Tellabs Lawsuit Hits End Of The Road - Supreme Court Raises "Scienter" Pleading Standard
The long wait is over. The Supreme Court's decision in Tellabs, Inc. v. Makor issues & Rights, Ltd. ends the split among the circuit courts of appeal by defining the "strong inference" scienter element that securities fraud claims must meet in order to survive a motion to dismiss. Vacating the Seventh Circuit's decision, the Supreme Court held that to qualify as "strong within the intendment of § 21D(b)(2) ... an inference of scienter must be more than merely plausible or reasonable - it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Boiled down, this means that courts "must not only consider inferences urged by the plaintiff, as the Seventh Circuit did, but also competing inferences rationally drawn from the facts alleged." To assist the district courts, the Supreme Court laid out a tripartite test for use when deciding the "strong inference" element of a securities fraud claim on a motion to dismiss. Courts must 1) accept all factual allegations in the complaint in the complaint as true, 2) consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on 12(b)6 motions to dismiss, and 3) take into account plausible opposing inferences as well as inferences to be drawn in support of the allegations.
Chalk this up as a victory for the Defense Bar. The stakes for securities fraud plaintiffs to get into federal court have just been raised. Now, only time will tell whether a split among the circuits will arise as to what the Supreme Court meant by requiring that an inference of scienter be "cogent."
