In one of its most recent decisions, the court refused to extend federal securities anti-fraud law to "secondary" actors who, although involved in deceptive conduct, were not involved in deceptive disclosure.
Before we get to Stoneridge, let's look at this trend of business protective decisions, dating back to the court's 2006-2007 term. In four antitrust cases, the court made a sharp turn on policy in favor of "hands-off" free-market competition.
In Bell Atlantic v. Twombly, the court stiffened the standards for pleading an antitrust claim in a federal civil complaint. Antitrust plaintiffs can no longer rely upon pleading that an antitrust defendant engaged in pricing that was "parallel" to competitors; now, there must be more robust pleading to suggest an agreement to price-fix, a cartel or a conspiracy.
In Leegin v. PSKS, the court reversed the 100-year-old Dr. Miles antitrust doctrine, ruling that a manufacturer's requirement that a distributor maintain a minimum price resale is not automatically an antitrust violation, but instead should be weighed on its economic and competitive merits.
In Weyerhauser v. Ross-Simmons, it delivered a new, more forgiving test for defending against charges of "predatory buying." And in Credit Suisse v. Billing, the court ruled that the federal securities law trumps federal antitrust law where the conduct may fall within both areas.
As an aside, in Hall Street v. Mattel, the court addressed the enforceability of a contractual arbitration clause that provides for broad federal court appellate review of a private arbitration decision. The court ruled that, under the Federal Antitrust Act, private parties may not expand the grounds upon which federal courts review arbitration awards. While not necessarily a pro-business decision, it shrinks access to the federal courts in business cases.
Fast-forward to Stoneridge, and more of the same. A customer and a supplier of Charter Communications allegedly engaged in sham transactions with Charter, which used them to fraudulently inflate revenue and financial disclosures to investors. The investors alleged the supplier and customer knew or recklessly disregarded how those transactions would be used.
The court argued that allegations under the federal securities anti-fraud provisions against "secondary" actors, in this case the supplier and customer, are to be held to the same standard as allegations against the primary wrongdoer.
Conduct, even though deceptive, does not violate federal securities laws if it is not disclosed to, and relied upon by, the public. Although the SEC may pursue secondary conduct through civil criminal proceedings, private investors may not. This case will have a huge impact on the viability of securities fraud claims. Traditional "aiding and abetting" claims against lawyers, accountants, investment bankers and others have been strained.
Stoneridge is yet another Roberts Supreme Court decision, in a short time, demonstrating a resolve to narrow interpretation of federal business law regulation. Regardless of decisions made around the time this article goes to press--expanding the scope of federal employment law and allowing private/federal government employees to sue for retaliation for complaints about discrimination--this Supreme Court is determined to the let the business beat go on.
PHILIP G. KIRCHER is co-chairman of the commercial litigation department at the law firm of Cozen O'Connor.
July 1, 2008
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