US Supreme Court Considers Petition for Writ of Certiorari Challenging Safe Harbor Decision under the PSLRA

January 10, 2005

The United States Supreme Court is considering a petition for a writ of certiorari challenging a new safe harbor decision under the PSLRA with far-reaching effects for public companies disclosing forward-looking information.  After a drop in the price of Baxter International Inc.’s stock in July of 2002, its shareholders filed a securities fraud lawsuit in which they claimed that certain financial projections made by Baxter had been misleading.  The district court dismissed the lawsuit on the ground that the company was protected by the "safe harbor" for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995 (PSLRA).  The PSLRA protects forward-looking disclosures, such as projections, when such statements are accompanied by "meaningful cautionary language."  On appeal, the Seventh Circuit reversed the district court, holding that the applicability of the safe harbor could not be determined until after plaintiffs were afforded the opportunity to conduct discovery.  Asher v. Baxter Int’l Inc., 377 F.3d 727 (7th Cir. 2004). 

In December, Baxter International filed a petition for writ of certiorari, arguing that the Seventh Circuit’s decision warrants review because, among other things, it could eviscerate the PSLRA’s discovery stay provision, which protects defendants from invasive discovery until a plaintiff has succeeded in defeating a motion to dismiss.  On Tuesday, January 4, 2005, Gibson, Dunn & Crutcher represented the Business Roundtable in filing an amicus brief [PDF] supporting the petition for certiorari.  The amicus brief supplements the petition for certiorari by arguing that the PSLRA’s statutory scheme and legislative history preclude the result reached by the Court of Appeals.  The Roundtable argued that Congress intended the PSLRA’s safe harbor and discovery stay to work in tandem to prevent strike suits, and that the Court of Appeals ignored the statutory structure in concluding that plaintiffs need discovery on the meaningfulness of cautionary statements before a court may decide whether the plaintiffs’ pleading is adequate to support their claim. 

This case is exceptionally important to public companies.  Because of the expense discovery poses in securities litigation, without the PSLRA’s procedural safeguards, defendant companies increasingly may be forced to settle with plaintiffs rather than defend themselves, even in frivolous lawsuits.  The increased threat of costly strike suits will chill companies from making forward-looking disclosures, ultimately harming investors.  Moreover, because the Seventh Circuit announced a holding contrary to decisions made by other courts of appeal and because companies can be sued in many locations, the decision will affect companies across the country, rather than just in the Seventh Circuit.

Gibson, Dunn & Crutcher’s lawyers are available to address questions regarding these issues.  For further information, please contact the attorney with whom you work or:

Jonathan C. Dickey – (650/849-5324; ),
Mark A. Perry - (202/887-3667;,
Amy L. Goodman (202-955-8653, or
Sally Berens (650-849-5348,

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