S. Peck, president of the Center for Constitutional Litigation, said that case showed it is too early to call the Roberts court overwhelmingly pro-business.
"While cases came down on the side of business, the victories were often incomplete," said Peck, who represented the family in the Philip Morris case and noted that the court didn't rule specifically on whether the punitive damages in the case were too high.
But, Mahoney said, "I think it's fair to say that the plaintiff's bar has lost considerable ground this term."
The victories come as corporate America is winning its share of battles outside the courtroom. The Securities and Exchange Commission is relaxing audit rules that businesses claim are too expensive and burdensome. That move, expected next month, would be the first major adjustment to the 2002 Sarbanes-Oxley Act, passed after accounting scandals at Enron and WorldCom.
And President Bush and Treasury Secretary Henry M. Paulson Jr. recently decried lawsuits that seek to impose liability on business partners, accountants and lawyers who did not make false statements but watched as corporate clients engaged in fraud. The Supreme Court is expected to address that issue next year.