Another Perspective

Two Cheers for the Ninth Circuit

The notorious bleeding hearts of this Federal appeals court know how to make tort reformers happy.

By 4.23.04

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LOS ANGELES -- With rulings in favor of eliminating "under God" from the Pledge of Allegiance and temporarily halting California's gubernatorial recall election last year, the Ninth Circuit added to its notoriety for being the most shamelessly liberal collection of courts in the Federal judiciary.

Yet securities class-action plaintiff lawyers in their jurisdiction, who sue companies for little more than a short drop in stock prices or earnings results that miss previous estimates by a few cents, are smarting. The Ninth Circuit's judges have made it much more difficult for these litigators to use the threat of a large judgment to intimidate their prey into multimillion-dollar settlements.

"They [Ninth Circuit judges] are not as liberal on business issues. They apply more stringent criteria than the others in stating a claim," says Lionel Glancy, the name partner of a Los Angeles-based firm that has tangled with once-hot sneaker maker Skechers USA and Deutsche Bank, the German financial services powerhouse.

Of course, "as liberal" needs some context here. As the largest of the 11 Federal judicial districts, covering California, eight other Western states, and two U.S. territories, the Ninth Circuit naturally attracts attention. It has come under fire from conservatives for its rubber band-like interpretations of the Constitution and rulings that often go against the intent of Congress, and common sense.

Just in the last two years, Ninth Circuit appellate judges ruled against U.S. Attorney General John Ashcroft's efforts to fight California's legalization of medical marijuana and threw out the death penalty conviction of former alarm salesman John Visciotti, who allegedly teamed up with another colleague to murder and rob two of his former co-workers in order to pay off their motel bill.

The Ninth Circuit's rulings are struck down by the U.S. Supreme Court at a higher rate than any other circuit. Twelve of the 16 appellate cases referred from Ninth Circuit to the Supremes were overturned in 2001 according to the Center for Individual Freedom -- a year later, the High Court reversed three consecutive Ninth Circuit rulings in a single day.

WHEN IT COMES TO securities torts, however, these judges stick close to the books. Between 1996 and 2001, Ninth Circuit judges dismissed 61 percent of securities class-action torts, almost double the number dismissed by the Second Circuit, which covers New York and the rest of the Northeast, according to a study by legal scholars Adam Pritchard and Hillary Sale for the University of Michigan's John M. Olin Center.

Those cases that actually make it to the appellate level have a scant chance of surviving. Last year, the Court of Appeals affirmed the dismissal of a class-action against the now-defunct Read-Rite Corp., agreeing that the plaintiffs couldn't prove that the computer hard-drive parts-maker intended to make false statements about its true financial condition seven years earlier.

Behind this heartless ruling by a bunch of bleeding hearts stands the Circuit's interpretation of the Private Securities Litigation Reform Act. This creature of the Clinton era came in response to a wave of meritless securities fraud class-actions, called strike suits against tech firms, much of them filed by the infamous William Lerach and his Milberg, Weiss law firm.

Passed by Congress in 1996 over then-President Clinton's veto, it was supposed to reduce the number of securities fraud torts -- and put Milberg, Weiss out of business -- by setting a higher standard of "strong intent." It was also supposed to force plaintiffs to have already nailed down their evidence without the benefit of discovery -- that is, court-sanctioned evidence trolling into a company's financial records.

THE NINTH CIRCUIT, home to nearly a quarter of securities torts filed in the country, shocked legal scholars by sticking to a fairly literal interpretation of the Act. Lawsuits are halted immediately, sometimes for as long as two years according to Glancy, which means that the plaintiffs cannot conduct discovery. Once that period passes, the plaintiffs have to either prove they actually have the goods on their target or the case gets dismissed.

So: Claims of misleading earnings estimates get tossed out quickly as does accusations of issuing positive company performance by executives to pump up the stock so they can exercise their stock options. On the other hand, claims that a firm allegedly violated accounting rules -- which usually arise from restatements of financial performance and Federal investigations -- often make it.

The Ninth Circuit began taking its tough line in 1998 when the Court of Appeals ruled in In Re Silicon Graphics that a case filed against the graphic design systems outfit by Milberg, Weiss was rightfully dismissed. It modified its guidelines slightly in later cases, but the Ninth Circuit has kept its stern reputation intact.

Per usual the Ninth Circuit is going against the grain, but for once it may be worth following. Other circuits have tended to follow the standards set down by the Second Circuit, which allow "strong intent" to be proven by circumstantial evidence. It's because of those less stringent interpretations that fewer cases are being dismissed -- and Lerach & Co. are still alive and kicking.

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About the Author

RiShawn Biddle the editor of Dropout Nation , is co-author of A Byte at the Apple: Rethinking Education Data for the Post-NCLB EraHe can be followed at Twitter.com/dropoutnation.