High court gives clarity to litigation venues: in a key decision issued earlier this year, the Supreme Court has restricted the ability of plaintiffs' attorneys to shop for accommodating state venues for class action suits. Most must now be pursued in more predictable federal courts.

• Author: Smith, Jeffrey Q.
• Position: Managing litigation

Nothing about the law frustrates financial executives more than its unpredictability. To cite just one example, some states are notoriously plaintiff-friendly, meaning that, given identical facts, a corporation's legal exposure in one state can exceed its legal exposure in another state; too often, the outcome just depends on where the plaintiffs' lawyer files the lawsuit.

A recent Supreme Court decision, however, will bring predictability to one legal issue that weighs heavily on financial executives. In Merrill Lynch v. Dabit, the high court ruled that plaintiffs' lawyers no longer may bring securities class action lawsuits in state courts where the securities at issue are listed nationally and traded on a national exchange. Instead, they must pursue their cases in federal courts, as Congress intended and where the law generally is applied more predictably and less parochially.

Some Background

The Dabit decision caps a long-fought legal and legislative battle to rein in securities class action lawsuits. As recently as the mid-1990s, virtually nothing prevented plaintiffs lawyers from churning out these lawsuits every time bad news was reported about a corporation or every time a company released a negative earnings report. It didn't matter that the lawsuits had no merit. Corporations tended to settle quickly, rather than risk costly jury verdicts and expose executives to time-consuming document discovery and depositions (interviews given under oath).

In a first attempt to shut down the securities class action mill, Congress enacted the Private Securities Litigation Reform Act of 1995 ("PSLRA"). That law made it difficult to file securities lawsuits at the drop of a hat because it required plaintiffs' lawyers to make very detailed factual allegations about the supposed fraud. The law also stopped document discovery and depositions until a court determined if the allegations were sufficiently detailed and otherwise legally sufficient. In this way, Congress intended to eliminate frivolous securities class action lawsuits.

But the PSLRA had an unintended effect: It made state courts a more attractive place to file securities lawsuits because state courts did not require detailed fact allegations and did not stop document discovery and depositions. Accordingly, plaintiffs' lawyers began suing in state courts.

While plaintiffs' lawyers couldn't accuse corporations of violating federal securities laws (those claims may be made in federal courts...