Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)
OCTOBER TERM, 2004
DURA PHARMACEUTICALS, INC. V. BROUDO
SUPREME COURT OF THE UNITED STATES
DURA PHARMACEUTICALS, INC., et al. v. BROUDO et al.
certiorari to the united states court of appeals for the ninth circuit
No. 03–932.Argued January 12, 2005—Decided April 19, 2005
Respondents filed a securities fraud class action, alleging that petitioners, Dura Pharmaceuticals, Inc., and some of its managers and directors (hereinafter Dura), made, inter alia, misrepresentations about future Food and Drug Administration approval of a new asthmatic spray device, leading respondents to purchase Dura securities at an artificially inflated price. In dismissing, the District Court found that the complaint failed adequately to allege “loss causation”—i.e., a causal connection between the spray device misrepresentation and the economic loss, 15 U. S. C. §78u–4(b)(4). The Ninth Circuit reversed, finding that a plaintiff can satisfy the loss causation requirement simply by alleging that a security’s price at the time of purchase was inflated because of the misrepresentation.
1. An inflated purchase price will not by itself constitute or proximately cause the relevant economic loss needed to allege and prove “loss causation.” The basic elements of a private securities fraud action—which resembles a common-law tort action for deceit and misrepresentation—include, as relevant here, economic loss and “loss causation.” The Ninth Circuit erred in following an inflated purchase price approach to showing causation and loss. First, as a matter of pure logic, the moment the transaction takes place, the plaintiff has suffered no loss because the inflated purchase price is offset by ownership of a share that possesses equivalent value at that instant. And the logical link between the inflated purchase price and any later economic loss is not invariably strong, since other factors may affect the price. Thus, the most logic alone permits this Court to say is that the inflated purchase price suggests that misrepresentation “touches upon” a later economic loss, as the Ninth Circuit found. However, to touch upon a loss is not to cause a loss, as 15 U. S. C. §78u–4(b)(4) requires. The Ninth Circuit’s holding also is not supported by precedent. The common-law deceit and misrepresentation actions that private securities fraud actions resemble require a plaintiff to show not only that had he known the truth he would not have acted, but also that he suffered actual economic loss. Nor can the holding below be reconciled with the views of other Courts of Appeals, which have rejected the inflated purchase price approach to showing loss causation. Finally, the Ninth Circuit’s approach is inconsistent with an important securities law objective. The securities laws make clear Congress’ intent to permit private securities fraud actions only where plaintiffs adequately allege and prove the traditional elements of cause and loss, but the Ninth Circuit’s approach would allow recovery where a misrepresentation leads to an inflated purchase price, but does not proximately cause any economic loss. Pp. 3–9.
2. Respondents’ complaint was legally insufficient in respect to its allegation of “loss causation.” While Federal Rule of Civil Procedure Rule 8(a)(2) requires only a “short and plain statement of the claim showing that the pleader is entitled to relief,” and while the Court assumes that neither the Rules nor the securities statutes place any further requirement in respect to the pleading, the “short and plain statement” must give the defendant “fair notice of what the plaintiff’s claim is and the grounds upon which it rests,” Conley v. Gibson, 355 U. S. 41, 47. The complaint here contains only respondents’ allegation that their loss consisted of artificially inflated purchase prices. However, as this Court has concluded here, such a price is not itself a relevant economic loss. And the complaint nowhere else provides Dura with notice of what the relevant loss might be or of what the causal connection might be between that loss and the misrepresentation. Ordinary pleading rules are not meant to impose a great burden on a plaintiff, but it should not prove burdensome for a plaintiff suffering economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind. Allowing a plaintiff to forgo giving any indication of the economic loss and proximate cause would bring about the very sort of harm the securities statutes seek to avoid, namely the abusive practice of filing lawsuits with only a faint hope that discovery might lead to some plausible cause of action. Pp. 9–11.
339 F. 3d 933, reversed and remanded.
Breyer, J., delivered the opinion for a unanimous Court.
OPINION OF THE COURT
DURA PHARMACEUTICALS, INC. V. BROUDO
544 U. S. ____ (2005)
SUPREME COURT OF THE UNITED STATES
DURA PHARMACEUTICALS, INC., et al., PETI- TIONERS v. MICHAEL BROUDO et al. on writ of certiorari to the united states court of appeals for the ninth circuit [April 19, 2005] Justice Breyer delivered the opinion of the Court. A private plaintiff who claims securities fraud must prove that the defendant’s fraud caused an economic loss. 109 Stat. 747, 15 U. S. C. §78u–4(b)(4). We consider a Ninth Circuit holding that a plaintiff can satisfy this requirement—a requirement that courts call “loss causation”—simply by alleging in the complaint and subsequently establishing that “the price” of the security “on the date of purchase was inflated because of the misrepresentation.” 339 F. 3d 933, 938 (2003) (internal quotation marks omitted). In our view, the Ninth Circuit is wrong, both in respect to what a plaintiff must prove and in respect to what the plaintiffs’ complaint here must allege. I Respondents are individuals who bought stock in Dura Pharmaceuticals, Inc., on the public securities market between April 15, 1997, and February 24, 1998. They have brought this securities fraud class action against Dura and some of its managers and directors (hereinafter Dura) in federal court. In respect to the question before us, their detailed amended (181 paragraph) complaint makes substantially the following allegations: (1)Before and during the purchase period, Dura (or its officials) made false statements concerning both Dura’s drug profits and future Food and Drug Administration (FDA) approval of a new asthmatic spray device. See, e.g., App. 45a, 55a, 89a. (2)In respect to drug profits, Dura falsely claimed that it expected that its drug sales would prove profitable. See, e.g., id., at 66a–69a. (3)In respect to the asthmatic spray device, Dura falsely claimed that it expected the FDA would soon grant its approval. See, e.g., id., at 89a–90a, 103a–104a. (4)On the last day of the purchase period, February 24, 1998, Dura announced that its earnings would be lower than expected, principally due to slow drug sales. Id., at 51a. (5)The next day Dura’s shares lost almost half their value (falling from about $39 per share to about $21). Ibid. (6)About eight months later (in November 1998), Dura announced that the FDA would not approve Dura’s new asthmatic spray device. Id., at 110a. (7)The next day Dura’s share price temporarily fell but almost fully recovered within one week. Id., at 156a. Most importantly, the complaint says the following (and nothing significantly more than the following) about economic losses attributable to the spray device misstatement: “In reliance on the integrity of the market, [the plaintiffs] … paid artificially inflated prices for Dura securities” and the plaintiffs suffered “damage[s]” thereby. Id., at 139a (emphasis added). The District Court dismissed the complaint. In respect to the plaintiffs’ drug-profitability claim, it held that the complaint failed adequately to allege an appropriate state of mind, i.e., that defendants had acted knowingly, or the like. In respect to the plaintiffs’ spray device claim, it held that the complaint failed adequately to allege “loss causation.” The Court of Appeals for the Ninth Circuit reversed. In the portion of the court’s decision now before us—the portion that concerns the spray device claim—the Circuit held that the complaint adequately alleged “loss causation.” The Circuit wrote that “plaintiffs establish loss causation if they have shown that the price on the date of purchase was inflated because of the misrepresentation.” 339 F. 3d, at 938 (emphasis in original; internal quotation marks omitted). It added that “the injury occurs at the time of the transaction.” Ibid. Since the complaint pleaded “that the price at the time of purchase was overstated,” and it sufficiently identified the cause, its allegations were legally sufficient. Ibid. Because the Ninth Circuit’s views about loss causation differ from those of other Circuits that have considered this issue, we granted Dura’s petition for certiorari. Compare ibid. with, e.g., Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F. 3d 189, 198 (CA2 2003); Semerenko v. Cendant Corp., 223 F. 3d 165, 185 (CA3 2000); Robbins v. Koger Properties, Inc., 116 F. 3d 1441, 1447–1448 (CA11 1997); cf. Bastian v. Petren Resources Corp., 892 F. 2d 680, 685 (CA7 1990). We now reverse. II Private federal securities fraud actions are based upon federal securities statutes and their implementing regulations. Section 10(b) of the Securities Exchange Act of 1934 forbids (1) the “use or employ[ment] … of any … deceptive device,” (2) “in connection with the purchase or sale of any security,” and (3) “in contravention of” Securities and Exchange Commission “rules and regulations.” 15 U. S. C. §78j(b). Commission Rule 10b–5 forbids, among other things, the making of any “untrue statement of material fact” or the omission of any material fact “necessary in order to make the statements made … not misleading.” 17 CFR §240.10b–5 (2004). The courts have implied from these statutes and Rule a private damages action, which resembles, but is not identical to, common-law tort actions for deceit and misrepresentation. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 730, 744 (1975); Ernst & Ernst v. Hochfelder, 425 U. S. 185, 196 (1976). And Congress has imposed statutory requirements on that private action. E.g., 15 U. S. C. §78u–4(b)(4). In cases involving publicly traded securities and purchases or sales in public securities markets, the action’s basic elements include: (1)a material misrepresentation (or omission), see Basic Inc. v. Levinson, 485 U. S. 224, 231–232 (1988); (2)scienter, i.e., a wrongful state of mind, see Ernst & Ernst, supra, at 197, 199; (3)a connection with the purchase or sale of a security, see Blue Chip Stamps, supra, at 730–731; (4)reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as “transaction causation,” see Basic, supra, at 248–249 (nonconclusively presuming that the price of a publicly traded share reflects a material misrepresentation and that plaintiffs have relied upon that misrepresentation as long as they would not have bought the share in its absence); (5)economic loss, 15 U. S. C. §78u–4(b)(4); and (6)“loss causation,” i.e., a causal connection between the material misrepresentation and the loss, ibid.; cf. T. Hazen, Law of Securities Regulation, §§12.11,  (5th ed. 2002). Dura argues that the complaint’s allegations are inadequate in respect to these last two elements. A We begin with the Ninth Circuit’s basic reason for finding the complaint adequate, namely, that at the end of the day plaintiffs need only “establish,” i.e., prove, that “the price on the date of purchase was inflated because of the misrepresentation.” 339 F. 3d, at 938 (internal quotation marks omitted). In our view, this statement of the law is wrong. Normally, in cases such as this one (i.e., fraud-on-the-market cases), an inflated purchase price will not itself constitute or proximately cause the relevant economic loss.