Corporate Governance

The Tellabs Excuse: Zukko v. Digimarc (Part 2)

By J. Robert Brown

We are discussing Judge Bybee's decision in Zukko, a decision that was deliberately designed to resurrect the largely discredited standard for scienter set out in the 9th Circuit decision In re Silicon Graphics Inc. Securities Litigation, 183 F.3d 970 (9th Cir. 1999) and upend later decisions that have sought to apply more reasonable and more justifiable standards.  

Evidence of a result oriented approach? The opinion raised the possibility that Tellabs may have required "a stricter standard for evaluating the sufficiency of securities fraud complaints relying on confidential witnesses." Id. at n. 2. The case did no such thing. There is little question that Justice Ginsburg's opinion gave plaintiffs maximum latitude under that statutory language and nothing in the language or reasoning suggests an intent to cut back on a widely used practice by plaintiffs.

If anything, it makes consideration of the witnesses mandatory (the case more or less makes consideration of all inferences mandatory). Moreover, the court cites two cases: Shaw Group and Higginbotham. Shaw Group relied on Higganbotham so it doesn't add much. Higginbotham was an odd case that arose out of Judge Posner's discovery that plaintiffs relied on confidential sources in securities cases and his visceral reaction to the practice. Perhaps reflecting additional thought, he largely changed his mind in the remand in Tellabs.

The suggestion that Tellabs somehow changed (read toughened) the standards for the use of confidential witnesses is incorrect.  But those judges and panels disliking securities cases will find many things in Tellabs that are not there.  This is, therefore, the quintessential "Tellabs Excuse."

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