|DURA PHARMACEUTICALS, INC. V. BROUDO (03-932) 544 U.S. 336 (2005)
339 F.3d 933, reversed and remanded.
[ Breyer ]
DURA PHARMACEUTICALS, INC., et al.,
TIONERS v. MICHAEL BROUDO et al.
ON WRIT OF CERTIORARI TO THE UNITED STATES
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 defendants fraud caused an economic loss. 109 Stat. 747, 15 U.S.C. § 78u4(b)(4). We consider a Ninth Circuit holding that a plaintiff can satisfy this requirementa requirement that courts call loss causationsimply 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.
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:
soon grant its approval. See, e.g., id., at 89a90a, 103a104a.
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 courts decision now before usthe portion that concerns the spray device claimthe 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 Circuits views about loss causation differ from those of other Circuits that have considered this issue, we granted Duras 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, 14471448 (CA11 1997); cf. Bastian v. Petren Resources Corp., 892 F.2d 680, 685 (CA7 1990). We now reverse.
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 10b5 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 § 240.10b5 (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. § 78u4(b)(4).
In cases involving publicly traded securities and purchases or sales in public securities markets, the actions basic elements include:
Dura argues that the complaints allegations are inadequate in respect to these last two elements.
We begin with the Ninth Circuits 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.
Given the tangle of factors affecting price, the most logic alone permits us to say is that the higher purchase price will sometimes play a role in bringing about a future loss. It may prove to be a necessary condition of any such loss, and in that sense one might say that the inflated purchase price suggests that the misrepresentation (using language the Ninth Circuit used) touches upon a later economic loss. Ibid. But, even if that is so, it is insufficient. To touch upon a loss is not to cause a loss, and it is the latter that the law requires. 15 U.S.C. § 78u4(b)(4).
For another thing, the Ninth Circuits holding lacks support in precedent. Judicially implied private securities-fraud actions resemble in many (but not all) respects common-law deceit and misrepresentation actions. See Blue Chip Stamps, supra, at 744; see also L. Loss & J. Seligman, Fundamentals of Securities Regulation, 910918 (5th ed. 2004) (describing relationship to common-law deceit). The common law of deceit subjects a person who fraudulently makes a misrepresentation to liability for pecuniary loss caused to one who justifiably relies upon that misrepresentation. Restatement (Second) of Torts §525, p. 55 (1977) (hereinafter Restatement of Torts); see also Southern Development Co. v. Silva, 125 U.S. 247, 250 (1888) (setting forth elements of fraudulent misrepresentation). And the common law has long insisted that a plaintiff in such a case show not only that had he known the truth he would not have acted but also that he suffered actual economic loss. See, e.g., Pasley v. Freeman, 3 T. R. 5:1, 100 Eng. Rep. 450, 457 (1789) (if no injury is occasioned by the lie, it is not actionable: but if it be attended with a damage, it then becomes the subject of an action); Freeman v. Venner, 120 Mass. 424, 426 (1876) (a mortgagee cannot bring a tort action for damages stemming from a fraudulent note that a misrepresentation led him to execute unless and until the note has to be paid); see also M. Bigelow, Law of Torts 101 (8th ed. 1907) (damage must already have been suffered before the bringing of the suit); 2 T. Cooley, Law of Torts §348, p. 551 (4th ed. 1932) (plaintiff must show that he suffered damage and that the damage followed proximately the deception); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and Keeton on Law of Torts §110, p. 765 (5th ed. 1984) (hereinafter Prosser and Keeton) (plaintiff must have suffered substantial damage, not simply nominal damages, before the cause of action can arise).
Given the common-law roots of the securities fraud action (and the common-law requirement that a plaintiff show actual damages), it is not surprising that other courts of appeals have rejected the Ninth Circuits inflated purchase price approach to proving causation and loss. See, e.g., Emergent Capital, 343 F.3d, at 198 (inflation of purchase price alone cannot satisfy loss causation); Semerenko, 223 F.3d, at 185 (same); Robbins, 116 F.3d, at 1448 (same); cf. Bastian, 892 F.2d, at 685. Indeed, the Restatement of Torts, in setting forth the judicial consensus, says that a person who misrepresents the financial condition of a corporation in order to sell its stock becomes liable to a relying purchaser for the loss the purchaser sustains when the facts become generally known and as a result share value depreciate[s]. §548A, Comment b, at 107. Treatise writers, too, have emphasized the need to prove proximate causation. Prosser and Keeton §110, at 767 (losses do not afford any basis for recovery if brought about by business conditions or other factors).
We cannot reconcile the Ninth Circuits inflated purchase price approach with these views of other courts. And the uniqueness of its perspective argues against the validity of its approach in a case like this one where we consider the contours of a judicially implied cause of action with roots in the common law.
Finally, the Ninth Circuits approach overlooks an important securities law objective. The securities statutes seek to maintain public confidence in the marketplace. See United States v. OHagan, 521 U.S. 642, 658 (1997). They do so by deterring fraud, in part, through the availability of private securities fraud actions. Randall v. Loftsgaarden, 478 U.S. 647, 664 (1986). But the statutes make these latter actions available, not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause. Cf. Basic, 485 U.S., at 252 (White, J., joined by OConnor, J., concurring in part and dissenting in part) ([A]llowing recovery in the face of affirmative evidence of nonreliancewould effectively convert Rule 10b5 into a scheme of investors insurance. There is no support in the Securities Exchange Act, the Rule, or our cases for such a result (internal quotation marks and citations omitted)).
The statutory provision at issue here
and the paragraphs that precede it emphasize this last
mentioned objective. Private Securities Litigation Reform Act
of 1995, 109 Stat. 737. The statute insists that securities
fraud complaints specify each misleading statement;
that they set forth the facts on which [a] belief
that a statement is misleading was formed; and that
they state with particularity facts giving rise to a
strong inference that the defendant acted with the required
state of mind. 15 U.S.C. §
78u4(b)(1), (2). And the statute expressly imposes
on plaintiffs the burden
of proving that the defendants misrepresentations caused the loss for which the plaintiff seeks to recover. §78u4(b)(4).
The statute thereby makes clear Congress intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss. By way of contrast, the Ninth Circuits approach would allow recovery where a misrepresentation leads to an inflated purchase price but nonetheless does not proximately cause any economic loss. That is to say, it would permit recovery where these two traditional elements in fact are missing.
In sum, we find the Ninth Circuits approach inconsistent with the laws requirement that a plaintiff prove that the defendants misrepresentation (or other fraudulent conduct) proximately caused the plaintiffs economic loss. We need not, and do not, consider other proximate cause or loss-related questions.
Our holding about plaintiffs need to prove proximate causation and economic loss leads us also to conclude that the plaintiffs complaint here failed adequately to allege these requirements. We concede that the Federal Rules of Civil Procedure require only a short and plain statement of the claim showing that the pleader is entitled to relief. Fed. Rule Civ. Proc. 8(a)(2). And we assume, at least for arguments sake, that neither the Rules nor the securities statutes impose any special further requirement in respect to the pleading of proximate causation or economic loss. But, even so, the short and plain statement must provide the defendant with fair notice of what the plaintiffs claim is and the grounds upon which it rests. Conley v. Gibson, 355 U.S. 41, 47 (1957). The complaint before us fails this simple test.
As we have pointed out, the plaintiffs lengthy complaint contains only one statement that we can fairly read as describing the loss caused by the defendants spray device misrepresentations. That statement says that the plaintiffs paid artificially inflated prices for Duras securities and suffered damage[s]. App. 139a. The statement implies that the plaintiffs loss consisted of the artificially inflated purchase prices. The complaints failure to claim that Duras share price fell significantly after the truth became known suggests that the plaintiffs considered the allegation of purchase price inflation alone sufficient. The complaint contains nothing that suggests otherwise.
For reasons set forth in Part IIA, supra, however, the artificially inflated purchase price is not itself a relevant economic loss. And the complaint nowhere else provides the defendants with notice of what the relevant economic loss might be or of what the causal connection might be between that loss and the misrepresentation concerning Duras spray device.
We concede that ordinary pleading rules are not meant to impose a great burden upon a plaintiff. Swierkiewicz v. Sorema N. A., 534 U.S. 506, 513515 (2002). But it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind. At the same time, allowing a plaintiff to forgo giving any indication of the economic loss and proximate cause that the plaintiff has in mind would bring about harm of the very sort the statutes seek to avoid. Cf. H. R. Conf. Rep. No. 104369, p. 31 (1995) (criticizing abusive practices including the routine filing of lawsuits with only a faint hope that the discovery process might lead eventually to some plausible cause of action). It would permit a plaintiff with a largely groundless claim to simply take up the time of a number of other people, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the [discovery] process will reveal relevant evidence. Blue Chip Stamps, 421 U.S., at 741. Such a rule would tend to transform a private securities action into a partial downside insurance policy. See H. R. Conf. Rep. No. 104369, at 31; see also Basic, 485 U.S., at 252 (White, J., joined by OConnor, J., concurring in part and dissenting in part).
For these reasons, we find the plaintiffs complaint legally insufficient. We reverse the judgment of the Ninth Circuit, and we remand the case for further proceedings consistent with this opinion.
It is so ordered.