Arecent flurry of class action lawsuit dismissals might lead you to believe that federal judges have become fed up with seemingly frivolous lawsuits. But the overall trend for dismissals is still down, and the "types" of the latest dismissals provide that the plaintiffs can—and likely will—refile their cases.

In the past few weeks alone, at least five lawsuits were dismissed.

For example, the Superior Court of Hamilton County, Indiana, dismissed with prejudice all of the claims against 13 current and former directors and executive officers of ITT Educational Services and its accounting firm. The plaintiffs now have until October 17 to file an appeal.

In a separate suit, the United States District Court for the Southern District of Indiana dismissed without prejudice all of the claims against all of the defendants in the consolidated securities class action lawsuit filed against ITT and 10 of its current and former directors and executive officers. These plaintiffs have until October 14 to file an amended complaint. Otherwise, the court will dismiss the case with prejudice.

“The plaintiff has failed to state a claim of securities fraud” under Section 10(b) of the Securities Exchange Act and Rule 10b-5 of the SEC, the judge concluded. He also said the plaintiffs allegations “do not meet the heightened pleading requirements” of Rule 9(b) or the Private Securities Litigation Reform Act (PSLRA) of 1995.

Teen retailer The Wet Seal announced Sept. 15 that Judge Gary Feess of the United States District Court for the Central District of California dismissed a class action against the company and several of its former directors and officers, because—among other reasons—many of the misstatements alleged in the complaint were forward-looking statements protected by the PSLRA’s Safe Harbor, and that the plaintiffs had not adequately alleged any actionable misstatements under the Act. The plaintiffs have until Nov. 10 to file an amended complaint.

On Sept. 14, the federal district court for the Northern District of California granted Synopsys’ motion to dismiss a class action complaint against the company and certain officers; the complaint alleged that they caused the maker of semiconductor design software to issue false and misleading statements about its business, forecasts and financial performance, and that certain officers or employees sold portions of their stock while in the possession of material, adverse non-public information.

The Court denied the company’s motion for sanctions, and gave the plaintiff 30 days to amend their complaint. The parties subsequently agreed to a dismissal with prejudice, with each side agreeing to be responsible for their own fees and costs.

A spokesperson for Synopsys said, “We felt the case had no substance. The original complaint was built on alleged statements by three former Synopsys employees. Plaintiff attorneys interviewed them. The employees later confirmed by declaration that the statements were not true.”

On Sept. 6, Lexar Media, a maker of flash memory cards, also announced that federal and state securities litigation has been dismissed. The United States District Court for the Northern District of California dismissed a class action suit alleging that executives misrepresented Lexar's business. The company said the action was dismissed without prejudice and the plaintiffs would not file an amended complaint. U.S. District Judge Samuel Conti concluded that the plaintiffs’ underlying allegations “of misleading statements are lacking.”

In addition, the Superior Court of the State of California, Alameda County, dismissed two derivative lawsuits with allegations substantially similar to those in the federal class actions “without leave to amend” and the plaintiffs have decided not to pursue an appeal, the company said. "We are extremely pleased with these results," said Eric Whitaker, executive vice president and general counsel for Lexar, in a statement. "We maintained throughout the litigation that these lawsuits should not be permitted to proceed, and are gratified that we are now able to put them behind us."

On Sept. 20, Merix Corp., a small maker of printed circuit boards, said a class action lawsuit filed against the company and four of its officers has been dismissed without prejudice to plaintiffs' right to refile.

Fewer Dismissals

Though the most recent cases make it appear that dismissals are on the rise, the facts demonstrate otherwise. A 2004 study by NERA Economic Consulting showed that, "The rate at which cases are dismissed has fallen by a third since SOX, a statistically significant drop compared to the prior pace." According to NERA, this lower pace of dismissals suggests that either cases are advancing more slowly, or judges may be allowing more cases to proceed.

Carton

Bruce Carton, vice president of Institutional Shareholder Services' Securities Class Action Services, agrees that over the past 4-5 years, the number of dismissals has decreased. As a result, he notes that the recent flurry of dismissals isn't the continuation—or even the start—of a significant trend. "There may be more [dismissals] so far in 2005, but I don't believe that's indicative of a major trend," says Carton.

Aaron Rubinstein, a partner at Kaye Scholer, agrees that the recent dismissals are not unusual and not indicative of a new trend. “There are dozens of these each month,” he says. “You see all kinds of dismissals on these kinds of issues.”

In addition, as shown in some of the examples above, many of the cases getting dismissed are "dismissed without prejudice," meaning the plaintiffs can amend and refile their complaint, typically within 30 days.

Rubinstein

In general, the dismissal rate runs somewhere between 25 percent and 33 percent, depending upon the expert with whom you speak. Whichever number is correct, it's much larger than the 13 percent of cases dismissed prior to 1995, says Rubinstein.

That was the year that Congress passed the Private Securities Litigation Reform Act of 1995. “It was essentially passed to try to deal with what was perceived to be frivolous litigation that was very costly,” Rubinstein explains.

Legal experts say the Act instantly gave companies more latitude when defending against suits, leading to a surge in dismissals. However, after the Enron and WorldCom scandals broke, dismissals came down in the early part of the decade, presumably because judges were afraid to mistakenly overlook the next major scandal.

Throwing Charges Against The Wall

Lefler

Daniel Lefler, partner with Irell & Manella in Los Angeles, says the PSLRA impacted class action suits in two major ways. First, it requires plaintiffs pleading a securities fraud case to describe with detail their allegation. Attorneys say that under this standard, shareholders can’t simply assert that, for example, since a company restated results and the stock subsequently fell, the top executives must have known beforehand that the numbers were wrong.

“It made the pleading requirement for fraudulent arguments much more stringent,” explains Rubinstein. “It requires much more detail and particularity of false statements.” Plaintiffs must explain why their allegations constitute fraud. They are not permitted to “throw charges against the wall” and see what sticks, Rubinstein explains.

This is what Judge Conti was saying when he dismissed the case against Lexar. “Neither party disputes that Lexar and its executives made optimistic statements about the company’s performance that were soon followed by a business slowdown and a dramatic decrease in the stock price,” the judge wrote in his opinion. But the judge then stressed that optimistic statements alone are not unusual or unlawful. Noting that businessmen by nature are optimistic, Conti added, “Financial markets could hardly function if every significant decline in a company’s stock created liability on the part of formerly optimistic executives.”

Also under the 1995 Act, plaintiffs must make the case that there was falsity and "scienter"—an intent to defraud. “Congress made it tougher to plead,” Lefler says. Adds Rubinstein, “You can’t just have vague allegations.”

Again, Judge Conti in the Lexar case noted: “This fact pattern is only unlawful if the optimistic statements are part of a fraudulent plan.” The judge asserted that the plaintiffs have not provided evidence to suggest that there was such a fraudulent plan carried out by Lexar’s executives, specifically noting that the allegations “come nowhere close to meeting the heightened pleading requirements of the PSLRA.”

Among other provisions, the PSLRA also created a "Safe Harbor" for forward-looking statements, as cited by Wet Seal, above. “Statements made as forward looking, and accompanied by cautionary factors are immune from liability, even if the forecast doesn’t come to pass,” Rubinstein explains.

But experts note that the decade-long downward trend in dismissals may not last forever.

Grundfest

Joseph Grundfest, a former SEC Commissioner and current professor at Stanford Law School, thinks one reasons for the recent spate of dismissals may actually be indicative of a larger trend: poorly crafted allegations. “Cases are weaker,” he says. “That’s what every judge will tell you.”

Darren Robbins, partner with Lerach Coughlin Stoia Geller Rudman & Robbins, agrees, noting that part of the problem relates to the size of the plaintiffs' law firms. According to Robbins, most are small and relatively understaffed. “They don’t have the ability to fight,” he says. “They get 300 to 400 pages of exhibits and briefs and have three weeks [to prepare for the case],” he says.

The most recent class action filings and settlements are available from the box above, right, as is related coverage on the PSLRA.

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