Motorola suit headed to Supreme Court
WASHINGTON -- The U.S. Supreme Court takes up a securities case involving Motorola Tuesday, one of the top business cases this term and a major lawsuit that raises questions about third-party liability in securities cases.
The business community, and Wall Street, come to the argument enjoying a string of important victories in related securities law cases.
Since 2004, the high court has handed down several unanimous or near-unanimous opinions restricting class-action securities lawsuits.
"The trend of the court's cases is that it has been very reluctant to extend private rights of action," said Gene Schaerr a Washington-based attorney with Winston & Strawn.
Last year, for example, the justices voted 8-1 for tough standards when securities suits are initially pleaded. And they voted 7-1 that federal antitrust laws can't be used to bring class-action lawsuits over securities fraud. Two other securities lawsuit appeals decided since 2004 were both unanimous in favor of business.
One reason for this resistance is securities litigation reforms Congress passed in the mid-1990s sought to limit lawsuits against public companies. The court's recent rulings on this issue reflect this trend.
The Stoneridge case is high-profile because it could, if the justices allow claims against third parties, permit investors to sue vendors and perhaps Wall Street firms, attorneys and others who advise public companies.
Indeed, a case brought by Enron Corp. investors against numerous Wall Street firms is pending at the Supreme Court, with the final outcome possibly hinging on the Stoneridge ruling.
Stoneridge Investment Partners v. Scientific-Atlanta and Motorola, 06-43, began in the wake of an accounting fraud scandal at Charter Communications Inc.
A group of investors sued Scientific-Atlanta Inc., now a unit of Cisco Systems Inc., and Motorola Inc. The companies, vendors for the cable company, allegedly participated in a cable control box sales scheme that inflated Charter's revenue by $17 million in a much larger accounting scheme. (Charter is not a party to the lawsuit.)
A U.S. trial judge dismissed the lawsuit before it ever got started, in a ruling that said Supreme Court precedent limited such suits to primary violators of federal securities laws. The 8th U.S. Circuit Court of Appeals in St. Louis in 2006 affirmed the trial court with a short opinion.
The Eighth Circuit ruling is in line with the holdings of several other appeals courts. The 9th U.S. Circuit Court of Appeals in San Francisco is an exception and has been more open to third-party liability arguments. This means that a ruling favorable to business would have an impact that is largely limited to the Ninth Circuit, which handles federal appeals in California and several western states.
"If they basically find that scheme liability theory isn't going to fly, then not much is going to change," said William Sullivan, a Los Angeles-based attorney with Paul Hastings. "If they say it does fly, that's a very major wrinkle."
How the justices rule in the Stoneridge case may turn on a 1994 ruling known as Central Bank of Denver that said federal securities laws don't allow "aiding and abetting" lawsuits against third parties. Although business won this case, the 5-4 vote outcome suggests the Stoneridge appeal might also split the high court.
Six justices still on the court who heard the Central Bank of Denver appeal split 3-3 when they voted in 1994. Assuming the views of those justices haven't changed, that leaves Chief Justice John Roberts Jr. and Justice Samuel Alito as the deciding votes in the Stoneridge appeal. Justice Stephen Breyer, who holds stock in the parent of an involved company, is recused from the case.
"The defense may well have the upper hand here, but it is certainly much too close to call," said Tom Goldstein, a Washington-based attorney with Akin Gump.
This appeal has drawn an unusual amount of politically charged interest. The Securities and Exchange Commission, which backed allowing investors to go after third parties in some instances, and the Bush Administration disagreed over what the government should say about third-party liability in a friend-of-the-court brief. U.S. Solicitor General Paul Clement, in the August court filing, sided with corporations in a brief arguing for the rejection of third-party liability. Meanwhile, former SEC commissioners and members of Congress have gotten into the fray by filing their own brief favoring scheme liability.
Most recently, Chief Justice John Roberts Jr. focused attention on the case when the court said he would participate in the ruling after earlier saying he was recused from the appeal. Roberts may have sold stock in Cisco, Scientific-Atlanta's parent, to bring the number of justices ruling in the case up to eight. Justice Breyer, who also holds Cisco stock, remains recused.
Oral arguments are on Tuesday and a decision is likely by the end of 2007 or early 2008.