My purpose here is very narrow. In 2005, when Supreme Court nominee Neil Gorsuch was in private legal practice, he co-authored a paper published by the Washington Legal Foundation. (It is an organization, for whom I, too, have written.) This paper is being used by the media as one example to allege that Judge Gorsuch has a bias in favor of business over consumers, workers, and employees.
Having read the 33-page, double-spaced paper, I make two conclusions:
The Commentaries on the 2005 Gorsuch Paper
In fact, the commenters not only evidence that they did not read the paper, they dismiss the very title of the paper. The title is Settlements in Securities Fraud Class Actions: Improving Investor Protection. They dismiss as inconvenient to their own bias the language “improving investor protection.” Here are examples of the commenters:
Ruth Conniff, writing for the Progressive, Feb. 1, cited the 2005 paper as an example of Judge Gorsuch’s “long record of protecting big companies from consumers, workers, and employees whose claims of fraud and discrimination threaten to make a dent in profits”:
In a working paper for the Washington Legal Foundation, Gorsuch staked out the opposite end of the ideological spectrum from consumer financial protection advocate Elizabeth Warren, lamenting securities class-action fraud claims that “prompt corporate defendants to pay dearly to settle,” and recommended making securities fraud class actions more difficult to pursue.
Conniff gave her readers practically no information about the paper except the eight-word quotation. She just hit the buzz words: corporate, consumer financial protection, fraud, Elizabeth Warren.
The Stand, an online publication advocating for workers’ rights, published the following on February 1, that had been prepared by the AFL-CIO:
Before being appointed to the bench, Gorsuch spent most of his career representing corporate clients. His record as a lawyer in private practice does not lessen our concerns about his alignment with corporate interests:
• In a 2005 paper, Gorsuch argued that class actions challenging securities fraud should be made more difficult for investors, since protecting corporations from the risk of litigation far outbalanced the concerns of investors who may have been swindled.
It is not only anti-business outfits that use this paper to assert Judge Gorsuch has a bias in favor of business. The Wall Street Journal published “Gorsuch Record Has a Pro-Business Tilt” by Sara Randazzo on February 1. The portion of Ms. Randazzo’s article that addresses the Gorsuch paper, stating that Gorsuch saw abuses by plaintiffs’ lawyers and “proposed a series of solutions to curb abuse of the system,” can only be regarded as pro-business in the same way that anti-business outfits perceive the paper to be pro-business, namely, any restriction on plaintiffs’ lawyers has to be pro-business.
I have found one neutral commenter. Although the text of the essay is neutral, the original headline (since changed) — often written by an editor — and the opening sentence are horribly misleading. The title of the February 1 piece by Carmen Germaine, senior reporter for Law360blog, is “Gorsuch Likely No Friend to Securities Suits,” It would be too much to ask, I suppose, for the headline to read, “Gorsuch No Friend to Meritless Securities Suits.” And it would be too much to ask for the opening sentence to insert the word meritless as follows: “Plaintiffs firms could be on rough terrain at the U.S. Supreme Court if the Senate confirms Tenth Circuit Judge Neil M. Gorsuch, an exacting jurist who as a private attorney voiced concerns about the growing number of meritless securities class actions and as a judge has taken a narrow view of securities fraud liability.”
Ms. Germaine spends 600 words on the 2005 paper and 300 words on one of Judge Gorsuch’s opinions on the Tenth Circuit. To her credit, she quotes WilmerHale attorney Matthew Martens, University of Virginia School of Law Professor Andrew Vollmer, and Paul Hastings attorney Kevin P. Broughel. The Tenth Circuit opinion she addresses was MHC Mut. Conversion Fund, L. P. v. Sandler O’Neill & Partners, L. P., 761 F. 3d 1109 (10th Cir. 2014). Ms. Germaine observed that that opinion was cited with approval by Justice Thomas in his concurring opinion in Omnicare, Inc. v. Laborers Dist. Council Const. Industry Pension Fund, 575 U.S. (Mar. 24, 2015). We should note that all nine Justices agreed with the result reached by the Court in Omnicare.
Turning to another commenter: The Alliance of Justice issued a press release on February 1 denouncing the nomination of Judge Gorsuch and provided a link to its “fact sheet” about the judge. That sheet included the following subheading and an example in support of it:
Gorsuch is a friend of big business and harms the rights of workers and consumers
In a working paper for the Washington Legal Foundation, Settlements in Securities Fraud Class Actions: Improving Investor Protection, Washington Legal Foundation 3-4 (2005), Gorsuch recommended that the legislature and courts make securities fraud class actions more difficult to achieve. He lamented that “[b]ecause the amount of damages demanded in securities class actions is frequently so great, corporations often face the choice of stak[ing] their companies on the outcome of a single jury trial, or be forced by fear of the risk of bankruptcy [into settling] even if they have no legal liability.”
(This part of the “fact sheet” was picked up by Nigel Roberts, “8 Things to Know About Trump’s Dangerously Conservative Supreme Court Nominee,” NEWSONE, Feb. 1.)
Frankly, nothing in this summary by the Alliance for Justice supports its subheading, and there is nothing in this summary that any fair-minded person would find offensive. In fact, this summary supports Gorsuch. Gorsuch lamented the injustice in allowing securities class actions to force innocent corporations into the choice of a bet-the-company trial or settling. This makes him a “friend” of the innocent, not a “friend of big business.” Moreover, making such lawsuits more difficult helps workers and consumers because, when companies go out of business or pay huge settlements to avoid going out of business, their ability to employ workers and to provide goods and services is eliminated or reduced, respectively. In sum, the Alliance for Justice did no justice to Mr. Gorsuch’s views and his paper.
The 2005 Gorsuch Paper
Let’s turn to the paper itself. Gorsuch and his co-author began by noting that class actions against publicly-held corporations were first proposed a few decades ago as a solution to the problem of investors who, suing singly for fraud, had great difficulty in obtaining remedies. But as often happens, the solution to one problem creates its own problems, in this instance, the creation of class actions (by which a large number of investors can join together as plaintiffs in a single lawsuit) provided economic incentives for plaintiff attorneys to bring meritless suits. Even meritless suits allowed lawyers to obtain hefty sums of money for themselves because the large sums they sought forced defendant companies to settle. And to make matters worse, while the lawyers enjoyed handsome monetary settlements, the investors they represented would obtain a pittance, often in the form of coupons — worth little and used by investors even less.
In making a series of proposals to reform class actions alleging securities fraud, Gorsuch wrote that he wanted to “protect the valuable function securities class action litigation was originally intended to serve.” We could be waiting a long, long time before the ant-business press admits that Gorsuch recognized the value of securities class actions, that he saw abuses and wanted to prevent them, saw a wrong and wanted to right it.
Before delineating his proposals, Gorsuch provided a couple striking examples of the abuses by plaintiffs’ lawyers:
Even when real money is obtained for investors by their lawyers, Gorsuch pointed out that the lawyers get rich at the expense of the investors. How? When a defendant corporation pays, the money comes from the corporation at the expense, out of the pockets of, the current investors and the proceeds go to the former investors, investors who were of record when the claimed fraud occurred. Since there is a huge overlap in the people and institutions among former and current investors, basically money is taken from investor Peter to pay the same investor Peter. So, there’s no net gain by the huge majority of investors. But there certainly is a net gain to the plaintiffs’ lawyers.
Let me interject here that the anti-business commenters presume that workers and consumers are only on one side of the ledger in securities class actions, that they are invariably on the plaintiffs’ side and only on the plaintiffs’ side. In fact, they are on both sides. As just explained, the very same people can be on both sides because they are both current and former investors. But more than this: On the one side, investors include individuals, wealthy and not-so-wealthy, institutions such as pension funds (those of teachers and government employees) and college endowments. And corporations, too, are on this side of the ledger as investors; they buy stocks, bonds and other financial instruments in other businesses.
On the other side of the ledger, defendant companies consist of employees, often thousands, and tens of thousands, of employees. These companies provide goods or services, and would not exist if there weren’t a demand for them by their customers: consumers, businesses, nonprofits, and government. Suppliers depend on orders from these companies. Government at all level, local, state and federal, depend on their taxes. So, why should anyone suppose that workers and consumers win only if the investor side of securities class actions win?
Gorsuch examined how the following actions by the Congress, and one by the Supreme Court, did not provide sufficient reform to “prevent unmeritorious securities fraud cases [and] deter settlements that benefit lawyers more than their clients”:
So Gorsuch proposed the following solutions:
1. Require that the plaintiffs “demonstrate that the price of the security at issue declined as the result of disclosure of previously concealed information…” In addition to stating this in his 2005 paper, Mr. Gorsuch argued for this point in an amicus brief before the U.S. Supreme Court in Dura Pharmaceuticals, Inc., v. Broudo, 544 U.S. 336 (2005). In that case, the Court readily threw out the Ninth Circuit’s decision, in a mere 10 pages, and they did so unanimously, 9-0, with a Court composed of Stevens, Ginsberg, Breyer, O’Connor, Souter, and Kennedy — and Rehnquist, Scalia, and Thomas. That line-up of support from the Court doesn’t sound like Gorsuch was an extremist, a conservative, or out of the mainstream. (In her essay, Carmen Germaine stated that Mr. Gorsuch, in answering the questionnaire from the Senate Judiciary Committee to support his nomination to the Tenth Circuit, stated that this case was among the most significant ten cases of his career.)
2. Mandate that plaintiffs’ attorneys’ fees be paid separately, rather than from the settlement fund, to keep intact the recovery for plaintiffs. This sounds like Gorsuch is pro-plaintiff.
3. Have courts scrutinize fees sought by plaintiffs’ attorneys because “many of them do little or nothing to prosecute their cases and simply ‘free ride’ on SEC or Justice Department investigations.” And grant fees to the plaintiffs’ lawyers to compensate them for the “fair market value of their time…” Again, this sounds like Gorsuch was pro-plaintiff. He wanted lawyers to prove that they have added value before they take money away from their clients’ settlement’s fund.
4. Let the trial courts use competitive bidding in selecting the lawyers who will represent the class of plaintiffs. Again, this would save money for plaintiffs.
5. Encourage “meaningful oversight” by providing notice to federal (FTC, Justice Department) and state agencies to review and comment on proposed settlements.
6. Prevent private lawyers from obtaining settlement monies that duplicate what has already been obtained by federal and state agencies by having the government settlements set up victim compensation funds. Where is the justice in having investors obtain double recoveries against defendants, one by the government and one by the private persons the government is supposed to represent? Again, this Gorsuch proposal helps investors. It ensures that investors receive money (1) from the government suits without waiting for the private suit to run its course through the courts, and (2) without plaintiffs’ lawyers taking a cut.
7. Ensure that the lead plaintiff investors in securities class actions are large enough, and have sustained attention spans, to oversee litigation being brought in their name.
So, look again at this list of seven proposals. Which of these proposals, if any, is pro-business? Only the first would restrict the bringing of securities class action suits. That restriction would require that plaintiff investors demonstrate they have been actually injured by the fraud they allege. That is such a plain and reasonable requirement (except to the wacky Ninth Circuit) that the U.S. Supreme Court agreed with Gorsuch in a 9-0 decision. Do anti-business groups want a reversal of that decision?
The remaining six proposals sought to put more money in defrauded investors’ pockets than in the pockets of their lawyers. Do anti-business groups object to this?
No, if a claim is made that Judge Gorsuch is biased in favor of business, the claim cannot be supported by his 2005 paper. In fact, anti-business groups should advocate for the proposals made in Mr. Gorsuch’s paper to achieve the goal he described in the title of the paper: “improve investor protection.”
Based on the commentary by the press made about this one example of Judge Gorsuch’s writing, to what degree would you expect commenters from the press to give an honest assessment of his other writings, including his 850 judicial opinions?
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