Dura Pharmaceuticals, Inc. v. Michael Broudo

Brief Fact Summary.

Dura Pharmaceuticals, Inc. (Dura) (Defendant) stated that investors (Plaintiff) who had brought a securities fraud class action had not claimed or demonstrated “loss causation†in their complaint, which only alleged that the cost of Dura stock on the date of purchase was exaggerated due to misstatements.

Synopsis of Rule of Law.

An exaggerated purchase cost alone will not establish or proximately cause the pertinent economic damage needed to claim and demonstrate “loss causation.â€

Facts.

Investors in Dura Pharmaceuticals, Inc. claimed that Dura and a few of its directors and managers offered up misstatements about an upcoming Food and Drug Administration endorsement of a new asthmatic spray device, steering the investors to buy Dura securities at an artificially exaggerated price and so brought a securities fraud class action. The district court dismissed, finding that the complaint did not substantially allege a chance link between the economic damage and the spray device misstatement aka “loss causation.†The court of appeals reversed, finding that a plaintiff can satiate the loss causation necessity by claiming that a security’s cost on the date of purchase was exaggerated due to the misstatement. The Supreme Court granted certiorari.

Issue.

Can an exaggerated purchase cost alone establish or proximately cause the pertinent economic damage needed to claim and demonstrate “loss causation�

Held.

(Breyer, J.) No. An exaggerated purchase cost alone does not establish or proximately cause the pertinent economic damage needed to claim and demonstrate “loss causationâ€.  Usually,an exaggerated purchase cost alone does not establish or proximately cause the pertinent economic damage in fraud-on-the-market cases, like this one. Logically, the instance when the transaction occurs, the plaintiff has endured no loss as a result of the exaggerated purchase price being balanced by possession of a share that retains equal worth at that moment. The connection between the overstated purchase price and any subsequent economic loss is not always strong seeing as additional elements can affect the cost. So, as the court of appeals found, the overstated purchase price proposes that misrepresentation “touches upon†a subsequent economic loss. Although, touching upon a loss is not causing a loss and causing a los sis required by law. The court of appeals holding also lacks precedent. A plaintiff must demonstrate both that he would not have acted had he been aware of the truth and that he suffered an actual economic loss as required by the common-law deceit and misrepresentations actions that are similar to private securities fraud actions. The holding below cannot be reconciled with the views of other courts of appeals, which have rebuffed the overstated purchase price tactic to demonstrating loss causation. Finally, the court of appeals tactic is not consistent with a significant securities law objective: advocating public confidence in the marketplace. The availability of private securities fraud actions helps to deter fraud. Congress’ intent to allow private securities fraud actions where plaintiffs sufficiently claim and demonstrate the conventionalessentials of cause and loss, but the court of appeals tactic would permit recovery where a misstatement brings about an overstated purchase price but fails to proximately cause any economic loss. In this case, the investors did not sufficiently assert the plaintiffs requirements of demonstrating proximate causation and economic loss. This complaint only claims that their loss is comprised of falsely exaggerated purchase prices. However, as in this case, such a price is not considered a pertinent economic loss.  Notice to Dura of what the relevant loss may be or what the casual link may be between the misrepresentation and the loss is provided nowhere else in the complaint, so it fails to satisfy the Federal Rules of Civil Procedure’s requirement of “a short and plain statement of the claim showing that the pleader is entitled to relief.†Ordinary pleading rules were not created to force a significant onus on a plaintiff, but it should not be considered burdensome for a plaintiff enduring economic loss to give the defendant some indication of the loss and the chance connection that the plaintiff was thinking of. Permitting a plaintiff to forgo giving any sign of the economic loss and the securities statutes hope to elude, specifically the offensive practice of filing lawsuits with only a dim optimism that discovery may lead to some reasonable cause of action. Reversed and remanded. 

Discussion.

As indicated within it, the Court’s decision is also utilizes the method taken by a majority of the courts of appeals, and also the Restatement (Second) of Torts and exceedingly esteemed commentators. In demonstrating the judicial consensus,the Restatement of Torts, states that someone who “misrepresents the financial condition of a corporation in order to sell its stock†turns out to be liable to a relying buyer “for the loss†the buyer withstands “when the facts…becomes generally known†and “as a result†share worth “depreciate[s].â€Â§ 548A, Comment b, at 107. Prosser and Keeton § 110, at 767, state that losses do “not afford any basis for recovery†if “brought about by business conditions or other factors.â€