I

104TH CONGRESS

1ST SESSION H. R. 10

To reform the Federal civil justice system; to reform product liability law.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 4, 1995

Mr. HYDE, Mr. RAMSTAD, Mrs. CHENOWETH, and Mr. CONDIT (for themselves, Mr. ARMEY, Mr. ALLARD, Mr. BACHUS, Mr. BAKER of California,

Mr. BAKER of Louisiana, Mr. BALLENGER, Mr. BARTLETT of Maryland,

Mr. BARTON of Texas, Mr. BILIRAKIS, Mr. BLILEY, Mr. BLUTE, Mr.

BONO, Mr. BUNNING of Kentucky, Mr. BURR, Mr. BURTON of Indiana,

Mr. CALLAHAN, Mr. CALVERT, Mr. CAMP, Mr. CANADY, Mr.

CHRISTENSEN, Mr. CHRYSLER, Mr. CLINGER, Mr. COBURN, Mr.

COOLEY, Mr. COX, Mr. CRANE, Mrs. CUBIN, Mr. CUNNINGHAM, Mr.

DAVIS, Mr. DOOLITTLE, Mr. DORNAN, Ms. DUNN, Mr. EMERSON, Mr.

ENSIGN, Mr. EVERETT, Mr. EWING, Mr. FOLEY, Mr. FORBES, Mrs.

FOWLER, Mr. FOX, Mr. FRISA, Mr. GANSKE, Mr. GILCHREST, Mr. GILMAN, Mr. GOODLATTE, Mr. GOODLING, Mr. GUNDERSON, Mr. HANCOCK,

Mr. HASTERT, Mr. HASTINGS of Washington, Mr. HAYWORTH, Mr.

HEINEMAN, Mr. HERGER, Mr. HILLEARY, Mr. HOBSON, Mr.

HOSTETTLER, Mr. HOUGHTON, Mr. INGLIS of South Carolina, Mrs.

JOHNSON of Connecticut, Mr. JONES, Mr. KIM, Mr. KNOLLENBERG, Mr.

LAHOOD, Mr. LARGENT, Mr. LATOURETTE, Mr. LEWIS of Kentucky, Mr.

LIGHTFOOT, Mr. LINDER, Mr. MCCOLLUM, Mr. MCHUGH, Mr.

MCINTOSH, Mr. MICA, Mr. MILLER of Florida, Ms. MOLLINARI, Mrs.

MYRICK, Mr. NUSSLE, Mr. PACKARD, Mr. PORTER, Mr. PORTMAN, Mr.

RADANOVICH, Mr. RIGGS, Mr. ROHRABACHER, Mr. ROTH, Mr. ROYCE,

Mr. SANFORD, Mr. SCHAEFER, Mr. SENSENBRENNER, Mr. SHADEGG,

Mr. SHAW, Mr. SHAYS of Connecticut, Mr. SMITH of Texas, Mr. SMITH

of New Jersey, Mr. SMITH of Michigan, Mr. SOLOMON, Mr. STEARNS,

Mr. STOCKMAN, Mr. STUMP, Mr. TALENT, Mr. TATE, Mr. TAYLOR of

North Carolina, Mr. TEJEDA, Mr. THORNBERRY, Mr. TIAHRT, Mr.

UPTON, Mrs. WALDHOLTZ, Mr. WAMP, Mr. WELDON of Florida, Mr.

ZIMMER, Mr. CRAPO, Mr. KOLBE, Mr. PAXON, Mr. YOUNG of Florida,

Mr. COMBEST, Mr. EHRLICH, and Mrs. MEYERS of Kansas) introduced

the following bill; which was referred as follows:

Title I, referred to the Committee on the Judiciary, and in addition to the

Committee on Rules, for a period to be subsequently determined by the

Speaker, in each case for consideration of such provisions as fall within

the jurisdiction of the committee concerned
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Title II, referred to the Committee on Commerce, and in addition to the Committee on the Judiciary, for a period to be subsequently determined by

the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned

JANUARY 19, 1995

Additional sponsors: Mr. SCHIFF, Mr. MOORHEAD, Mr. CREMEANS, Mr. NORWOOD, Mr. BONILLA, Mr. HUNTER, Mrs. VUCANOVICH, Mr. WALKER,

Ms. EDDIE BERNICE JOHNSON of Texas, Mrs. SEASTRAND, and Mr.

COLLINS of Georgia

FEBRUARY 10, 1995

Additional sponsors: Mr. LONGLEY, Mr. ROBERTS, Mr. POMBO, Mr. SALMON,

and Mr. GALLEGLY

A BILL

To reform the Federal civil justice system; to reform product

liability law.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Common Sense Legal

5 Reforms Act of 1995’’.

6 TITLE I—CIVIL JUSTICE

7 REFORM

8 SEC. 101. AWARD OF ATTORNEY’S FEE TO PREVAILING

9 PARTY IN FEDERAL CIVIL DIVERSITY LITIGA10 TION.

11 (a) AWARD OF ATTORNEY’S FEE.—Section 1332 of

12 title 28, United States Code, is amended by adding at the

13 end the following:
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1 ‘‘(e)(1) The district court that exercises jurisdiction

2 in a civil action commenced under this section shall award

3 to the party that prevails with respect to a claim in such

4 action an attorney’s fee determined in accordance with

5 paragraph (2).

6 ‘‘(2) An attorney’s fee awarded under paragraph (1)

7 shall be a reasonable attorney’s fee attributable to such

8 claim, except that the fee awarded under such paragraph

9 may not exceed—

10 ‘‘(A) the actual cost incurred by the

11 nonprevailing party for an attorney’s fee payable to

12 an attorney for services in connection with such

13 claim; or

14 ‘‘(B) if no such cost was incurred by the

15 nonprevailing party due to a contingency fee agree16 ment, a reasonable cost that would have been in17 curred by the nonprevailing party for an attorney’s

18 noncontingent fee payable to an attorney for services

19 in connection with such claim.

20 ‘‘(3) Notwithstanding paragraphs (1) and (2), the

21 court in its discretion may refuse to award, or may reduce

22 the amount awarded as, an attorney’s fee under paragraph

23 (1) to the extent that the court finds special circumstances

24 that make an award of an attorney’s fee determined in

25 accordance with such subparagraph unjust.’’.
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1 SEC. 102. HONESTY IN EVIDENCE.

2 (a) OPINION TESTIMONY BY EXPERTS.—Rule 702 of

3 the Federal Rules of Evidence is amended—

4 (1) by inserting ‘‘(a) In general.’’ before

5 ‘‘If’’, and

6 (2) by adding at the end the following:

7 ‘‘(b) Adequate basis for opinion. Testimony in

8 the form of an opinion by a witness that is based on sci9 entific knowledge shall be inadmissible in evidence unless

10 the court determines that such opinion is—

11 ‘‘(1) based on scientifically valid reasoning; and

12 ‘‘(2) sufficiently reliable so that the probative

13 value of such evidence outweighs the dangers speci14 fied in rule 403.

15 ‘‘(c) Disqualification. Testimony by a witness

16 who is qualified as described in subsection (a) is inadmis17 sible in evidence if such witness is entitled to receive any

18 compensation contingent on the legal disposition of any

19 claim with respect to which such testimony is offered.’’.

20 SEC. 103. PRODUCT LIABILITY REFORM.

21 (a) APPLICABILITY AND PREEMPTION.—This section

22 governs any product liability action brought in any State

23 or Federal Court against any manufacturer or seller of

24 a product on any theory for harm caused by the product.

25 This section supersedes State law only to the extent that

26 State law applies to an issue covered by this section. Any
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1 issue that is not covered by this section shall be governed

2 by otherwise applicable State or Federal law.

3 (b) LIABILITY RULES APPLICABLE TO PRODUCT

4 SELLERS.—

5 (1) GENERAL RULE.—Except as provided in

6 paragraph 2, in a product liability action, a product

7 seller shall be liable to a claimant for harm only if

8 the claimant establishes that—

9 (A)(i) the product which allegedly caused

10 the harm complained of was sold by the product

11 seller,

12 (ii) the product seller failed to exercise rea13 sonable care with respect to the product, and

14 (iii) such failure to exercise reasonable care

15 was a proximate cause of the claimant’s harm,

16 (B)(i) the product seller made an express

17 warranty applicable to the product which alleg18 edly caused the harm complained of, independ19 ent of any express warranty made by the manu20 facturer as to the same product,

21 (ii) the product failed to conform to the

22 warranty, and

23 (iii) the failure of the product to conform

24 to the warranty caused the claimant’s harm, or
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1 (C) the product seller engaged in inten2 tional wrongdoing as determined under applica3 ble State law and such intentional wrongdoing

4 was a proximate cause of the harm complained

5 of by the claimant.

6 For purposes of subparagraph (A)(ii), a product sell7 er shall not be considered to have failed to exercise

8 reasonable care with respect to a product based

9 upon an alleged failure to inspect a product where

10 there was no reasonable opportunity to inspect the

11 product in a manner which would, in the exercise of

12 reasonable care, have revealed the aspect of the

13 product which allegedly caused the claimant’s harm.

14 (2) SPECIAL RULE.—In a product liability ac15 tion, a product seller shall be liable for harm to the

16 claimant caused by such product as if the product

17 seller were the manufacturer of such product if—

18 (A) the manufacturer is not subject to

19 service of process under the laws of the State

20 in which the claimant brings the action, or

21 (B) the court determines that the claimant

22 would be unable to enforce a judgment against

23 the manufacturer.

24 (c) LIMITATIONS ON PUNITIVE DAMAGES.—
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1 (1) GENERAL LIMITATION.—Punitive damages

2 may, to the extent permitted by applicable State law,

3 be awarded against a manufacturer or product seller

4 in a product liability action if the claimant estab5 lishes by clear and convincing evidence that the

6 harm suffered was the result of conduct manifesting

7 actual malice.

8 (2) LIMITATION ON AMOUNT.—The amount of

9 punitive damages that may be awarded for a claim

10 in any civil action subject to this section shall not

11 exceed 3 times the amount awarded to the claimant

12 for the economic injury on which such claim is

13 based, or $250,000, whichever is greater.

14 (d) SEVERAL LIABILITY FOR NONECONOMIC DAM15 AGES.—In any product liability action, the liability of each

16 manufacturer or seller of the product involved in such ac17 tion shall be several only and shall not be joint for non18 economic damages. Such manufacturer or seller shall be

19 liable only for the amount of noneconomic damages allo20 cated to such manufacturer or seller in direct proportion

21 to such manufacturer’s or such seller’s percentage of re22 sponsibility as determined by the trier of fact.

23 (e) DEFINITIONS.—For purposes of this section—

24 (1) the term ‘‘claimant’’ means any person who

25 brings a product liability action and any person on
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1 whose behalf such an action is brought, including

2 such person’s decedent if such an action is brought

3 through or on behalf of an estate or such person’s

4 legal representative if it is brought through or on be5 half of a minor or incompetent,

6 (2) the term ‘‘malice’’ means conduct that is

7 either—

8 (A) specifically intended to cause serious

9 personal injury, or

10 (B) carried out with both a flagrant indif11 ference to the rights of the claimant and an

12 awareness that such conduct is likely to result

13 in serious personal injury,

14 (3) with respect to a product, the term ‘‘manu15 facturer’’ means—

16 (A) any person who is engaged in a busi17 ness to produce, create, make, or construct the

18 product and who designs or formulates the

19 product or has engaged another person to de20 sign or formulate the product,

21 (B) a product seller of the product who,

22 before placing the product in the stream of

23 commerce—

24 (i) designs or formulates or has en25 gaged another person to design or formu-
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1 late an aspect of the product after the

2 product was initially made by another, and

3 (ii) produces, creates, makes, or con4 structs such aspect of the product, or

5 (C) any product seller not described in

6 subparagraph (B) which holds itself out as a

7 manufacturer to the user of the product,

8 (4) the term ‘‘product’’—

9 (A) means any object, substance, mixture,

10 or raw material in a gaseous, liquid, or solid

11 state—

12 (i) which is capable of delivery itself,

13 in a mixed or combined state, or as a com14 ponent part or ingredient,

15 (ii) which is produced for introduction

16 into trade or commerce,

17 (iii) which has intrinsic economic

18 value, and

19 (iv) which is intended for sale or lease

20 to persons for commercial or personal use,

21 and

22 (B) does not include—

23 (i) human tissue, human organs,

24 human blood, and human blood products,

25 or
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1 (ii) electricity, water delivered by a

2 utility, natural gas, or steam,

3 (5) the term ‘‘product seller’’—

4 (A) means a person—

5 (i) who sells, distributes, leases, pre6 pares, blends, packages, or labels a product

7 or is otherwise involved in placing a prod8 uct in the stream of commerce, or

9 (ii) who installs, repairs, or maintains

10 the harm-causing aspect of a product, and

11 (B) does not include—

12 (i) a manufacturer,

13 (ii) a seller or lessor of real property,

14 (iii) a provider of professional services

15 in any case in which the sale or use of a

16 product is incidental to the transaction and

17 the essence of the transaction is the fur18 nishing of judgment, skill, or services,

19 (iv) any person who acts only in a fi20 nancial capacity with respect to the sale of

21 a product, or

22 (v) any person who leases a product

23 under a lease arrangement in which the se24 lection, possession, maintenance, and oper-
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1 ation of the product are controlled by a

2 person other than the lessor,

3 (6) the term ‘punitive damages’ means damages

4 in addition to compensation for actual injury suf5 fered, for purposes of imposing punishment for con6 duct engaged in with malice and to deter similar fu7 ture conduct, but such term does not include com8 pensation for actual injury, and

9 (7) the term ‘‘State’’ means any State of the

10 United States, the District of Columbia, the Com11 monwealth of Puerto Rico, the Virgin Islands,

12 Guam, American Samoa, the Northern Mariana Is13 lands, the Trust Territory of the Pacific Islands, and

14 any other territory or possession of the United

15 States, or any political subdivision thereof.

16 SEC. 104. ATTORNEY ACCOUNTABILITY.

17 (a) TRUTH IN ATTORNEYS’ FEES.—It is the sense

18 of the Congress that each State should require, under pen19 alty of law, each attorney admitted to practice law in such

20 State to disclose in writing, to any client with whom such

21 attorney has entered into a contingency fee agreement—

22 (1) the actual services performed for such client

23 in connection with such agreement, and
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1 (2) the precise number of hours actually ex2 pended by such attorney in the performance of such

3 services.

4 (b) AMENDMENT TO THE FEDERAL RULES OF CIVIL

5 PROCEDURE.—Rule 11(c) of the Federal Rules of Civil

6 Procedure (28 U.S.C. App.) is amended—

7 (1) in the matter preceding subdivision (1) by

8 striking ‘‘may’’ and inserting ‘‘shall’’;

9 (2) in the penultimate sentence of subdivision

10 (1)(A) by striking ‘‘may’’ and inserting ‘‘shall’’; and

11 (3) in subdivision (2)—

12 (A) by amending the first sentence to read

13 as follows: ‘‘A sanction imposed for a violation

14 of this rule shall be sufficient to deter repetition

15 of such conduct or comparable conduct by oth16 ers similarly situated, and to compensate the

17 parties that were injured by such conduct.’’;

18 and

19 (B) in the second sentence by striking ‘‘,

20 if imposed on motion and warranted for effec21 tive deterrence,’’.

22 SEC. 105. NOTICE REQUIRED BEFORE COMMENCEMENT OF

23 CIVIL ACTION.

24 Chapter 99 of title 28, United States Code is amend25 ed by adding at the end the following:
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1 § 1632. Notice required before commencement of civil

2 action

3 ‘‘(a) DISMISSAL OF CIVIL ACTION.—Except as pro4 vided in subsection (c), the district court in which a civil

5 action is commenced shall dismiss such action with respect

6 to a defendant, without prejudice, if—

7 ‘‘(1) not later than 60 days after such action is

8 commenced, the defendant files a motion to dismiss

9 such action on the basis that the plaintiff failed to

10 comply with the requirement specified in subsection

11 (b); and

12 ‘‘(2) the plaintiff fails to establish that before

13 commencing such action the plaintiff complied with

14 such requirement.

15 ‘‘(b) REQUIREMENT.—Not less than 30 days before

16 commencing a civil action in a district court of the United

17 States, the plaintiff shall transmit (by 1st class mail, post18 age prepaid, or contract for delivery by any company that

19 in its regular course of business physically delivers cor20 respondence as a commercial service to the public) to the

21 defendant (at an address reasonably calculated to provide

22 actual notice to such defendant) a written statement speci23 fying the particular claims alleged in such action and the

24 amount of damages claimed in such action.

25 ‘‘(c) EXCEPTIONS.—Subsection (a) shall not apply

26 with respect to any civil action—
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1 ‘‘(1) to seize or forfeit assets subject to forfeit2 ure;

3 ‘‘(2) commenced under title 11 of the United

4 States Code;

5 ‘‘(3) commenced to establish a receivership or

6 conservatorship;

7 ‘‘(4) based on the insolvency of the defendant,

8 or the need to liquidate assets of the defendant to

9 satisfy any requirement under Federal law;

10 ‘‘(5) if assets that are subject to such action or

11 that would satisfy a judgment in such action are

12 likely to be removed, dissipated, or destroyed by the

13 defendant;

14 ‘‘(6) if the defendant is likely to flee;

15 ‘‘(7) if prior written notice of the filing of such

16 action is required by any other law;

17 ‘‘(8) to enforce a civil investigative demand or

18 an administrative summons;

19 ‘‘(9) if such action is—

20 ‘‘(A) to foreclose a lien;

21 ‘‘(B) to obtain a temporary restraining

22 order or preliminary injunction; or

23 ‘‘(C) to prevent the fraudulent conveyance

24 of property; or
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1 ‘‘(10) if such action involves exigent cir2 cumstances that compel immediate resort to the

3 court.

4 ‘‘(d) STATUTE OF LIMITATIONS.—

5 ‘‘(1) SUSPENSION BEFORE COMMENCEMENT OF

6 ACTION.—If the statute of limitations applicable to

7 a claim would expire in the 30-day period beginning

8 on the date the plaintiff transmits the notice re9 quired by subsection (b), such statute shall be sus10 pended—

11 ‘‘(A) during such 30-day period; or

12 ‘‘(B) during the 90-day period beginning

13 on the date the plaintiff so transmits such no14 tice if, in such 30-day period, the parties to

15 such action so agree in writing.

16 ‘‘(2) FILING CIVIL ACTION AFTER DISMIS17 SAL.—If—

18 ‘‘(A) a civil action is timely commenced in

19 a district court with respect to a claim;

20 ‘‘(B) such action is dismissed under sub21 section (a); and

22 ‘‘(C) the statute of limitations applicable to

23 such claim expires before the expiration of the

24 60-day period beginning on the date such action

25 is dismissed;
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1 then the plaintiff in such action may commence a

2 civil action based on such claim in such 60-day pe3 riod notwithstanding such statute.’’.

4 (b) CONFORMING AMENDMENT.—Chapter 99 of title

5 28, United States Code, is amended in the table of sec6 tions by adding at the end the following:

‘‘1632. Notice required before commencement of civil action.’’.

7 SEC. 106. HOUSE COMMITTEE REPORTS.

8 Clause 2(l) of rule XI of the Rules of the House of

9 Representatives is amended by adding at the end the fol10 lowing new subparagraph:

11 ‘‘(8) Each report of a committee on each bill or joint

12 resolution of a public character reported by that commit13 tee shall include the following information regarding that

14 bill or joint resolution:

15 ‘‘(A) Whether that bill or joint resolution pre16 empts the law of any State.

17 ‘‘(B) The retroactive applicability, if any, of

18 that bill or joint resolution.

19 ‘‘(C) Whether that bill or joint resolution cre20 ates any private cause of action and, if so, a descrip21 tion of that relief and the terms and conditions for

22 awarding attorneys fees, if any.

23 ‘‘(D) The applicability, if any, of that bill or

24 joint resolution to the Federal Government or any of

25 its agencies or instrumentalities.’’.
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1 SEC. 107. AMENDMENT TO RACKETEER INFLUENCED AND

2 CORRUPT ORGANIZATIONS ACT.

3 Section 1964(c) of title 18, United States Code, is

4 amended by inserting ‘‘, except that no person may bring

5 an action under this provision if the racketeering activity,

6 as defined in section 1961(1)(D), involves conduct action7 able as fraud in the purchase or sale of securities’’ before

8 the period.

9 SEC. 108. EFFECTIVE DATE; APPLICATION OF AMEND10 MENTS.

11 (a) EFFECTIVE DATE.—Except as provided in sub12 sections (b) and (c), this title and the amendments made

13 by this title shall take effect on the first day of the first

14 month beginning more than 180 days after the date of

15 the enactment of this Act.

16 (b) PRODUCT LIABILITY.—Section 103 shall apply

17 only with respect to claims arising after the effective date

18 of this title.

19 (c) APPLICATION OF AMENDMENTS.—

20 (1) The amendments made by sections 101 and

21 105 shall apply only with respect to civil actions

22 commenced after the effective date of this title.

23 (2) The amendments made by section 102 shall

24 apply only with respect to cases in which a trial has

25 commenced after the effective date of this title.
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1 (3) The amendment made by section 106 shall

2 apply to bills and joint resolutions reported by any

3 committee at least 30 calendar days after the date

4 of enactment of this Act.

5 TITLE II—REFORM OF PRIVATE

6 SECURITIES LITIGATION

7 SEC. 201. SHORT TITLE; TABLE OF CONTENTS.

8 (a) SHORT TITLE.—This Act may be cited as the

9 ‘‘Securities Litigation Reform Act’’.

10 (b) TABLE OF CONTENTS.—The table of contents for

11 this Act is as follows:

Sec. 201. Short title; table of contents.

Sec. 202. Prevention of lawyer-driven litigation.

(a) Plaintiff steering committees to ensure client control of lawsuits.

(b) Full disclosure of proposed class action settlements.

Sec. 203. Prevention of abusive practices that foment litigation.

Sec. 204. Prevention of ‘‘fishing expedition’’ lawsuits.

Sec. 205. Establishment of ‘‘safe harbor’’ for predictive statements.

Sec. 206. Alternative dispute resolution procedure.

Sec. 207. Rule of construction.

Sec. 208. Effective date.

12 SEC. 202. PREVENTION OF LAWYER-DRIVEN LITIGATION.

13 (a) PLAINTIFF STEERING COMMITTEES TO ENSURE

14 CLIENT CONTROL OF LAWSUITS.—The Securities Ex15 change Act of 1934 (15 U.S.C. 78a et seq.) is amended

16 by adding at the end the following new section:

17 ‘‘SEC. 36. GUARDIAN AD LITEM AND CLASS ACTION STEER18 ING COMMITTEES.

19 ‘‘(a) GUARDIAN AD LITEM.—Except as provided in

20 subsection (b), not later than 10 days after certifying a
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1 plaintiff class in any private action brought under this

2 title, the court shall appoint a guardian ad litem for the

3 plaintiff class from a list or lists provided by the parties

4 or their counsel. The guardian ad litem shall direct counsel

5 for the class as set forth in this section and perform such

6 other functions as the court may specify. The court shall

7 apportion the reasonable fees and expenses of the guard8 ian ad litem among the parties. Court appointment of a

9 guardian ad litem shall not be subject to interlocutory re10 view.

11 ‘‘(b) CLASS ACTION STEERING COMMITTEE.—Sub12 section (a) shall not apply if, not later than 10 days after

13 certifying a plaintiff class, on its own motion or on motion

14 of a member of the class, the court appoints a committee

15 of class members to direct counsel for the class (hereafter

16 in this section referred to as the ‘plaintiff steering commit17 tee’) and to perform such other functions as the court may

18 specify. Court appointment of a plaintiff steering commit19 tee shall not be subject to interlocutory review.

20 ‘‘(c) MEMBERSHIP OF PLAINTIFF STEERING COM21 MITTEE.—

22 ‘‘(1) QUALIFICATIONS.—

23 ‘‘(A) NUMBER.—A plaintiff steering com24 mittee shall consist of not fewer than 5 class
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1 members, willing to serve, who the court be2 lieves will fairly represent the class.

3 ‘‘(B) OWNERSHIP INTERESTS.—Members

4 of the plaintiff steering committee shall have

5 cumulatively held during the class period not

6 less than—

7 ‘‘(i) the lesser of 5 percent of the se8 curities which are the subject matter of the

9 litigation or securities which are the sub10 ject matter of the litigation with a market

11 value of $10,000,000; or

12 ‘‘(ii) such smaller percentage or dollar

13 amount as the court finds appropriate

14 under the circumstances.

15 ‘‘(2) NAMED PLAINTIFFS.—Class members who

16 are named plaintiffs in the litigation may serve on

17 the plaintiff steering committee, but shall not com18 prise a majority of the committee.

19 ‘‘(3) NONCOMPENSATION OF MEMBERS.—Mem20 bers of the plaintiff steering committee shall serve

21 without compensation, except that any member may

22 apply to the court for reimbursement of reasonable

23 out-of-pocket expenses from any common fund es24 tablished for the class.
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1 ‘‘(4) MEETINGS.—The plaintiff steering com2 mittee shall conduct its business at one or more pre3 viously scheduled meetings of the committee, of

4 which prior notice shall have been given and at

5 which a majority of its members are present in per6 son or by electronic communication. The plaintiff

7 steering committee shall decide all matters within its

8 authority by a majority vote of all members, except

9 that the committee may determine that decisions

10 other than to accept or reject a settlement offer or

11 to employ or dismiss counsel for the class may be

12 delegated to one or more members of the committee,

13 or may be voted upon by committee members seria14 tim, without a meeting.

15 ‘‘(5) RIGHT OF NONMEMBERS TO BE HEARD.—

16 A class member who is not a member of the plaintiff

17 steering committee may appear and be heard by the

18 court on any issue in the action, to the same extent

19 as any other party.

20 ‘‘(d) FUNCTIONS OF GUARDIAN AD LITEM AND

21 PLAINTIFF STEERING COMMITTEE.—

22 ‘‘(1) DIRECT COUNSEL.—The authority of the

23 guardian ad litem or the plaintiff steering committee

24 to direct counsel for the class shall include all pow25 ers normally permitted to an attorney’s client in liti-
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1 gation, including the authority to retain or dismiss

2 counsel and to reject offers of settlement, and the

3 preliminary authority to accept an offer of settle4 ment, subject to the restrictions specified in para5 graph (2). Dismissal of counsel other than for cause

6 shall not limit the ability of counsel to enforce any

7 contractual fee agreement or to apply to the court

8 for a fee award from any common fund established

9 for the class.

10 ‘‘(2) SETTLEMENT OFFERS.—If a guardian ad

11 litem or a plaintiff steering committee gives prelimi12 nary approval to an offer of settlement, the guardian

13 ad litem or the plaintiff steering committee may seek

14 approval of the offer by a majority of class members

15 if the committee determines that the benefit of seek16 ing such approval outweighs the cost of soliciting the

17 approval of class members.

18 ‘‘(e) IMMUNITY FROM CIVIL LIABILITY; REMOVAL.—

19 Any person serving as a guardian ad litem or as a member

20 of a plaintiff steering committee shall be immune from any

21 civil liability arising from such service. The court may re22 move a guardian ad litem or a member of a plaintiff steer23 ing committee for good cause shown.

24 ‘‘(f) EFFECT ON OTHER LAW.—This section does not

25 affect any other provision of law concerning class actions
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1 or the authority of the court to give final approval to any

2 offer of settlement.’’.

3 (b) FULL DISCLOSURE OF PROPOSED CLASS ACTION

4 SETTLEMENTS.—Section 21 of the Securities Exchange

5 Act of 1934 (15 U.S.C. 78u) is amended by adding at

6 the end the following new subsection:

7 ‘‘(i) DISCLOSURE OF SETTLEMENT TERMS TO CLASS

8 MEMBERS.—In any private action under this title that is

9 certified as a class action pursuant to the Federal Rules

10 of Civil Procedure, a proposed settlement agreement that

11 is published or otherwise disseminated to the class shall

12 include the following statements:

13 ‘‘(1) STATEMENT OF POTENTIAL OUTCOME OF

14 CASE.—

15 ‘‘(A) AGREEMENT ON AMOUNT OF DAM16 AGES AND LIKELIHOOD OF PREVAILING.—If the

17 settling parties agree on the amount of dam18 ages per share that would be recoverable if the

19 plaintiff prevailed on each claim alleged under

20 this title and the likelihood that the plaintiff

21 would prevail—

22 ‘‘(i) a statement concerning the

23 amount of such potential damages; and

24 ‘‘(ii) a statement concerning the prob25 ability that the plaintiff would prevail on
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1 the claims alleged under this title and a

2 brief explanation of the reasons for that

3 conclusion.

4 ‘‘(B) DISAGREEMENT ON AMOUNT OF

5 DAMAGES OR LIKELIHOOD OF PREVAILING.—If

6 the parties do not agree on the amount of dam7 ages per share that would be recoverable if the

8 plaintiff prevailed on each claim alleged under

9 this title or on the likelihood that the plaintiff

10 would prevail on those claims, or both, a state11 ment from each settling party concerning the

12 issue or issues on which the parties disagree.

13 ‘‘(C) INADMISSIBILITY FOR CERTAIN PUR14 POSES.—Statements made in accordance with

15 subparagraphs (A) and (B) shall not be admis16 sible for purposes of any Federal or State judi17 cial or administrative proceeding.

18 ‘‘(2) STATEMENT OF ATTORNEYS’ FEES OR

19 COSTS SOUGHT.—If any of the settling parties or

20 their counsel intend to apply to the court for an

21 award of attorneys’ fees or costs from any fund es22 tablished as part of the settlement, a statement indi23 cating which parties or counsel intend to make such

24 an application, the amount of fees and costs that

25 will be sought (including the amount of such fees
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1 and costs determined on a per-share basis, together

2 with the amount of the settlement proposed to be

3 distributed to the parties to suit, determined on a

4 per-share basis), and a brief explanation of the basis

5 for the application. Such information shall be clearly

6 summarized on the cover page of any notice to a

7 party of a proposed or final settlement.

8 ‘‘(3) IDENTIFICATION OF LAWYERS’ REP9 RESENTATIVES.—The name and address of one or

10 more representatives of counsel for the plaintiff class

11 who will be reasonably available to answer written

12 questions from class members concerning any matter

13 contained in any notice of settlement published or

14 otherwise disseminated to class members.

15 ‘‘(4) OTHER INFORMATION.—Such other infor16 mation as may be required by the court, or by any

17 guardian ad litem or plaintiff steering committee ap18 pointed by the court pursuant to this section.’’.

19 (c) PROHIBITION ON ATTORNEYS’ FEES PAID FROM

20 COMMISSION DISGORGEMENT FUNDS.—Section 21(d) of

21 the Securities Exchange Act of 1934 (15 U.S.C. 78u(d))

22 is amended by adding at the end the following new para23 graph:

24 ‘‘(4) PROHIBITION ON ATTORNEYS’ FEES PAID

25 FROM COMMISSION DISGORGEMENT FUNDS.—Except
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1 as otherwise ordered by the court, funds disgorged

2 as the result of an action brought by the Commis3 sion in Federal court, or of any Commission admin4 istrative action, shall not be distributed as payment

5 for attorneys’ fees or expenses incurred by private

6 parties seeking distribution of the disgorged funds.’’.

7 SEC. 203. PREVENTION OF ABUSIVE PRACTICES THAT FO8 MENT LITIGATION.

9 (a) ADDITIONAL PROVISIONS APPLICABLE TO CLASS

10 ACTIONS.—Section 21 of the Securities Exchange Act of

11 1934 (15 U.S.C. 78u) is further amended by adding at

12 the end the following new subsections:

13 ‘‘(j) ELIMINATION OF BONUS PAYMENTS TO NAMED

14 PLAINTIFFS IN CLASS ACTIONS.—In any private action

15 under this title that is certified as a class action pursuant

16 to the Federal Rules of Civil Procedure, the portion of

17 any final judgment or of any settlement that is awarded

18 to class plaintiffs serving as the representative parties

19 shall be equal, on a per share basis, to the portion of the

20 final judgment or settlement awarded to all other members

21 of the class. Nothing in this subsection shall be construed

22 to limit the award to any representative parties of actual

23 expenses (including lost wages) relating to the representa24 tion of the class.
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1 ‘‘(k) REQUIREMENT THAT NAMED PLAINTIFF HAVE

2 MEANINGFUL INVESTMENT.—In any private action under

3 this title, in order for a plaintiff or plaintiffs to obtain

4 certification as representatives of a class of investors pur5 suant to the Federal Rules of Civil Procedure, the plaintiff

6 or plaintiffs must show that they owned, in the aggregate,

7 at the beginning of the time period in which violations of

8 this title are alleged to have occurred, not less than the

9 lesser of—

10 ‘‘(1) 1 percent of the class of securities which

11 are the subject of the litigation; or

12 ‘‘(2) $10,000 (in market value) of such securi13 ties.

14 ‘‘(l) RESTRICTIONS ON PROFESSIONAL PLAIN15 TIFFS.—A person may be a named plaintiff, or officer, di16 rector, fiduciary, or beneficiary of a named plaintiff, in

17 no more than 5 class actions filed during any 3-year

18 period.

19 ‘‘(m) LOSER’S LIABILITY FOR ATTORNEYS’ FEES

20 AND COSTS OF SUIT.—

21 ‘‘(1) PAYMENT BY LOSING PARTY.—If the court

22 in any private action under this title enters a final

23 judgment against a party litigant on any basis other

24 than settlement, the court shall, upon motion by the

25 prevailing party, order the losing party to pay the
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1 prevailing party reasonable attorneys’ fees and other

2 expenses incurred by the prevailing party.

3 ‘‘(2) TIME FOR APPLICATION.—A party seeking

4 an award of fees and other expenses shall, within 30

5 days of a final, nonappealable judgment in the ac6 tion, submit to the court an application for fees and

7 other expenses.

8 ‘‘(3) COURT DISCRETION.—The court, in its

9 discretion, may reduce the amount to be awarded

10 pursuant to this section, or deny an award, to the

11 extent that the prevailing party during the course of

12 the proceedings engaged in conduct that unduly and

13 unreasonably protracted the final resolution of the

14 matter in controversy.

15 ‘‘(n) PREVENTION OF ABUSIVE CONFLICTS OF IN16 TEREST.—In any private action under this title that is cer17 tified as a class action pursuant to the Federal Rules of

18 Civil Procedure, if a party is represented by an attorney

19 who directly owns or otherwise has a beneficial interest

20 in the securities that are the subject of the litigation, the

21 court shall make a determination of whether such interest

22 constitutes a conflict of interest sufficient to disqualify the

23 attorney from representing the party.

24 ‘‘(o) ENCOURAGEMENT OF FINALITY IN SETTLE25 MENT DISCHARGES.—
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1 ‘‘(1) DISCHARGE.—A defendant who settles any

2 private action brought under this title at any time

3 before verdict or judgment shall be discharged from

4 all claims for contribution brought by other persons.

5 Upon entry of the settlement by the court, the court

6 shall enter a bar order constituting the final dis7 charge of all obligations to the plaintiff of the set8 tling defendant arising out of the action. The order

9 shall bar all future claims for contribution or indem10 nity arising out of the action—

11 ‘‘(A) by nonsettling persons against the

12 settling defendant; and

13 ‘‘(B) by the settling defendant against any

14 nonsettling defendants.

15 ‘‘(2) REDUCTION.—If a person enters into a

16 settlement with the plaintiff prior to verdict or judg17 ment, the verdict or judgment shall be reduced by

18 the amount paid to the plaintiff by that person.

19 ‘‘(p) CONTRIBUTION FROM NON-PARTIES IN INTER20 ESTS OF FAIRNESS.—

21 ‘‘(1) RIGHT OF CONTRIBUTION.—A person who

22 becomes liable for damages in any private action

23 under this title may recover contribution from any

24 other person who, if joined in the original suit,

25 would have been liable for the same damages.
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1 ‘‘(2) STATUTE OF LIMITATIONS FOR CONTRIBU2 TION.—Once judgment has been entered in any pri3 vate action under this title determining liability, an

4 action for contribution must be brought not later

5 than 6 months after the entry of a final,

6 nonappealable judgment in the action.

7 ‘‘(q) DEFENDANT’S RIGHT TO SPECIAL VERDICTS

8 ESTABLISHING SCIENTER.—In any private action under

9 this title in which the plaintiff may recover money dam10 ages, the court shall, when requested by a defendant, sub11 mit to the jury a written interrogatory on the issue of each

12 such defendant’s state of mind at the time the alleged vio13 lation occurred.’’.

14 (b) PROHIBITION OF REFERRAL FEES THAT FO15 MENT LITIGATION.—Section 15(c) of the Securities Ex16 change Act of 1934 (15 U.S.C. 78o(c)) is amended by add17 ing at the end the following new paragraph:

18 ‘‘(7) RECEIPT OF REFERRAL FEES.—No broker

19 or dealer, or person associated with a broker or deal20 er, may solicit or accept remuneration for assisting

21 an attorney in obtaining the representation of any

22 customer in any private action under this title.’’.
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1 SEC. 204. PREVENTION OF ‘‘FISHING EXPEDITION’’ LAW2 SUITS.

3 The Securities Exchange Act of 1934 (15 U.S.C. 78a

4 et seq.) is amended by inserting after section 10 the fol5 lowing new section:

6 ‘‘SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD AC7 TIONS.

8 ‘‘(a) SCIENTER.—In any action under section 10(b),

9 a defendant may be held liable for money damages only

10 on proof—

11 ‘‘(1) that the defendant made an untrue state12 ment of a material fact, or omitted to state a mate13 rial fact necessary in order to make the statements

14 made, in light of the circumstances in which they

15 were made, not misleading; and

16 ‘‘(2) that the defendant knew the statement

17 was misleading at the time it was made, or inten18 tionally omitted to state a fact knowing that such

19 omission would render misleading the statements

20 made at the time they were made.

21 ‘‘(b) REQUIREMENT FOR EXPLICIT PLEADING AND

22 PROOF OF SCIENTER.—In any action under section 10(b)

23 in which it is alleged that the defendant—

24 ‘‘(1) made an untrue statement of a material

25 fact; or
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1 ‘‘(2) omitted to state a material fact necessary

2 in order to make the statements made, in the light

3 of the circumstances in which they were made, not

4 misleading;

5 the complaint shall allege specific facts demonstrating the

6 state of mind of each defendant at the time the alleged

7 violation occurred. The complaint shall also specify each

8 statement or omission alleged to have been misleading,

9 and the reasons the statement or omission is misleading.

10 If an allegation regarding the statement or omission is

11 made on information and belief, the complaint shall set

12 forth with specificity all information on which that belief

13 is formed. Failure to comply fully with this requirement

14 shall result in dismissal of the complaint for failure to

15 state a cause of action.

16 ‘‘(c) RELIANCE.—In any action arising under section

17 10(b) based upon a material misstatement or omission

18 concerning a security, the plaintiff must prove that he or

19 she had actual knowledge of and actually relied on such

20 statement in connection with the purchase or sale of a se21 curity and that the misstatement or omission proximately

22 caused (through both transaction causation and loss cau23 sation) any loss incurred by the plaintiff.

24 ‘‘(d) LIMITS ON WINDFALL DAMAGES.—In any ac25 tion arising under section 10(b) based on a material
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1 misstatement or omission concerning a security, an award

2 of damages that exceeds the price paid for a security pur3 chased in reliance upon a material misstatement or omis4 sion shall not exceed the lesser of—

5 ‘‘(1) the difference between the price paid for

6 the security which was purchased in reliance upon a

7 material misstatement or omission, and the market

8 value of the security immediately after dissemination

9 to the market of information which corrects the

10 misstatement or omission; and

11 ‘‘(2) the difference between the price paid for

12 the security which was purchased in reliance upon a

13 material misstatement or omission, and the price at

14 which the relying party sold the security after dis15 semination of information correcting the

16 misstatement or omission.’’.

17 SEC. 205. ESTABLISHMENT OF ‘‘SAFE HARBOR’’ FOR PRE18 DICTIVE STATEMENTS.

19 (a) CONSIDERATION OF REGULATORY OR LEGISLA20 TIVE CHANGES.—In consultation with investors and issu21 ers of securities, the Securities and Exchange Commission

22 shall adopt or amend its rules and regulations to create—

23 (1) clear and objective criteria that the Com24 mission finds sufficient for the protection of inves25 tors, compliance with which shall be readily ascer-
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1 tainable by issuers prior to issuance of securities, by

2 which forward-looking statements concerning the fu3 ture economic performance of an issuer of securities

4 registered under section 12 of the Securities Ex5 change Act of 1934 will be deemed not to be in vio6 lation of section 10(b) of that Act; and

7 (2) procedures by which courts shall timely dis8 miss claims against such issuers of securities based

9 on such forward-looking statements if such state10 ments are in accordance with any criteria under

11 paragraph (1).

12 (b) COMMISSION CONSIDERATIONS.—In developing

13 rules in accordance with subsection (a), the Commission

14 shall also—

15 (1) prescribe appropriate limits to liability for

16 conscientiously prepared forward-looking statements

17 that do not fall within any regulatory safe harbor;

18 (2) set forth procedures for making a summary

19 determination of the applicability of any Commission

20 rule for forward-looking statements early in a judi21 cial proceeding to limit protracted litigation and ex22 pansive discovery;

23 (3) ensure that its rules incorporate and reflect

24 the scienter requirements applicable to actions under
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1 section 10(b) of the Securities Exchange Act of

2 1934; and

3 (4) ensure that its rules provide clear guidance

4 to investors, issuers of securities, and the judiciary.

5 (c) SECURITIES ACT AMENDMENT.—The Securities

6 Exchange Act of 1934 (15 U.S.C. 78a et seq.), is amended

7 by adding at the end the following new section:

8 ‘‘SEC. 38. APPLICATION OF SAFE HARBOR FOR FORWARD9 LOOKING STATEMENTS.

10 ‘‘(a) IN GENERAL.—In any private action under this

11 title that alleges that a forward-looking statement con12 cerning the future economic performance of an issuer reg13 istered under section 12 was materially false or mislead14 ing, if a party making a motion in accordance with sub15 section (b) requests a stay of discovery concerning the

16 claims or defenses of that party, the court shall grant such

17 a stay until it has ruled on any such motion.

18 ‘‘(b) SUMMARY JUDGMENT MOTIONS.—Subsection

19 (a) shall apply to any motion for summary judgment made

20 by a party asserting that the forward-looking statement

21 was within the coverage of any safe harbor rule which the

22 Commission may have adopted concerning such predictive

23 statements, if such motion is made not less than 60 days

24 after the commencement of discovery in the action.
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1 ‘‘(c) DILATORY CONDUCT; DUPLICATIVE DISCOV2 ERY.—Notwithstanding subsection (a) or (b), the time

3 permitted for discovery under subsection (b) may be ex4 tended, or a stay of the proceedings may be denied, if the

5 court finds that—

6 ‘‘(1) the party making a motion described in

7 subsection (b) engaged in dilatory or obstructive

8 conduct in taking or opposing any discovery; or

9 ‘‘(2) a stay of discovery pending a ruling on a

10 motion under subsection (b) would be substantially

11 unfair to such party or to other parties to the ac12 tion.’’.

13 SEC. 206. ALTERNATIVE DISPUTE RESOLUTION PROCE14 DURE.

15 The Securities Exchange Act of 1934 (15 U.S.C. 78a

16 et seq.) is amended by adding at the end the following

17 new section:

18 ‘‘SEC. 39. ALTERNATIVE DISPUTE RESOLUTION PROCE19 DURE.

20 ‘‘(a) IN GENERAL.—

21 ‘‘(1) OFFER TO PROCEED.—Except as provided

22 in paragraph (2), in any private action arising under

23 this title, any party may, before the expiration of the

24 period permitted for answering the complaint, de25 liver to all other parties an offer to proceed pursuant
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1 to any voluntary, nonbinding alternative dispute res2 olution procedure established or recognized under

3 the rules of the court in which the action is main4 tained.

5 ‘‘(2) PLAINTIFF CLASS ACTIONS.—In any pri6 vate action under this title which is brought as a

7 plaintiff class action, an offer under paragraph (1)

8 shall be made not later than 30 days after a guard9 ian ad litem or plaintiff steering committee is ap10 pointed by the court in accordance with section 38.

11 ‘‘(3) RESPONSE.—The recipient of an offer

12 under paragraph (1) or (2) shall file a written notice

13 of acceptance or rejection of the offer with the court

14 not later than 10 days after receipt of the offer. The

15 court may, upon motion by any party made prior to

16 the expiration of such period, extend the period for

17 not more than 90 additional days, during which time

18 discovery may be permitted by the court.

19 ‘‘(4) SELECTION OF TYPE OF ALTERNATIVE

20 DISPUTE RESOLUTION.—For purposes of paragraphs

21 (1) and (2), if the rules of the court establish or rec22 ognize more than 1 type of alternative dispute reso23 lution, the parties may stipulate as to the type of al24 ternative dispute resolution to be applied. If the par25 ties are unable to so stipulate, the court shall issue
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1 an order not later than 20 days after the date on

2 which the parties agree to the use of alternative dis3 pute resolution, specifying the type of alternative

4 dispute resolution to be applied.

5 ‘‘(5) SANCTIONS FOR DILATORY OR OBSTRUC6 TIVE CONDUCT.—If the court finds that a party has

7 engaged in dilatory or obstructive conduct in taking

8 or opposing any discovery allowed during the re9 sponse period described in paragraph (3), the court

10 may—

11 ‘‘(A) extend the period to permit further

12 discovery from that party for a suitable period;

13 and

14 ‘‘(B) deny that party the opportunity to

15 conduct further discovery prior to the expiration

16 of the period.’’.

17 SEC. 207. RULE OF CONSTRUCTION.

18 Nothing in the amendments made by this Act shall

19 be deemed to create or ratify any implied private right

20 of action, or to prevent the Commission by rule from re21 stricting or otherwise regulating private actions under the

22 Securities Exchange Act of 1934.
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1 SEC. 208. EFFECTIVE DATE.

2 This Act and the amendments made by this Act are

3 effective on the date of enactment of this Act and shall

4 apply to cases commenced after such date of enactment.

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