Court Opinion

ID: 6933194
Source: CourtListenerOpinion
Date Created: 2022-07-24 00:15:43.538832+00
Date Added: 2024-06-11T16:07:18.678251
License: Public Domain

WILLIAM A. NORRIS, Circuit Judge,
concurring, joined by BEEZER, CYNTHIA HOLCOMB HALL and RYMER, Circuit Judges, as to Parts I & III:
I agree with the majority that Rule 9(b) does not require plaintiffs to plead facts giving rise to an inference of scienter. I write separately, however, for two reasons: (1) to respond to the concerns of our sister circuits that have read an inference of scienter test into 9(b), and (2) to express my own concern that the majority’s discussion of the particularity requirement of 9(b) destabilizes settled Ninth Circuit law by effectively reading into the Rule a requirement that plaintiffs plead facts giving rise to an inference of falsity.1
*1555I
The First, Second and Seventh Circuits have all held that Rule 9(b) requires that plaintiffs in securities fraud cases plead a factual basis for allegations of fraudulent intent. See Greenstone v. Cambex Corp., 975 F.2d 22, 25 (1st Cir.1992) (“The courts have uniformly held inadequate a complaint’s general averment of the defendant’s ‘knowledge’ of material falsity, unless the complaint also sets forth specific facts that make it reasonable to believe that defendant knew that a statement was materially false or misleading.”) (emphasis in original); Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir.1990) (“Although scienter need not be alleged with great specificity, plaintiffs are still required to plead the factual basis which gives rise to a ‘strong inference’ of fraudulent intent.”) (citations omitted); DiLeo v. Ernst & Young, 901 F.2d 624, 629 (7th Cir.), cert. denied, 498 U.S. 941, 111 S.Ct. 347, 112 L.Ed.2d 312 (1990) (“[T]he complaint ... must afford a basis for believing that plaintiffs could prove scienter.”).
I respect the concerns that animated this expansive interpretation of Rule 9(b) by the First, Second and Seventh Circuits. As Chief Judge Newman, writing for the Second Circuit, observed, in securities fraud eases,
there is [an] interest in deterring the use of the litigation process as a device for extracting undeserved settlements as the price of avoiding the extensive discovery costs that frequently ensue once a complaint survives dismissal, even though no recovery would occur if the suit were litigated to completion.
In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 263 (2d Cir.1993), cert. denied, — U.S. -, 114 S.Ct. 1397, 128 L.Ed.2d 70 (1994); see also Greenstone, 975 F.2d at 25; DiLeo, 901 F.2d at 627. The Supreme Court expressed similar concerns in an earlier securities fraud case:
[T]o the extent that [discovery] permits a plaintiff with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the process will reveal relevant evidence, it is a social cost rather than a benefit.
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741, 95 S.Ct. 1917, 1928, 44 L.Ed.2d 539 (1975). Notwithstanding these legitimate concerns about nuisance actions based upon the in terrorem effect of discovery costs in complex security fraud cases, I believe that the language of 9(b) cannot and should not be construed as requiring the pleading of facts that give rise to an inference of scienter. Not only does such a construction do violence to the plain meaning of the second sentence of 9(b), I believe it does unnecessary violence to the fundamental tenets of notice pleading.
As a radical departure from basic principles of our notice pleading system, an inference of scienter test inevitably contributes to the plague of burdensome and prolix complaints that have become fashionable in securities fraud cases today. Here, for example, the second amended complaint contains over 100 pages of painstakingly detailed allegations of evidentiary facts. This level of detail is typical of the modem securities fraud complaint. While I deplore such a radical departure from Rule 8’s command of “simple, concise, and direct” pleadings, it is inevitable that prudent lawyers, faced with the obstacle of an inference of scienter test at the pleading stage, will throw into their complaints every scrap of evidence they can muster. Not surprisingly, securities fraud complaints now commonly read more like summary judgment papers than pleadings designed “to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged....” Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985).
Rule 9(b) need not and should not be read as clashing with Rule 8’s requirement of a short and plain statement of plaintiff’s claim. Rather, since the promulgation of the Federal Rules, courts have stated that the requirements of Rule 9(b) must be harmonized with the basic principles of notice pleading embodied in Rule 8. See, e.g., Craighead v. E.F. Hutton, 899 F.2d 485, 491 (6th Cir.1990); *1556Cayman Exploration Corp. v. United Gas Pipe Line Co., 873 F.2d 1357, 1362 (10th Cir.1989); Friedlander v. Nims, 755 F.2d 810, 813 (11th Cir.1985); Simcox v. San Juan Shipyard, Inc., 754 F.2d 430, 439-40 (1st Cir.1985); Credit & Finance Corp. v. Warner & Swasey Co., 638 F.2d 563, 566 (2d Cir.1981); Felton v. Walston & Co., 508 F.2d 577, 581 (2d Cir.1974); Hirshhorn v. Mine Safety Appliances Co., 54 F.Supp. 588, 591 (W.D.Pa.1944); United States v. Kralmann, 3 F.R.D. 473, 474-75 (E.D.Ky.1943); 2A James Wm. Moore et al., Moore’s Federal Practice ¶ 9.03[2] (2d ed. 1994).
Our circuit has harmonized Rules 8 and 9(b) by making it clear that “[r]ule 9(b) does not require nor make legitimate the pleading of detailed evidentiary matter.” Walling v. Beverly, 476 F.2d 393, 397 (1973) (quoting 2A James Wm. Moore et al., Moore Federal Practice ¶ 9.03, at 1930 (2d ed. 1972)). In taking this approach, we followed the many courts that have, since the inception of the Federal Rules of Civil Procedure, consistently declared that the pleading of detailed evidentiary matter is unwarranted by the strictures of Rule 9(b) and inconsistent with the basic principles of notice pleading. See, e.g., Seattle-First Nat’l Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th Cir.1986); Ross v. A.H. Robins Co., 607 F.2d 545, 557 n. 20 (2d Cir.1979); Brady v. Games, 128 F.2d 754, 755 (D.C.Cir.1942); Capalbo v. Paine Webber, Inc., 672 F.Supp. 1048, 1050 (N.D.Ill.1987); Hirshhom, 54 F.Supp. at 591; Perrott v. United States Banking Corp., 53 F.Supp. 953, 957 (D.Del.1944); Brown v. Fire Ass’n, 1 F.R.D. 450, 450 (S.D.N.Y.1940); 2A Moore et al., supra, ¶ 9.03[1]; 5 Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 1298 (1990).
Even though I join the majority in rejecting the inference of scienter test, I share the concerns of our sister circuits about the social costs of strike suits.2 There is good reason to be concerned about such cases, many of which are brought by plaintiffs hoping to extract an early settlement based on the in terrorem effect of discovery costs. Too often, these cases are filed on the heels of a dramatic change in a corporation’s stock price and are based on evidence no better than the announcement of an unexpected change in the financial condition of the corporation.
It is also true, however, that there are social costs associated with a rule of pleading that causes a proliferation of complaints that are chock full of allegations of detailed evidentiary matter. Not only are such pleadings burdensome for defendants to deal with, they are burdensome for judges who are required to comb through the evidentiary matter pleaded and struggle with the inferences it does or does not support as though the evidence were presented in affidavit form as required by Rule 56 rather than merely alleged in a complaint. This is a difficult and time-consuming process that judges must necessarily engage in at the summary judgment stage, but it is a wasteful use of judicial resources to require judges to engage in the same process at the pleading stage. See, e.g., In re Time Warner, 9 F.3d at 268-71 (sifting through evidence pleaded in complaint in search of inference' of scienter); Greenstone, 975 F.2d at 26-27 (same); DiLeo, 901 F.2d at 629-30 (same).
In my view, the social costs of reading an inference of scienter test into Rule 9(b) outweigh any incremental value of such a rule in screening out strike suits at the pleading stage.3 As our court has written:
*1557The pleading rules, designed to avoid and reduce long and technical allegations, are necessarily supplemented by procedures including summary judgment which enable a party to have a judgment in a relatively short time if there is actually no bona fide claim presented. [The defendant] is at liberty to avail itself of these procedures and thereby seek to avoid what otherwise might be protracted litigation.
Walling, 476 F.2d at 397-98. In sum, it is unnecessary and counterproductive to refashion Rule 9(b) in response to the problem of strike suits when more cost efficient responses are available.
Pleading rules are no substitute for active case management by district court judges. The driving force behind securities fraud suits filed to extract early settlements disproportionate to the merits is the expectation that once plaintiffs get past the pleading stage, they will automatically gain access to virtually unlimited discovery. Once a defendant is faced with that daunting prospect, practical business considerations drive settlement values skyward. The inference of scienter test is designed to deal with this in terrorem effect of discovery costs by weeding out groundless cases at the pleading stage. Regrettably, however, it also helps spread the plague of prolix complaints.
In the notice pleading system that has served the federal courts so well, we must rely heavily on individual district judges to keep the costs of discovery under control. District judges have broad discretion and a range of tools that allow them to control the extent and timing of discovery as well as to test the plaintiffs’ ability to prove their case prior to trial. District courts need not permit unlimited discovery simply because a plaintiff has managed to draft a complaint that satisfies the minimal requirements of Rules 9(b) and 12(b)(6). See Fed.R.Civ.P. 16, 26. Nor must they wait for trial to determine whether the complaint has been brought without any basis in fact. See Fed. R.Civ.P. 11, 56. By exercising active control over the early stages of the litigation, district judges can dramatically reduce the in terro-rem effect of discovery in complex security cases. Rather than adopting more stringent rules of pleading, we should be encouraging district judges to use their broad discretion to limit the ability of plaintiffs to extract undeserved settlements by confronting defendants with the prospect of exorbitant discovery costs.4
In sum, I believe that the second sentence of Rule 9(b) means what it says — scienter may be averred generally. I also believe that an inference of scienter test is counterproductive. Accordingly, I concur with the majority that the allegations of fraudulent intent in plaintiffs’ second amended complaint easily comply with Rule 9(b). See Second Amended Complaint ¶¶29, 132, 153 (E.R. 26-30, 105, 110).
II
I now turn to the majority’s discussion of the particularity requirement of the first sentence of Rule 9(b). See Majority Opinion Parts I.B & II. I write separately on this issue solely to express my concern that the majority’s discussion will be read as creating an inference of falsity test that parallels the inference of scienter test unanimously rejected by this en banc court. Like the inference of scienter test, an inference of falsity test clashes not only with the settled law of this circuit, but also with the basic principles of notice pleading.
Although the majority does not say that it is adopting an inference of falsity test, it appears to do just that by requiring the pleading of evidentiary facts giving rise to an inference that the allegedly fraudulent statements were false when made. The majority requires that plaintiffs “explain how and why the statement was misleading when made.” Id. at 1549 (emphasis added). Thus, it is not enough for the plaintiff to explain *1558“how” — i.e., in what respect — the statement was false. The majority requires a further explanation as to “why” it was false. The majority opinion makes clear that explaining “why” a statement was false requires that the plaintiffs “demonstrate the falseness of the charged statements.” Id. at 1558; see also id. at 1549-50. The use of the word “demonstrate” is revealing. It shows that the majority requires plaintiffs to make a demonstration — i.e., prove by evidence — -of falsity at the complaint stage. See Black’s Law Dictionary 432 (6th ed. 1990) (defining “to demonstrate” as “[t]o show or prove value or merits by operation, reasoning, or evidence”). The majority even offers a suggestion as to the best type of evidence for plaintiffs to plead: “inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants.” Majority Opinion at 1549.
Notwithstanding the majority’s disclaimer that “[w]e do not test the evidence at this stage,” id. at 1550, Part II of the majority’s opinion proceeds to do just that by examining whether or not the evidence pleaded in the complaint supports an inference that the challenged statements were false when made. For example, with regard to the subsidiaries claim, the majority reviews statements from Glenfed’s Form 10-Q, Strategic Plan, and board minutes, weighing these pieces of evidence to see if they give rise to an inference of falsity. Id. at 1549-50. The majority’s discussion ruminates on the proper evidentia-ry weight to be accorded each statement depending on whether or not it was made contemporaneously with the allegedly fraudulent statement. Id. at 1549-50.5. Indeed, Part II of the majority’s opinion reads like a summary judgment opinion rather than an opinion reviewing a 9(b) motion to dismiss.
In requiring plaintiffs to plead evidentiary facts that “explain why” or “demonstrate” that the allegedly false statements were in fact false when made, the majority opinion creates the unfortunate impression that it is modifying settled Ninth Circuit caselaw. Our seminal case interpreting Rule 9(b) is Walling v. Beverly, 476 F.2d at 393. In upholding the adequacy of the plaintiffs’ complaint under 9(b), we adhered to the interpretation of 9(b) articulated by Professor Moore:
Rule 9(b) requires that the circumstances constituting fraud must be stated with particularity. But “[r]ule 9(b) does not require nor make legitimate the pleading of detailed evidentiary matter.” 2A J. Moore, Federal Practice ¶ 9.03, at 1930 (2d ed. 1972). Nor does Rule 9(b) require any particularity in connection with an averment of intent, knowledge or condition of the mind. It only requires the identification of the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.
Id. at 397. Following Moore further, we held that the notice requirement of 9(b) was satisfied by allegations of “the time, place and nature of the alleged fraudulent activities.” Id; see also 2A Moore et al., supra, ¶ 9.03[1].
Since Walling, our eases regarding the particularity requirement of the first sentence of 9(b) have continued to follow Moore, reiterating three basic principles:
1) Rule 9(b) does not require or legitimate the pleading of detailed evidentiary matter;6
*15592) A complaint satisfies 9(b) if it provides sufficient notice to the defendant of the particular acts that are alleged to be fraudulent so that the defendant can prepare an adequate answer;7
3) This notice requirement is satisfied by allegations of the time, place and specific content of the allegedly fraudulent statement, along with an identification of what in particular was false or misleading about the statement.8
None of our cases have stated anything about requiring a plaintiff to demonstrate falsity or anything else. Nor have any engaged in the summary judgment-like weighing of the evidence that the majority opinion undertakes.
Despite this, the majority presents its approach as consistent with circuit precedent. Majority Opinion at 1547-48. In imposing its requirement that plaintiffs plead “[facts that] amount to an explanation as to why the [disputed] statement was false,” id. at 1549-50, the majority relies primarily on our statement in Blake v. Dierdorff, 856 F.2d 1365 (9th Cir.1988), that 9(b) requires “specific descriptions of the representations made, [and] the reasons for their falsity.” Id. at 1369 (emphasis added). The majority, however, misinterprets our statement in Blake and in the process strays from Walling and its progeny.
I read Blake the way I read our other cases: the plaintiff must set forth the allegedly fraudulent statements and explain what is false about them. In other words, Blake was merely restating, in slightly different form, the requirements that have been reiterated by our court time and again, the requirements that reflect Professor Moore’s summary of the law. See supra n. 8. His statement of the rule is thus revealing:
the pleader is required to specify the time, place, and content of any allegedly false representation, the fact misrepresented, the identity of the perpetrator, and what was obtained or given up as a consequence of the fraud.
Moore et al., supra, ¶ 9.03[1] (emphasis added). There is no requirement of making any kind of demonstration, no need to state facts that “explain why” or otherwise substantiate the allegation of falsity.
In straying from the settled law of our circuit, the majority falls into the same trap that the other circuits fell into when they adopted an inference of scienter test: a rule of pleading that encourages, if not requires, the exhaustive pleading of evidentiary facts, spawning monstrous complaints such as the 800-pound gorilla we have been wrestling with in this ease.9 The majority’s lesson to *1560securities fraud practitioners is that if the evidentiary facts they plead are deemed “insufficient,” they risk dismissal under 9(b). Careful lawyers will ignore the language of the opinion admonishing the plaintiffs for their lengthy complaint and plead as much evidence as they can muster to make a “demonstration” of falsity.
While the majority has avoided the pitfalls of an inference of scienter rule, the second part of its opinion may create just as much mischief as the rule it has rejected.
III
I concur in the judgment to the extent it vacates the decision of the original panel dismissing the second amended complaint for failure to plead facts giving rise to an inference of scienter.

. I believe it was unnecessary and imprudent for the majority to reach the issue whether the allegations of falsity satisfy the particularity requirements of the first sentence of Rule 9(b). The issue was not reached by the original panel, which affirmed the district court's dismissal of the second amended complaint solely on the ground that the plaintiffs failed to plead scienter with sufficient particularity. It never reached the issue of the sufficiency of the falsity allega*1555tions under 9(b). Nor was that issue briefed or argued to the en banc court.

. Some commentators have also advocated an inference of scienter test as a means of ferreting out factually baseless suits at the pleading stage. See, e.g., Jared L. Kopel, Procedural Reforms, in Securities Class Actions: Abuses and Remedies 107 (Edward J. Yodowitz et al. eds. 1994); William C. Baskin III, Note, Using Rule 9(b) to Reduce Nuisance Securities Litigation, 99 Yale L.J. 1591 (1990).

. The costs associated with rules that spawn the pleading of detailed evidentiary matter are borne not only by defendants and the courts, but also by actual victims of securities fraud. When plaintiffs prevail in a securities class action, whether by settlement or adjudication, class counsel's fees are paid for out of the common fund created to compensate the members of the class for their losses. See, e.g., In re Washington Pub. Power Supply Sys. Sec. Litig., 19 F.3d 1291, 1294-95 (9th Cir.1994). Any time spent by class counsel to create and then defend hundred-page complaints is ultimately paid out of the common fund, which means out of the pockets of the class members themselves. Thus, it is in the interests *1557of both plaintiffs and defendants, as well as the courts and, ultimately, the taxpayers, to avoid the proliferation of prolix pleadings.

. It may be that still additional reforms are necessary to deal with the problem. See Securities Class Actions: Abuses and Remedies (Edward J. Yodowitz et al. eds., 1994). Amending the Federal Rules of Civil Procedure, however, is reserved for the rulemaking process and changes in the substantive law must be left to Congress.

. Not only is such analysis inappropriate at the pleading stage, it is also misguided. Whether the statements were contemporaneous with the allegedly fraudulent statements is, for the most part, irrelevant as to whether the statements were in fact false. As the Majority Opinion itself demonstrates, the contemporaneity of evidence in a fraud case is much more probative of scien-ter than falsity. See, e.g., Majority Opinion at 1548-49 ("[Explaining why a statement was false when made] can be done most directly by pointing to inconsistent contemporaneous statements or information (such as internal reports) which were made by or available to the defendants.") (emphasis added); id. at 1548-49 n. 8 ("This is not to say that a plaintiff might not find other ways to explain why a statement was false when made. A later statement by the defendant along the lines of ‘I knew it all along’ might suffice. See Greenstone, 975 F.2d at 26-27.”) (emphasis added). Greenstone, however, is a scienter case — it applies an inference of scienter test, not an inference of falsily test.

. See, e.g., Walling v. Beverly, 476 F.2d at 397; 2A Moore et al., supra, ¶ 9.03[1].

. See, e.g., Kaplan v. Rose, No. 92-55879, slip op. 12491, 12504 (9th Cir. Oct. 11, 1994); Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.1989); Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987); Semegen v. Weidner, 780 F.2d 727, 729 (9th Cir.1985).

. See, e.g., Kaplan v. Rose, No. 92-55879, slip op. at 12504 ("time, place, and nature of the misleading statements”); Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.1989) ("time, place and nature of the alleged fraudulent activities”); Blake v. Dierdorff, 856 F.2d 1365, 1369 (9th Cir.1988) ("date ..., specific descriptions of the representations made, the reasons for their falsity, and, where possible, the roles of the individual defendants”); Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987) ("time, place and nature of the alleged fraudulent activities”); Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir.1985) (“time, place and specific content of the false representation"); Misc. Serv. Workers v. Philco-Ford Corp., 661 F.2d 776, 782 (9th Cir.1981) ("time, place and specific content of the false representations as well as the identities of the parties to the misrepresentation”); Gottreich v. San Francisco Investment Corp., 552 F.2d 866, 866 (9th Cir.1977) (“the time, place and content of the false misrepresentation^, the fact[s] misrepresented and what was obtained or given up as a consequence of the fraud”) (quoting 2A J. Moore, Federal Practice ¶ 9.03, at 1927-1928 (2d ed. 1975)).
Early cases interpreting the new Federal Rules of Civil Procedure also followed this formulation. See, e.g., United States v. Hartmann, 2 F.R.D. 477, 478 (E.D.Pa.1942) (holding that "the circumstances constituting the fraud means merely the time, place and content of the false representation, the fact misrepresented, and an identification of what has been obtained").

.Just imagine trying to draft an answer to this complaint. Responding to each evidentiary allegation would be the functional equivalent of responding to a request for admissions — even before a discovery conference has been held and the scope of discovery defined by the district judge.