House Passes Securities Class Action Litigation Reform Bill

(July 23, 1998)  The House of Representatives passed HR 1689, the Securities Litigation Uniform Standards Act, by a vote of 340 to 83.  The Senate passed its version of the bill, S 1260, on May 13 by a vote of 79-21.  Clinton will likely sign the bill.  The bill will benefit high tech Silicon Valley companies whose volatile stock prices make them targets for class action strike suits.

The bill would preempt state laws by establishing uniform national standards for class action lawsuits involving nationally traded securities.  It is designed to decrease the number of harassment suits brought in state courts that threaten the ability of companies -- particularly high-tech Silicon Valley companies -- to raise capital and disseminate information.

"This bill ensures that the will of Congress will be realized," Rep. White said in a press release after the vote. "Our thriving high technology companies need protection from frivolous law suits that prey on their volatile stock prices. This bill will help those companies focus their energies on the marketplace instead of the courtroom, and keep them providing the innovative products and services we have come to expect."

The bill would amend the Securities Act of 1933 and the Securities Exchange Act of 1934.   It remedies what many see as an oversight or deficiency of the recently enacted Private Securities Litigation Reform Act of 1995.   The PSLRA sought to reduce the number of frivolous class action 10(b) suits in federal courts.  One of its key provisions was to create a "safe harbor" for forward looking statements made by public companies, in order to promote dissemination of financial information to analysts and investors, and improve market efficiency.

It also limited plaintiffs' lawyers' ability to use pre-trial discovery for harassment purposes.  Since passage of the PSLRA, many companies, and several studies, have asserted that plaintiffs' securities lawyers have responded by shifting their securities fraud suits into state courts -- particularly in California, and particularly in suits against high-tech companies.  These suits avoid the "safe harbor clause" of the PSLRA.   Some suits are brought in both state and federal courts, with the state action used to evade the discovery restraints in the PSLRA.

The bill was unsuccessfully opposed by trial lawyers' groups.  President Clinton vetoed  the underlying Private Securities Litigation Reform Act of 1995, and was overridden.  A veto of this bill would likely be overridden too.  Also, Presidential aide Bruce Lindsey wrote a letter in April announcing administration support for the bill.

The house bill was sponsored and pushed through by Rep. Rick White (R-WA) and Rep. Anna Eshoo (D-CA).

The Floor Debate.

The House debated the bill late Tuesday and voted on Wednesday.  Members of the House who spoke in favor included: Rep. Tom Bliley (R-VA), Rep. Chris Cox (R-CA), Rep. Peter Deutsch (D-FL), Rep. Anna Eshoo (D-CA), Rep. Mike Oxley (R-OH), and Rep. Billy Tauzin (R-LA).  In addition, Rep. Thomas Manton (D-NY) offered his qualified support for the bill.

Anna Eshoo, a lead sponsor of the bill, said: "The migration to State courts is not a minor problem. It represents an undermining of the core reforms that this Congress implemented in 1995 because the reform act relied on uniform application and enforcement of the law in order to be effective. The bill is needed because as long as frivolous strike suits are threatening high growth companies, they will be held hostage. Consumers are hurt because the companies will not use the safe harbor provision in the 1995 law."

Rep John Dingell (D-MI), the Ranking Member of the House Commerce Committee, spoke against the bill.  He stated that "This bill strikes at one of the most fundamental rights that the people of this country have, the ability to sue to protect themselves from wrongdoing and to collect damages from wrongdoing and from wrongdoers. I would observe that this bill takes away that right.  It also attacks public confidence in the securities market, something which is going to cost this country dearly. I urge a no vote on the outrageous legislation."

Rep. Bart Stupak (D-MI) stated that, "If we pass this bill, Congress will place all investors into a largely untested, untried new federal system that will make it very difficult for investors to prove fraud. Many of the proponents of this bill claim that it corrects an oversight from the Private Securities Litigation Act of the last Congress. This claim is disingenuous and false. These same Members claim that during the debate over the Private Securities Litigation Reform Act that investors would continue and would always have available to them the protection afforded by the state courts."

Other members who spoke in opposition to the bill included: Rep. Diana DeGette (D-CO), Rep. Gene Taylor (D-MS), and Rep. Don Klink (D-PA).