Detainee Decision Casts Shadow on Corp. Lawsuits

Corporate legal departments are buzzing about a recent U.S. Supreme Court ruling over federal detention policies for would-be terrorists that could inadvertently have profound consequences for corporate litigation.

Lawyers increasingly suspect—or worry, depending on which side of the lawsuit you’re on—that the Ashcroft v. Iqbal decision handed down in May could sharply raise the standard for what plaintiffs must demonstrate to pursue a case in court. Essentially, the decision says plaintiffs must offer more than “threadbare recitals of a cause of action’s elements supported by mere conclusory statements” for a judge to allow their case to proceed.

Such threadbare recitals, however, are the coin of the realm in lawsuits against corporations. Both Congress and the Supreme Court have repeatedly tried to raise the pleading standards for plaintiffs to keep frivolous lawsuits off the docket, and most recently in 2007 the Supreme Court ruled in Bell Atlantic v. Twombly that plaintiffs in anti-trust disputes had to have concrete facts when they file a complaint. The Iqbal decision could now apply that standard to all federal lawsuits: shareholder litigation, whistleblower complaints, discrimination claims, and more.

Isquith

“It is in my view a dreadful decision,” says Fred Isquith of the law firm Wolf Haldenstein Adler Freeman & Herz. By the court’s own admission, he says, the intent of the ruling is to make it significantly more difficult to have a case heard in federal court. “When the courts close their doors to people, they are abandoning their historic function.”

Historically, a federal judge had to determine “beyond doubt” that a plaintiff had no case to dismiss it. The Iqbal decision has turned the tables by establishing that if a plaintiff does not have concrete facts to initiate a lawsuit, “it potentially provides an opportunity to have more cases dismissed before discovery,” says Miriam Nemetz of law firm Mayer Brown.

The problem, according to Isquith, is that such details often aren’t available absent some sort of discovery. That would put plaintiffs at the mercy of the court.

Nemetz

Iqbal does direct lower courts to use “common sense judicial experience” in deciding whether a case has enough merit to go forward, Nemetz adds. “Courts are going to have to decide what needs to be pleaded, and I think that’s going to vary greatly from case to case,” she says.

“It is in my view a dreadful decision. When the courts close their doors to people, they are abandoning their historic function.”

— Fred Isquith,

Partner,

Wolf Haldenstein Adler Freeman & Herz

Isquith argues that judges already know enough to throw out frivolous cases, and shouldn’t be determining whether to hear disputes based on whether a complaint might be too big of a burden for courts or judges. “It may be that down the road, the plaintiff doesn’t have a claim. It may be that the defense has a good claim,” he says. But the merits of a case should be decided as it progresses and not before that, he says.

Iqbal Citings

The original complaint came from Javaid Iqbal, a Pakistani Muslim arrested on fraud charges in November 2001. Iqbal sued former Attorney General John Ashcroft and former FBI Director Robert Mueller, claiming they instigated his harsh treatments because of his Muslim faith. Lower courts dismissed his case, Iqbal appealed, and finally the Supreme Court ruled against him on May 18.

Lower courts have cited Iqbal more than 500 times; Nemetz says that’s not surprising, since the decision “so nicely articulates” the pleading standards established under Rule 8 of the Federal Rules of Civil Procedure.

Pincus

The case is “clearly going to be cited a lot,” because motions to dismiss are pleaded every day, says Andy Pincus of law firm Mayer Brown. “The question is going to be what impact it has on decisions.”

Iqbal is making waves in courts across the country. On July 24, a federal district court in Chicago dismissed a class action where the plaintiffs alleged that Playtex marketed its baby-bottle coolers as being safe, despite knowing the coolers contained excess amounts of lead. Citing Iqbal and Twombly, the court (in Ramos v. Playtex Products) said the plaintiffs failed to meet pleading standards due to the absence of numerous specific details, including as to ”when, where, or from whom they purchased the coolers.” In addition, the court said the plaintiffs “failed to furnish any information on the presence of lead in the products, such as what part of the cooler contained lead and whether the lead was exposed or easily accessible.”

IQBAL COURT ORDER

The following excerpt from Ashcroft v. Iqbal details the Second Court’s decision:

Respondent offers three arguments that bear on our

disposition of his case, but none is persuasive.

Respondent first says that our decision in Twombly should be limited to pleadings made in the context of an antitrust dispute. This argument is

not supported by Twombly and is incompatible with the Federal Rules of Civil Procedure. Though Twombly determined the sufficiency of a complaint sounding in anti­trust, the decision was based on our interpretation and

application of Rule 8. That Rule in turn governs the pleading standard “in all civil actions and proceedings in the United States district courts.” Our decision in Twombly expounded the pleading standard for “all civil actions,” ibid., and it applies to antitrust and discrimination suits alike.

Respondent next implies that our construction of Rule 8 should be tempered where, as here, the Court of Appeals has “instructed the district court to cabin discovery in such a way as to preserve” petitioners’ defense of qualified

immunity “as much as possible in anticipation of a summary judgment motion.” We have held, however, that the question presented by a motion to dismiss a complaint for insufficient pleadings does not turn on the controls placed upon the discovery process …

… We decline respondent’s invitation to relax the pleading requirements on the ground that the Court of Appeals promises petitioners minimally intrusive discovery. That promise provides especially cold comfort in this pleading context, where we are impelled to give real content to the concept of qualified immunity for high-level officials who must be neither deterred nor detracted from the vigorous performance of their duties. Because respondent’s complaint is deficient under Rule 8, he is not entitled to discovery, cabined or otherwise.

Respondent finally maintains that the Federal Rules expressly allow him to allege petitioners’ discriminatory intent “generally,” which he equates with a conclusory allegation. It follows, respondent says, that his complaint is sufficiently well pleaded because it claims that petitioners discriminated against him “on account of [his] religion, race, and/or national origin and for no legitimate penological interest.” Were we required to accept this allegation as true, respondent’s complaint would survive petitioners’ motion to dismiss. But the Federal Rules do not require courts to credit a complaint’s conclusory statements without reference to its factual context.

It is true that Rule 9(b) requires particularity when pleading “fraud or mistake,” while allowing “[m]alice, intent, knowledge, and other conditions of a person’s mind[to] be alleged generally.” But “generally” is a relative

term. In the context of Rule 9, it is to be compared to the particularity requirement applicable to fraud or mistake. Rule 9 merely excuses a party from pleading discriminatory intent under an elevated pleading standard. It does not give him license to evade the less rigid—though still operative—strictures of Rule 8.

We hold that respondent’s complaint fails to plead sufficient facts to state a claim for purposeful and unlawful discrimination against petitioners. The Court of Appeals should decide in the first instance whether to remand to

the District Court so that respondent can seek leave to amend his deficient complaint.

The judgment of the Court of Appeals is reversed, and

the case is remanded for further proceedings consistent

with this opinion.

Source

Second Court Decision in Ashcroft v. Iqbal (May 18, 2009).

In another case decided one day earlier, a federal judge in Ohio tossed a manufacturing and design defect claim in Frey v. Novartis Pharmaceuticals. In that case, plaintiff Amanda Frey sued Novartis when she developed organ failure after taking the epilepsy drug Trileptal. In the opinion, the court noted that the case “failed to allege any facts that would permit the court to conclude that a manufacturing defect occurred,” or that the defect caused Frey’s injuries.

Also in a decision made public on July 20, a district court in Florida dismissed a false marketing suit brought by the Pennsylvania Employees Benefit Trust Fund against AstraZeneca Pharmaceuticals. The fund alleged that it spent millions of dollars in unwarranted reimbursements because AstraZeneca promoted its antipsychotic drug Seroquel for unapproved uses. Once again, the court cited Iqbal, clarifying that “naked assertions” without “further factual enhancement” are not sufficient to withstand a motion to dismiss.

Despite those three decisions, so few cases have been decided that measuring the Iqbal effect on litigation generally is still difficult, Pincus says. Several claims where motions to dismiss have been denied have also cited Iqbal, he adds.

But if the outcome turns out to be anything like Twombly—where courts have upheld thousands of cases and dismissed claims based on tougher pleading standards­—the Iqbal decision is “by and large not a good thing,” says Isquith, whose firm is representing the plaintiffs in the Playtex class-action case.

Congress Weighs In

The debate over Iqbal has even reached Congress. In remarks prepared for the Senate floor on July 22, Sen. Arlen Specter (D-Penn.) said: “The effect of the court’s actions will no doubt be to deny many plaintiffs with meritorious claims access to the federal courts and, with it, any legal redress for their injuries.”

Specter

Specter has introduced the “Notice Pleading Restoration Act of 2009,” which would overturn the Iqbal standard in favor of an older one spelled out by the Supreme Court’s 1957 decision Conley v. Gibson. In that case the court found that “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” (Specter is also currently pushing legislation to expand legal liability in shareholder lawsuits to so-called “secondary actors,” such as investment banks, that might help companies perpetrate fraud indirectly.)

Nemetz describes Specter’s pleading legislation, however, as “very poorly crafted.” While the intent of the bill is to “make it easier for plaintiffs to get into court under the concern of what Twombly and Iqbal would do … it’s very ill considered at this point because who knows what that standard would be, which they’re trying to legislate,” she says.