The Continuing Impact of Dura Pharmaceuticals v. Broudo
As part of an occasional series leading up to the arguments before the Supreme Court in Stoneridge in the first week of October, we examined the impact of the Court’s decision in Dura, decided two years ago. That case held, as previously discussed here, that a securities law plaintiff must allege and prove more to establish a claim under Section 10(b) claim than mere price inflation. In addition, plaintiff must prove loss causation – the link between the claimed fraud and injury. Overall, Dura is making it more difficult to plead and prove a securities fraud case.
Dura is having an impact in other areas not discussed in the earlier series. Class certification is one such area. In Oscar Private Equity Inves. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007), the Fifth Circuit vacated and remanded a district court class certification decision, concluding that “loss causation must be established at the class certification stage by a preponderance of all admissible evidence.”
The case is a class action against telecom company Allegiance. The complaint alleged that the company had fraudulently misrepresented it line-installation count in violation of Section 10(b). When the final quarterly results were announced for 2001, the company had to restate the line-installation count. Earnings were also reported below street expectations. Plaintiffs’ suit followed the drop in the share price.
The District Court certified the class following a hearing at which it concluded that class certification should not be a mini-trial on the merits. The Fifth Circuit held otherwise. The circuit court concluded that full consideration to the requirements of Federal Civil Rule 23 was required even if they overlap into the merits. This included consideration of whether loss causation had been established, thus extending the reach of Dura into critical the class certification area. See also In re Organogenesis Securities Litig., Case No. 04-10027-JLT (D. Mass. March 15, 2007) (considering expert affidavit arguing no Dura causation in denying class certification).
The Dura decision is also having an impact on non-securities, common law fraud cases. For example, in Glaser v. Enzo Biochem, Inc., 464 F.3d 474 (4th Cir. 2006), plaintiff investors brought a common law fraud action against Enzo Biochem and several of its officers. The complaint alleged that plaintiffs purchased their shares at an inflated price that resulted from a conspiracy by defendants to conceal the fact that clinical trials for a key drug had not progressed well so that they could sell their shares at an inflated price.
The Fourth Circuit affirmed the dismissal of the complaint based, in part, on Dura, despite the fact that the case was based on a common law fraud claim, not the federal securities laws. Although plaintiffs repeatedly claimed that they purchased shares at an inflated price, they failed to link the price inflation to the claimed economic injury. But see Merrill Lynch & Co. V. Allegheny Energy, Inc., 2007 WL 2458411 (2d Cir. Aug. 31, 2007) (declining to apply Dura to a common law fraud claim, citing New York law re proximate cause). Overall, courts are continuing to extend the reach of Dura.