Corporate Governance

The Tellabs Excuse: Zucco v. Digimarc (Part 1)

By J. Robert Brown

We have been following the lower court implementation of Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), a case that interpreted language in the PSLRA that required plaintiffs to produce evidence establishing a "strong inference" of scienter.  Zucco v. Digimarc out of the 9th Circuit is the latest entry into the field. 

The case involved yet another decision from that circuit on the issue of scienter and represented a deliberate attempt to reduce the significance of cases that been using Tellabs to bring the law back in line with the other circuits.  The standard for determining scienter was set out in the Circuit in Silicon Graphics, an early case that came close to concluding that scienter required evidence of intentional rather than just reckless behavior.  No other circuit has agreed with the reasoning and the case has been sharply criticized.  In  South Ferry, a post-Tellabs 9th Circuit case, the panel largely did away with the reasoning in Silicon Graphics. 

Zucco is a deliberate attempt to reinvigorate Silicon Graphics.  The panel first reiterated the standard in Silicon Graphics.  It then looked to the impact of Tellabs, concluding that the only change was the need to undertake a "holistic" review of the facts alleging scienter.

• Although we have developed a set of rules to analyze different types of scienter allegations, we recognize that Tellabs calls into question a methodology that relies exclusively on a segmented analysis of scienter. We read Tellabs to mean that our prior, segmented approach is not sufficient to dismiss an allegation of scienter.

Despite the acknowledgment of the impact of Tellabs, the "holistic" review was perfunctory.  It consisted of one paragraph, while the individual review of the evidence took up 26 pages. 

It is hard to say whether the decision on the merits is right or wrong (one suspects another panel would come out the other way) but it suggests an approach by some judges in the 9th Circuit to use Tellabs to make it exceedingly tough to maintain securities class action lawsuits.

Full post as published by The Race to the Bottom on January 19, 2009 (boomark / email).