Federal securities fraud litigation as a lawmaking partnership.

Author:Fisch, Jill E.
Position:New Directions for Corporate and Securities Litigation


In its most recent Halliburton II decision, the Supreme Court rejected an effort to overrule its prior decision in Basic Inc. v. Levinson. The Court reasoned that adherence to Basic was warranted by principles of stare decisis that operate with "special force" in the context of statutory interpretation. This Article offers an alternative justification for adhering to Basic--the collaboration between the Court and Congress that has led to the development of the private class action for federal securities fraud. The Article characterizes this collaboration as a lawmaking partnership and argues that such a partnership offers distinctive lawmaking advantages.

Halliburton II offered a compelling illustration of the lawmaking partnership, as Congress and the Court together used the Basic decision as a building block to enable and then refine private securities fraud class actions. Notably, Congress took affirmative steps through legislation--the Private Securities Litigation Reform Act and the Securities Litigation Uniform Standards Act--to balance the competing policy objectives of allowing effective enforcement while limiting the potential for abusive litigation. The process illustrates the three critical components of a lawmaking partnership: an open-textured statute, sequential adjustments to the statutory scheme by both the Court and Congress, and a set of common objectives to guide the lawmaking enterprise.

This Article argues that the existence of a lawmaking partnership offers the Court the freedom to engage in explicit policy analysis of a type that is inconsistent with a traditional textualist approach. Put differently, the partnership operates as a type of rule of construction allowing the Court to engage in its own analysis of the interpretation that will best further congressional objectives.

The lawmaking partnership also offers distinctive lawmaking advantages, including efficiency, political insulation, and comparative institutional competence. An exploration of these advantages can be used to identify the potential value of the lawmaking partnership beyond-federal securities fraud.


    The lawmaking power is generally understood to reside primarily in the legislative branch. (1) In the case of federal law, that branch is Congress. (2) Yet it is well documented that Congress does not exercise exclusive federal lawmaking power. (3) The federal courts play an important lawmaking role by interpreting federal statutes and creating interstitial law. (4) Similarly, the growth of the administrative state has placed primary lawmaking authority for many substantive areas into the hands of unelected officials at administrative and independent agencies. (5)

    Coordinating and balancing the exercise of lawmaking power among these three actors raises difficult questions. These questions include the extent of Congress's power to delegate lawmaking authority, (6) the weight to be given to interpretative material beyond the statutory text, (7) and the legal significance of Congress's failure to take action in response to a judicial or agency interpretation. (8) At the constitutional level, the debate raises important separation-of-powers concerns. (9) Separate from the constitutional questions, however, are broader policy questions about comparative institutional competence and the extent to which choices among lawmakers should reflect considerations of efficiency, expertise, and political accountability. (10)

    This Article does not attempt to resolve broad questions about the legitimacy or desirability of congressional delegations of the lawmaking function. Instead, this Article uses the Supreme Court's recent decision in Halliburton Co. v. Erica P. John Fund, Inc. ("Halliburton II") II to identify a new lawmaking model. This Article argues that Congress and the Supreme Court have developed the scope of federal securities fraud litigation through a collaborative process, a process that this Article terms a lawmaking partnership. (12)

    The partnership should operate as a rule of construction. (13) Where the Court finds evidence of this type of collaborative process, (14) the lawmaking partnership should authorize the Court to use policy analysis in its interpretation of the authorizing statute to determine how best to further Congress's lawmaking objectives. In Halliburton II, this canon of construction provides independent support for adhering to the Basic decision. (15)

    The Article argues that not only is a lawmaking partnership an accurate description of the process used by the Court and Congress to develop the legal contours of private securities fraud litigation, but also that, in appropriate cases, it is a normatively desirable method of making securities law. In particular, the lawmaking partnership offers distinctive advantages over alternatives such as a narrow adherence to statutory text coupled with detailed statutory guidance, on the one hand, or a broad delegation to judicial or agency lawmaking, on the other.

    In Halliburton II, the Court considered the continued viability of a judicially-created doctrine--fraud on the market ("FOTM"). (16) The Court had previously created FOTM in Basic Inc. v. Levinson (17) as a tool to enable plaintiffs in impersonal public capital-markets transactions to address the reliance requirement in federal securities fraud class actions. (18)

    By enabling the class action, FOTM dramatically changed the nature of private securities fraud litigation and generated large-scale cases involving substantial potential damages. (19) In turn, these developments led to complaints about the resulting scope of litigation and the potential for litigation abuse. (20) Some commentators demanded that the Court reconsider its earlier decision. (21) Commentators also raised their concerns in Congress. (22)

    Although the Court did not revisit the validity of FOTM prior to Halliburton II, it responded to claims of abusive litigation by imposing various limitations on the private right of action. (23) Similarly, although Congress did not speak directly to the validity of FOTM, it responded by enacting statutory reforms, first in the Private Securities Litigation Reform Act of 1995 ("PSLRA") (24) 25 and then in the Securities Litigation Uniform Standards Act ("SLUSA"). (25 ) Both the Court's decisions and Congress's refinements to the statutory framework reflected a common goal of reducing the prospective of costly and frivolous litigation while maintaining the viability of private litigation as a means of enforcing the disclosure obligations of the federal securities laws.

    The Court in Halliburton II did not discuss this cooperative enterprise in its opinion; instead, it based its decision on principles of stare decisis. (26) Nonetheless, this Article argues that evidence of a lawmaking partnership supplies an independent justification for the Court's decision. More significantly, the Article argues that the virtues of the lawmaking partnership extend beyond the issue of FOTM and should be considered by the Court in evaluating the scope of its lawmaking power with respect to federal securities fraud. Specifically, the lawmaking partnership should give rise to a canon of construction by which the Court determines how best to further congressional objectives, rather than limiting its inquiry to the contours of the statutory text.

    The Article proceeds as follows. In Part II, the Article briefly recounts the traditional story positioning the federal lawmaking function in Congress and the debate over the relationship between that story and congressional delegations of lawmaking power to the courts and federal agencies. Part III describes the Supreme Court's decision in Halliburton II. Part IV conceptualizes the lawmaking partnership and identifies its structural advantages with respect to the development of federal securities law. Finally, Part V extends the analysis beyond FOTM and, using the example of insider trading regulation, explains the potential value of the lawmaking partnership in enabling Congress, the courts, and the Securities & Exchange Commission ("SEC") to collaborate on the development of federal securities law.


    The starting point for understanding the federal lawmaking power is Article I of the US Constitution, which provides that "[a]ll legislative Powers herein granted shall be vested in a Congress of the United States." (27) While this Constitutional text would appear to vest exclusive lawmaking power in Congress, the lawmaking function of the federal courts and government agencies is widely accepted. As Thomas Merrill explains: "the notion that Congress is the exclusive federal lawmaking body is an oversimplification of constitutional reality." (28)

    Federal lawmaking occurs outside of Congress in two distinct fora. First, Congress delegates extensive lawmaking power to executive and independent agencies. Beginning at the end of the nineteenth century with the rise of the administrative state, federal agencies have exercised an increasing percentage of the federal lawmaking power. (29) This development raised questions about the extent to which Congress could delegate lawmaking authority to agencies, questions that are addressed by the nondelegation doctrine. (30) Broadly speaking, the nondelegation doctrine accepts the premise that Congress may permissibly delegate some degree of lawmaking power to agencies, but also that the Constitution imposes limits on the scope of that delegation, providing that a delegation may exceed constitutional limits if Congress does not retain for itself the role of making the critical policy choices that underlie legislation. (31)

    Courts also make federal law. At a minimum, the process of interpreting federal statutes requires courts to engage in interstitial lawmaking--addressing questions that the statute does not answer. In some substantive areas, however, Congress has...

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