Legal Document

127 S. Ct. 2499 (2007) TELLABS, INC., et al., Petitioners, v. MAKOR ISSUES & RIGHTS, LTD., al. No. 06-484. Supreme Court of United States. Argued March 28, 2007. Decided June 21, *2503 Carter G. Phillips, Washington, DC, for petitioners. Kannon K. Shanmugam, the States as amicus curiae, by special leave Court, supporting *2504 Arthur R. Miller, New York, NY, respondents. David F. Graham, Hille Sheppard, Robert N. Hochman, Melanie E. Walker, Sidley Austin LLP, Chicago, Illinois, Counsel Record, Richard D. Bernstein, Eamon P. Joyce, D.C., Petitioners. Cambridge, MA, Melvyn I. Weiss, Jerome M. Congress, H. Clifford Goodstein, Milberg Weiss Bershad Respondents. Justice GINSBURG delivered opinion Court. This has long recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement criminal prosecutions and civil enforcement brought, respectively, Department Securities Exchange Commission (SEC). See, e.g., Dura Pharmaceuticals, Inc. Broudo, 544 U.S. 336, 345, 125 1627, 161 L. Ed. 2d 577 (2005); J.I. Case Co. Borak, 377 426, 432, 84 1555, 12 423 (1964). Private fraud actions, however, if not adequately contained, can be employed abusively impose substantial costs on companies individuals whose conduct conforms law. See Merrill Lynch, Pierce, Fenner Smith Dabit, 547 71, 81, 126 1503, 164 179 (2006). As a check against abusive litigation parties, Congress enacted Litigation Reform Act 1995 (PSLRA), 109 Stat. 737. Exacting pleading requirements among control measures included in PSLRA. The requires plaintiffs state with particularity both facts constituting alleged violation, evidencing scienter, i.e., defendant's intention "to deceive, manipulate, or defraud." Ernst Hochfelder, 425 185, 194, n. 12, 96 1375, 47 668 (1976); see 15 U.S.C. § 78u-4(b)(1),(2). case concerns latter requirement. set out 21D(b)(2) PSLRA, must "state giving rise strong inference defendant acted required mind." 78u-4(b)(2). left key term "strong inference" undefined, Courts Appeals have divided its meaning. In before us, Seventh Circuit held standard would met complaint "allege[d] from which, true, reasonable person could infer intent." 437 F.3d 588, 602 That formulation, we conclude, does capture stricter demand sought convey 21D(b)(2). It suffice factfinder plausibly complaint's allegations requisite mind. Rather, determine whether scienter survive threshold inspection sufficiency, court governed engage comparative evaluation; it consider, only inferences urged plaintiff, did, but also competing rationally drawn alleged. An fraudulent intent may plausible, yet less cogent than other, nonculpable explanations conduct. To qualify "strong" within intendment 21D(b)(2), hold, *2505 more merely plausible reasonable at least compelling any opposing nonfraudulent intent. I Petitioner Tellabs, Inc., manufactures specialized equipment used fiber optic networks. During time period relevant this case, petitioner Notebaert was Tellabs' chief executive officer president. Respondents (Shareholders) persons who purchased Tellabs stock between December 11, 2000, 19, 2001. They accuse (as well several other executives) engaging scheme deceive investing public about true value stock. F.3d, 591; App. 94-98.[1] Beginning Shareholders allege, (and imputation Tellabs) "falsely reassured investors, series statements ... continuing enjoy products earning record revenues," when, fact, knew opposite true. Id., 94-95, 98. From 2000 until spring 2001, claim, knowingly misled four ways. 596. First, he made indicating flagship networking device, TITAN 5500, grow, when fact product waning. 596, 597. Second, 6500, next-generation available delivery, growing, truth ready delivery weak. 597-598. Third, falsely represented financial results fourth quarter (and, connection those results, condoned practice "channel stuffing," under which flooded customers unwanted products). 598. Fourth, overstated revenue projections, 5500 drying up production 6500 behind schedule. 598-599. Based Notebaert's sunny assessments, contend, market analysts recommended investors buy id., 592. first glimmer business so healthy came 2001 modestly reduced sales projections. Ibid. next months, progressively cautious projected sales. On last day class period, disclosed had significantly dropped. 593. Simultaneously, company substantially lowered projections second day, price stock, reached high $67 during plunged low $15.87. 3, 2002, filed action District Northern Illinois. Their stated, inter alia, engaged violation 10(b) 1934, 48 *2506 891, 78j(b), SEC Rule 10b-5, 17 CFR 240.10b-5 (2006), "controlling person" 20(a) 1934 Act, 78t(a), therefore derivatively liable company's acts. 98-101, 167-171. moved dismiss ground failed plead their PSLRA requires. agreed, dismissed without prejudice. Pet. Cert. 80a-117a; Johnson 303 Supp. 941, 945 (N.D.Ill.2004). then amended complaint, adding references 27 confidential sources making further, specific, concerning mental state. 594; 91-93, 152-160. again dismissed, F.Supp.2d, 971. sufficiently pleaded were misleading, determined, 955-961, they insufficiently 954-955, 961-969. reversed part. 591. Like found misleading character sufficient particularity. 595-600. Unlike concluded 603-605. "unequivocally raise[d] bar scienter" requiring "plea[d] create scienter." 601 (internal quotation marks omitted). evaluating is met, said, "courts [should] examine all decide collectively establish such inference." "[W]e will allow survive," critically "if alleges .... If draw facts, defendants entitled dismissal." 602. adopting survival explicitly rejected stiffer adopted Sixth Circuit, "plaintiffs most inferences." 601, (quoting Fidel Farley, 392 220, 227 (C.A.6 2004)). Circuit's standard, observed, because involved assessment inferences, "could potentially infringe upon plaintiffs' Amendment rights." We granted certiorari resolve disagreement Circuits whether, what extent, consider determining gives scienter.[2] 549 ___, 853, 166 681 (2007). *2507 II Section forbids "use employ, purchase sale security ..., [of] manipulative deceptive device contrivance contravention rules regulations [SEC] prescribe necessary appropriate interest protection investors." 78j(b). 10b-5 implements declaring unlawful: "(a) employ scheme, artifice defraud, "(b) make untrue statement material omit order "(c) act, practice, course operates operate deceit person, security." 240.10b-5. 10(b), implied statute's text purpose, affords right purchasers sellers injured violation. U.S., 341, 1627. 1627 ("The statutes seek maintain confidence marketplace deterring fraud, part, through availability actions."); 1555 (private provide "a effective weapon enforcement" action"). liability plaintiff prove embracing Ernst, 193-194, 1375.[3] ordinary action, Federal Rules Civil Procedure require short plain claim showing pleader relief." Fed. Civ. Proc. 8(a)(2). Although rule encourages brevity, say enough give "fair notice plaintiff's grounds rests." 346, Prior enactment sufficiency 8, heightened forth 9(b). Greenstone Cambex Corp., 975 F.2d 22, 25 (C.A.1 1992) (Breyer, J.) (collecting cases). 9(b) applies "all averments mistake"; "the circumstances stated particularity" provides "[m]alice, intent, knowledge, condition mind averred generally." diverged inquiry cases: Could allege "simply stating existed," re GlenFed, Litigation, 42 *2508 1541, 1546-1547 (C.A.9 1994) (en banc), scienter? Compare 1546 ("We permitted add new simply like effects doing so."), with, Greenstone, F.2d, (were law permit evade too easily `particularity' requirement 9(b)'s sentence"). specific expressed variously. 5A C. Wright A. Practice 1301.1, pp. 300-302 (3d ed.2004) (hereinafter Miller). Second formulation stringent. "specifically [facts] assert had" Ross A.H. Robins Co., 607 545, 558 (1979) (emphasis added). appropriate, ward off "fraud hindsight." Shields Citytrust Bancorp, 1124, 1129 (1994) Denny Barber, 576 465, 470 (C.A.2 1978) (Friendly, J.)). Setting uniform Congress' objectives Designed curb perceived abuses action"nuisance filings, targeting deep-pocket defendants, vexatious discovery requests manipulation lawyers," 1503 H.R. Conf. Rep. 104-369, p. 31 (1995), U.S.Code Cong. Admin.News 1995, 730 Rep.))the installed substantive procedural controls.[4] Notably, prescribed procedures appointment lead counsel. innovation aimed increase likelihood institutional investorsparties likely balance interests long-term company serve plaintiffs. 33-34; S.Rep. 104-98, 11 679, 690. "limit[ed] recoverable damages attorney's fees, provide[d] `safe harbor' forward-looking statements, mandate[d] imposition sanctions frivolous litigation, authorize[d] stay pending resolution motion dismiss." 1503. And 21D(b) "impose[d] brought pursuant 10b-5." Under PSLRA's instructions, alleging false must: (1) "specify each been [and] reason reasons why misleading," 78u-4(b)(1); (2) mind," instant earlier supra, 2506, agreed two requirements: *2509 specified misleading. 596-600. But courts disagreed Shareholders, "state[d] [Notebaert] [scienter]," 2506. scienter," signaled purpose promote greater uniformity Circuits, Rep., 41. "Congress did throw much light [a strong] inference," "degree imagination use divining whether" exists. 601. While codify interpreting standard. Brief Amicus Curiae 18. With no clear guide "inten[tion] strengthen existing requirements," 41, again, construing Among uncertainties, should "strong"? 601-602 Our task workable construction reading geared twin goals: frivolous, lawyer-driven while preserving investors' ability recover claims. III A following prescriptions: faced 12(b)(6) must, failure relief granted, accept factual Leatherman Tarrant County Narcotics Intelligence Coordination Unit, 507 163, 164, 113 1160, 122 517 (1993). point, parties agree. Reply 8; 26; 20, 21. entirety, ordinarily ruling motions dismiss, particular, documents incorporated into reference, matters take judicial notice. 5B Miller 1357 ed.2004 Supp.2007). inquiry, recognized, alleged, taken collectively, individual allegation, scrutinized isolation, meets Abrams Baker Hughes 292 424, 431 (C.A.5 2002); Gompper VISX, 298 893, 897 2002). 25. account inferences. expressly declined inquiry. survive, "alleges intent"; words, "[i]f *2510 facts" prevail dismiss. "provide basis [their] allegations," ibid. Cerner Corp. 1079, 1084, 1085 (C.A.8 2005)), drawn. Instead, "strong"i.e., powerful cogentinference. American Heritage Dictionary 1717 (4th ed.2000) (defining "[p]ersuasive, effective, cogent"); 16 Oxford English 949 (2d ed.1989) "[p]owerful demonstrate convince" (definition 16b)); cf. 7 924 "inference" conclusion [drawn] known assumed statements"; "reasoning something else follows it"). strength cannot decided vacuum. inherently comparative: How one conclusion, compared others, underlying facts? conduct, favoring plaintiff. need irrefutable, "smoking-gun" genre, even "most inferences," Fidel, Helwig Vencor, 251 540, 553 2001) banc)). Recall regard 21D(b)'s constraint many screen suits, allowing move forward. 2508, 4. Yet "reasonable" "permissible"it compelling, thus explanations. deem alleged.[5] *2511 B contends considered, evident lack pecuniary motive dispositive. stresses, sold shares period. Petitioners 50 absence color putatively scienter."). consideration, personal gain weigh heavily favor inference, agree allegation fatal. 2509-2510, considered collectively; significance ascribed motive, thereof, depends entirety complaint. maintains Shareholders' vague ambiguous contribute scienter. For example, products, stuffing." 2505. failed, argues, specify channel stuffing allegedly illegitimate kind (e.g., writing orders requested) legitimate offering discounts incentive buy). 44-46; 8. 8-9 (complaint lacks precise dates reports critical distinguish culpable conduct). 598, 603-604 (pointing multiple particulars including specifications timing). omissions ambiguities count inferring reiterate, court's job scrutinize isolation assess holistically. 2509-2510; sum, reviewing ask: When accepted inference?[6] IV Accounting explained "th[ought] wis[e] adopt approach [could not] misunderstood usurpation jury's role." our view, concern undue.[7] *2512 constantly assuming think plain, impinge jury trial.[8] creator statutory claims, power just proved merits. lawmaker's prerogative, therefore, allow, disallow, shape contours of proof for actions. No decision questions authority general, suggests, inhibits establishing whatever finds Cf. Swierkiewicz Sorema N.A., 534 506, 512-513, 992, 152 1 (2002); Leatherman, 168, 1160 (both recognizing established Rule, citing 9(b), mistake particularity).[9] Fidelity Deposit Md. States, 187 315, 23 120, 194 (1902), instructive. concerned Columbia 1879 rulemaking delegated Congress. certain contract file affidavit distinct terms, his defen[s]e." 318, 120 insufficient, judgment entered declaration satisfactory. upheld District's contention violated Amendment. 320, 120. Just complaints, prescription issue "preserve defen[s]es," Explaining implicated, said "prescribes means issue," that, "[t]he [was] prescribed, trial accrues." Ibid.; accord Ex parte Peterson, 253 300, 310, 40 543, 64 919 (1920) (Brandeis, (citing reiterating: "It constitutional [in case], require, view formulating issues, oath party relied upon."). Walker Mexico Southern Pacific 165 *2513 593, 421, 41 837 (1897) (Seventh "does attempt regulate pleading"). provided satisfied congressionally "prescribe[d] fall credibility witnesses, genuine issues ultimate determination and, imputation, emphasize, well, forced she trial. hold today, rendering inference. At trial, her "preponderance evidence." Stated otherwise, Herman MacLean Huddleston, 459 375, 390, 103 683, 74 548 (1983). * reject do described, 2509-2511, warrant [Notebaert Tellabs] Neither nor opportunity matter prescriptions announce today. vacate reexamined vacated, remanded further proceedings consistent opinion. ordered. SCALIA, concurring judgment. fail how "at ante, 2505, conceivably called statute here requires: jade falcon stolen room access, possibly there thief? not, Court's test fail. my (if any) innocence.[*] explicit rejection reading, 2510, rests assertions. (doubtless true) scienter... `smoking-gun' genre," *2514 avoid extremities effectively baseless phrase inference"; normal abandon unexpressed does, inconceivable Congress's stringent somehow manifests edge close cases. assertion (also "an can, some cases, recovery." Ante, 5 Summers Tice, 33 Cal. 80, 84-87, 199 P.2d 1, 3-5 (1948) (in bank)). famous sticks body tort sore thumb. relaxation" "such required" succeed negligence action. 86, P.2d, 4 There indication meant relax tie goes defendant. contrary, strengthens extending stage case. One petitioners' amici suggests transform "strongest" Association 27. point might force clearly using word instead "strong." superlative sense given provision's structure: What mean "facts strongest mind"? certainly wanted clarity, restructured entire provisionto possibility total restructuring, equally express demanded Argument saying differently draw. content hasten precision interpretation always pursued own sake, doubt instance correct produce different Court's. often precisely equipoise? All reason, think, read language says. dissent criticize me suggesting text. 2510-2511, 5; post, 2517, (STEVENS, J., dissenting). mistaken. mine natural (i.e., reading), conceivable one. standing object approach, since concludes another respect, admits namely, weighed strong-inference "is comparative" 2510. dissent, asserts discernible meaning, *2515 appeals" "Members Court" "have divided" over question. weeks ago, author joined today's meaning "plain," Rockwell Int'l 1397, 1412, 167 190 dissenting), though Members question, (127 S.Ct., 1407, 5). Was then, claims "in eye beholder"? unremarkable various Justices reach conclusions remarkable, believes "implicitly significant lawmaking Judiciary th[e] [strong-inference] practice." Post, 2516-2517. usually describe discretion conferred administrative agencies, faithful statute, choose interpretation, bounds reasonable, later change reasonable. Chevron U.S.A. Natural Resources Defense Council, 467 837, 104 2778, 81 694 (1984). Courts, contrast, single, reading. exercise "delegated authority" seems peculiarunless lawmakers discretion. apply judgment, sure. Even join frequent indulgence remaining legal fiction West: report single committee House expresses says, "Congress'[s] purpose" Circuits," 2509, relying certitude managers accompanying Conference Committee Report never House, Senate, far know almost sure "`inten[ded] requirements,'" ibid., becauseagainthe so. come same safer Houses actually voted on) indicates. legislation done so, assuredly remedied deficiency. above exceptions, am generally agreement analysis, concur ALITO, erroneously burden "with lower respects, disagree best *2516 properly sufficient. SCALIA present context, correct. quite clear. 78u-4(b)(2) states shall, respect act omission violate chapter, Thus, arise particularity." met. dicta, "omissions ambiguities" "count against" nonparticularized ones, considering 2511. Not contradict undermines requirement's preventing general get claim. Allowing derive benefit him circumvent important provision. Furthermore, way distinguishes review, naturally weight containing particularized facts. stripped Questions meet requirement, where violated, offending account. mind" stronger lacked very little guidance regarding difference (the scienter) SCALIA's marginally unlikely practical difference. approaches similar question posing binary choice (either not). align summary-judgment judgment-as-a-matter-of-law stages, whereas introduce previously unknown litigation. quantity approach. STEVENS, dissenting. explains, laws, "left `strong inference' undefined." *2517 2504-2505. implicitly practice. Today majority crafts perfectly definition term, persuaded easier statute. basic context protect unmeritorious Because intrusive nature, invade privacy executives. citizens suspected having activity, unless probable cause believe them guilty misconduct. Admittedly, probable-cause capable measurement, concept familiar judges. usage, roughly Moreover, intended us makes difficult commence case.[1] addition grounding already concept, unnecessary `strong' 2509 times deemed drug dealer exits building immediately after confirmed transaction, carrying suspicious looking package, judge aforementioned transaction debating suspect leaving exact unrelated reason. If, methodology, assume 2511) detailed attributed informants described "acted intent," held.[2] *2518 Accordingly, affirm Appeals. NOTES [1] suit executives Notebaert, Birck, chairman former officer. executives, focus relate Notebaert. refer defendant-petitioners "Tellabs." [2] (C.A.7 2006) (decision below); Brown Credit Suisse First Boston 36, 49, 51 2005); Ottmann Hanger Orthopedic Group, 353 338, 347-349 (C.A.4 2003); Pirraglia Novell, 339 1182, 1187-1188 (C.A.10 896-897 banc). [3] reserved reckless behavior 10b-5. (1976). Every intentionally recklessly, differ degree recklessness required. Ottmann, 343 satisfies presented [4] Nothing noted, casts "that [i]s indispensable tool defrauded losses"a crucial integrity domestic capital markets. (2006) [5] objects access," "possibly thief." 2513 (opinion judgment) original). suspect, officials owner precious find guilt strong investigation. Indeed, recovery. bank) (plaintiff wounded gunshot other); Restatement (Third) Torts 28(b), Comment e, 504 (Proposed Final Draft Apr. 6, 2005) ("Since publication 1965, alternative-liability principle [Summers in] 433B(3), fleshing limits."). event, hardly invariably ("natural" "normal") reading his. 2514-2515. ALITO agrees transpose stages." 2516 judgment). measured backdrop. improbable stating, pleadings, unaided discovery, "no fact." 56(c). post-trial turning produced evidence "legally sufficient" party's favor. 50(a)(1). [6] imputed defendants. 602-603. 603 (to proceed beyond stage, violations) Phillips Scientific-Atlanta, 374 1015, 1018 (C.A.11 Though group doctrine survived see, Southland INSpire Ins. Solutions 365 353, 364 2004), contest determination, disturb it. [7] raised problem initiative. contend below dismissal jury. Monroe Employees Retirement System Bridgestone 399 651, (noting possible argument declining address plaintiffs). [8] numerous contexts, gatekeeping determinations prevent submission violating Daubert Merrell Dow 509 579, 589, 2786, 469 (1993) (expert testimony excluded based reliability); Neely Martin Eby Constr. 386 317, 321, 87 1072, 18 75 (1967) (judgment law); Pease Rathbun-Jones Engineering 243 273, 278, 37 283, 61 715 (1917) (summary [9] Any rule, effect getting gone jury, occurred yielded evidence. makers' rules, detected impediment. [*] strong." 5. wisdom ancient maxim "aliquis non debet esse Judex propria causa"no man ought cause. Dr. Bonham's Case, 8 107a, 114a, 118a, 77 Eng. 638, 646, 652 (C.P. 1610). (from dispassionate perspective falcon) possibility, responsible responsible. "Inference" connotes "belief" inferred, impossible form belief A, B. determined will, turn clarity language, drafters. Here, whole, defendant-friendly prefers. He wrong concluding "read says," susceptible 2514 argues "must meaning," "normal meaning" surely beholder. points out, 2504-2505, 2508-2509, same. acknowledge itself open interpretation. stuffing" ¶¶ 62-72 110-113, particularly persuasive. Contrary arguments respondents' "are 2511, portion himself knowledge 111, ¶ 67 ("Defendant worked directly personnel stuff SBC"); 110-112 (alleging, describing stuffing, took "extraordinary" steps amounted abnormal industry"; "distributors upset returned inventory" Verizon's Chairman, complain); "did want" sent employees wrote for; "returns heavy January February lease extra storage space accommodate returns"; "backdat[ed] sales" place appear 2000). these viewed collective, hard imagine counteract "`acted mind.'" Court) 78u-4(b)(2)).

Classification Label: 7