Opinion ID: 2761260
Heading Depth: 3
Heading Rank: 2

Heading: Pleading Standard for Loss Causation

Text: Although it is clear that Rule 9(b) and the PSLRA apply to almost all elements of a securities fraud action, the law is less clear about the pleading standard that applies to the loss causation element. In Dura Pharmaceuticals, Inc. v. Broudo, the Supreme Court suggested that Rule 8’s “short and plain statement” might apply: “we assume, at least for argument’s sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss.” 544 U.S. 336, 346 (2005). OPERF V. APOLLO GROUP 9 After Dura, we have applied a plausibility standard to loss causation, which avoids the question of whether the Rule 8(a) or Rule 9(b) pleading standard applies. See WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1053 (9th Cir. 2011) (“It is unclear in this Circuit whether Rule 9(b)’s heightened pleading standard or whether Rule 8(a)(2)’s ‘short and plain’ statement applies to allegations of loss causation.”); In re Gilead Sciences Sec. Litig., 536 F.3d 1049, 1057 (9th Cir. 2008) (“So long as the complaint alleges facts that, if taken as true, plausibly establish loss causation, a Rule 12(b)(6) dismissal is inappropriate.”). At times, we have applied both Rule 8(a) and 9(b) standards to allegations of loss causation, finding that plaintiffs meet both standards. See Berson v. Applied Signal Tech., Inc., 527 F.3d 982, 989–90 (9th Cir. 2008). Some of our sister circuits have suggested that heightened pleading standards apply to loss causation. See Katyle v. Penn Nat’l Gaming, Inc., 637 F.3d 462, 471 (4th Cir. 2011) (“We review allegations of loss causation for ‘sufficient specificity,’ a standard largely consonant with Fed. R. Civ. P. 9(b)’s requirement that averments of fraud be pled with particularity.”); Tricontinental Indus., Ltd. v. PricewaterhouseCoopers, LLP, 475 F.3d 824, 842 (7th Cir. 2007) (“To plead loss causation, the plaintiff must allege that it was the very facts about which the defendant lied which caused its injuries.”). The Second Circuit applies a different, but heightened, two-part test for loss causation, requiring that plaintiffs show that the loss was both foreseeable and caused by the materialization of the risk concealed by the fraudulent statement. See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 107 (2d Cir. 2007). At least one district court in the Sixth Circuit has suggested that heightened pleading requirements apply to loss causation. See Fla. Carpenters 10 OPERF V. APOLLO GROUP Reg’l Council Pension Plan v. Eaton Corp., 964 F. Supp. 2d 875, 891 (N.D. Ohio 2013). The First Circuit, like our court, has only stated that it is unclear whether a plaintiff has to plead loss causation under Rule 8(a) or 9(b). See Mass. Ret. Sys. v. CVS Caremark Corp., 716 F.3d 229, 239 n.6 (1st Cir. 2013). Other circuits have suggested that heightened pleading standards do not apply to loss causation. The Fifth Circuit has concluded that Rule 8(a) applies. See Lormand v. US Unwired, Inc., 565 F.3d 228, 258 (5th Cir. 2009). At least one court in the Third Circuit agrees with this approach. See Nat’l Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d 517, 558 (D.N.J. 2010). We are persuaded by the approach adopted in the Fourth Circuit and hold today that Rule 9(b) applies to all elements of a securities fraud action, including loss causation. This approach is appropriate for at least three reasons. First, the law on securities fraud is derived from commonlaw fraud. As the Supreme Court has noted, “the case law developed in this Court with respect to § 10(b) and Rule 10b-5 has been based on doctrines with which we, as judges, are familiar: common-law doctrines of fraud and deceit.” Basic Inc. v. Levinson, 485 U.S. 224, 253 (1988). The requirement of loss causation, in particular, is founded on the common law of fraud and deceit. Dura, 544 U.S. at 343–44 (“the common law has long insisted that a plaintiff in [a fraud or deceit] case show not only that had he known the truth he would not have acted but also that he suffered actual economic loss.”). Since Rule 9(b) applies to all circumstances of common-law fraud, Salameh v. Tarsadia Hotel, 726 F.3d 1124, 1133 (9th Cir. 2013) cert. denied, 134 S. Ct. 1322 OPERF V. APOLLO GROUP 11 (2014), and since securities fraud is derived from common law fraud, it makes sense to apply the same pleading standard to all circumstances of securities fraud. Second, Rule 9(b) clearly states that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Securities fraud encompasses six elements, including loss causation. Dura, 544 U.S. at 341–42. Loss causation is part of the “circumstances” constituting fraud because, without it, a claim of securities fraud does not exist. Third, our approach creates a consistent standard through which to assess pleadings in 10(b) actions, rather than the piecemeal standard adopted by some courts. Accordingly, we hold that Rule 9(b) governs the Plaintiffs’ Amended Complaint. However, the Plaintiffs’ claims fail even if the less stringent Rule 8(a) standard applied.