Class Actions Endangered? Hardly.

There was something for everyone in the U.S. Supreme Court's 8-1 decision in Tellabs Inc. v. Makor Issues & Rights Ltd., the big shareholders' class action ruling handed down Thursday.

While the decision, written by Justice Ruth Bader Ginsburg, certainly dealt a setback to shareholder class actions, but did not go nearly as far as it could have.

Some lawyers, including the author of the statute at issue in the case, say the ruling could have been much more in favor of big companies at the expense of shareholders.

Many say the ruling is unlikely to diminish the number of such cases filed, merely shift the focus of their arguments to the meaning of some waffling language in the opinion.

The decision was based on the Private Securities Lawsuit Reform Act of 1995, a law aimed at curbing perceived abuses by the class action bar. Congress, then newly in the hands of Republicans, enacted the law over the veto of then President Bill Clinton.

Supporters of the law said changes were necessary because plaintiffs lawyers were running to the courthouse every time a stock dropped, often with a cut-and-pasted complaint alleging securities fraud, and didn't worry about building a real case until later.

The law created tough new standards for the complaint filed at the beginning of these lawsuits, demanding that plaintiffs clearly and specifically list the misstatements plied to the investing public.

Absent a sufficiently detailed list, the case risked being dismissed almost as soon as it was filed, preventing plaintiffs from fishing through companies' records for hard evidence to make or expand their case. Complying with this so-called discovery process can cost companies upwards of $5 million.

Then there is the waffling language problem. The law also requires the complaint to be compelling in another way, one "giving rise to a strong inference" that the defendants acted with the required intent -- that is, that they clearly knew they were cheating shareholders.

The Tellabs case took up the question of what constitutes a "strong inference" on the amorphous subject of intent -- an issue that federal appeals courts have been grappling with since the law passed more than a decade ago.

Earlier, the 7th Circuit Court of Appeals based in Chicago had refused to dismiss the Tellabs case, finding it could not do so if a "reasonable person" could infer that the defense had acted with intent -- without regard to inferences that would naturally compete with those laid out in the complaint.

Justice Ginsburg's opinion rejects that notion. First, it cites the definition of "strong" as found in the American Heritage Dictionary; namely "powerful or cogent." After that warm-up, the opinion draws this stunning insight: "The strength of an inference can not be decided in a vacuum. It is inherently comparative...."

It then concludes that a judge must consider the "nonculpable" -- that is, innocent -- explanations for the defendants' conduct as well as the culpable ones favoring the plaintiff's case.

"It was the easiest decision possible," says Bruce Vanyo, a partner with the Los Angeles office of Katten Muchin Rosenman, who worked on drafts of the 1995 law while a partner at Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif. "What the majority is saying is, 'It's basically a no-brainer.' I don't even understand why there's a debate about that."

In fact, says Vanyo, "you could argue that it should be stronger; you could make a case for that."

In two concurring opinions, Justice Antonin Scalia and Justice Samuel Alito did push for a tougher standard for plaintiffs. They would have judges dismiss shareholder class actions unless they found that the case outlined in a complaint was "more plausible" than a hypothetical case of the executives' innocence.

With that much tougher standard in mind, Stuart Grant of Grant & Eisenhofer in Wilmington, Delaware, said the court's decision "could have been much worse" for plaintiffs.

"The middle prevailed," added Grant, whose firm specializes in representing pension funds and other institutional investors in these class action cases. "It don't think, as a practical matter, the decision is going to change a lot of things. In the end, judges are going to use their discretion."

He said he was also pleased that Justice Ginsburg threw the plaintiffs by "a bone," pointing out that the lack of profit by the chief executive in this case did not necessarily mean lack of motive on his part to defraud.

Meanwhile, Professor Joseph A, Grundfest of Stanford Law School, who consults regularly with defendants in shareholder class actions, said he believes plaintiffs and defense lawyers will begin sparring over competing sentences in the Ginsburg majority opinion:

On page 12, it states that the evidence in favor of the plaintiff "need not" be of the "'smoking gun' genre" or even the "most plausible" of competing inferences -- bits that will be seized by the plaintiffs. Later in the page, the decision says the complaint will survive only if the evidence of guilt is "at least as compelling" as the inferences of innocence -- good words for the defense.

"My concern is that the Tellabs case doesn't resolve the matter so much as it changes the language that will be used in the debate," Grundfest says. "It is just going to lead to another round of litigation."

And so it goes...

by Karen Donovan