Wall Street Banks Benefit From Tougher Suit Standards in U.S.

Two U.S. Supreme Court decisions making it tougher to pursue lawsuits may have begun to bear fruit for corporations fighting investor claims or employee litigation.

Where once it was enough to give a defendant “fair notice” of a claim and the grounds on which it rested, the high court’s 2007 holding in Bell Atlantic Corp. v. Twombly required an antitrust complaint to contain enough facts to show a claim that is “plausible on its face.” Two years later, in Ashcroft v. Iqbal, the court applied Twombly to all federal civil suits.

The Supreme Court rulings mean that someone who wants to sue in federal court “should not subject a defendant to the costs and burdens of litigation when there is no plausible basis for their claims,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in an e-mail. The Washington-based business advocacy group filed a friend-of-the- court brief in Twombly.

The rule aided financial-services companies after the February 2008 collapse of the $330 billion auction-rate securities market.

Judges cited Twombly alongside the 1995 Private Securities Litigation Reform Act, which also added hurdles to investor cases, in dismissing suits against Citigroup Inc. and Bank of America Corp.’s Merrill Lynch unit over the sale of the securities.

Photographer: Dennis Brack/Bloomberg

U.S. Supreme Court Chief Justice John G. Roberts. Close

U.S. Supreme Court Chief Justice John G. Roberts.

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Photographer: Dennis Brack/Bloomberg

U.S. Supreme Court Chief Justice John G. Roberts.

‘Keys to the Courthouse’

“Implausible conclusory allegations are no longer keys to the courthouse,” Scott D. Musoff, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in New York and a lawyer for Merrill Lynch in the auction-rate litigation, said in an e-mail. “This is especially important in the wake of a financial crisis when people are looking for someone to blame for their losses even if they have no factual basis to support their claims.”

Musoff wouldn’t comment specifically on Merrill’s auction- rate case.

Plaintiffs’ lawyers say the justices’ new threshold unfairly closes the courthouse to their clients or increases their costs by forcing them to gather facts before suing, often before they can gain access to key information. Fred T. Isquith, a plaintiffs’ lawyer in class actions, criticized the Twombly court for trying to cut caseloads at the expense of litigants seeking redress.

“It is the most fundamental task of government to administer justice and provide judgment,” Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP in New York, said in an e-mail. “Dismissing cases is not the solution; the solution is more judges and more money for the court system.”

Waste Management

In tossing out James Stenger’s age-bias lawsuit against his employer, a waste management firm owned by Zurich-based Credit Suisse Group AG, U.S. District Judge Eric F. Melgren in Kansas City, Kansas, said the claim didn’t raise enough facts to cross the line “from conceivable to plausible.”

Melgren allowed Stenger, 55, a former customer-relations worker at Shawnee, Kansas-based Deffenbaugh Industries Inc., to refile his complaint with more detail. Deffenbaugh again asked the judge to dismiss. He has yet to rule.

Twombly and Iqbal supplanted the standard set by the Supreme Court in Conley v. Gibson in 1957. Under Conley, a suit could be dismissed if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.”

Federal civil cases typically proceed from the complaint to the motion to dismiss, followed by an evidence-gathering stage known as discovery, then summary judgment if there are no facts in dispute that would require a trial to resolve.

Earlier Disposal

Twombly and Iqbal are part of a trend to dispose of suits earlier in the process, said Arthur R. Miller, a professor at New York University School of Law. In 1986, the Supreme Court made it easier to decide a lawsuit between discovery and trial.

“Twombly-Iqbal now moves it to the motion to dismiss based on a single document, the complaint, with no opportunity for discovery,” said Miller, who is also special counsel to New York-based law firm Milberg LLP, which represents plaintiffs in securities litigation. “It’s becoming a big battle.”

The Chamber of Commerce says suits deserve more scrutiny in part because of the expense incurred by defendants in discovery. A report the group co-sponsored this year found that the discovery cost in 20 cases involving “major” companies averaged $621,880 in 2008, up from $488,847 for 15 cases in 2004.

Some U.S. lawmakers are seeking a return to the old, less restrictive standard. Pennsylvania Senator Arlen Specter’s bill, S. 1504, specifically mentions Conley. New York Representative Jerrold Nadler’s, H.R. 4115, refers to the “no set of facts” standard. Both Democrats’ bills are in committee.

Dollar General

In August 2009, U.S. District Judge Norman K. Moon in Lynchburg, Virginia, threw out a complaint brought by Holly Branham for injuries she allegedly sustained after slipping on liquid in a Dollar General Corp. store in Amherst, Virginia, while shopping for clothespins. Branham sought $300,000.

Citing Twombly and Iqbal, Moon said Branham “failed to allege any facts that show how the liquid came to be on the floor, whether the defendant knew or should have known of the presence of the liquid or how the plaintiff’s accident occurred.”

The judge let Branham amend the complaint to add the fact that an assistant manager had just mopped the floor. Dollar General, based in Goodlettsville, Tennessee, didn’t seek dismissal and the parties settled.

“It clearly does push forward the cost for the plaintiff side to look into a situation that might give rise to a claim, but I just have not seen that quantified,” said Richard A. Nagareda, a professor at Vanderbilt University Law School in Nashville, Tennessee, who discusses Twombly and Iqbal in an article due to be published in the DePaul Law Review next year.

Monitoring Consequences

The Advisory Committee on Civil Rules of the Judicial Conference of the U.S., the federal courts’ policy-making group, is monitoring the consequences of Twombly and Iqbal.

The effects of the decisions were debated at a May conference at Duke Law School in Durham, North Carolina, and the committee plans to present a report on the discussion to U.S. Chief Justice John Roberts before the Judicial Conference meets Sept. 14, said John Rabiej, chief of the Rules Committee Support Office.

Patricia W. Hatamyar, a professor at the St. Thomas University School of Law in Miami Gardens, Florida, analyzed a sample of federal cases and found it four times more likely for a motion to dismiss to be granted under Iqbal than under Conley.

Sample of Cases

In another sample of cases, dismissals were granted 38 percent of the time they were requested in both the four months before Twombly and the four months after Iqbal, according to an Aug. 12 report by the Administrative Office of the U.S. Courts, the support agency for the federal system.

“The case law to date does not appear to indicate that Iqbal has dramatically changed the application of the standards used to determine pleading sufficiency,” according to a July 26 Judicial Conference public memorandum.

The cases include Stenger v. Deffenbaugh Industries Inc., 09-cv-2422, U.S. District Court, District of Kansas (Kansas City); and Branham v. Dolgencorp Inc., 09-cv-00037, U.S. District Court, Western District of Virginia (Lynchburg).

To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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