The nomination of Judge Neil Gorsuch to the United States Supreme Court has created several questions with respect to the future of securities class actions. In short, Judge Gorsuch’s confirmation may cause a significant decrease in the filing of securities class actions, slowing the recent trend of ever-increasing securities class action litigation.
Undoubtedly, 2016 was the year of securities class actions. According to both NERA and Cornerstone Research, plaintiffs filed a record 270 to 300 new federal class action securities cases in 2016, a 44 percent increase from both 2015 filings and the historical average of 188 filings observed between 1997 and 2015. Of those filings, approximately one in twenty-five companies listed on U.S. exchanges were the subject of “traditional” Rule 10b-5, Section 11, and Section 12(2) claims. Nontraditional filings, primarily related to proposed merger and other shareholder transactions, also increased significantly. Additionally, of the companies in the S&P 500 at the beginning of 2016, one in approximately twelve companies was a defendant in a class action, the largest percentage since 2008.
The upward trend in the filing of securities class actions in the last year is a trend that Judge Gorsuch will undoubtedly find disagreeable, as he has described such actions as a “free ride to fast riches enjoyed by securities class action attorneys.” A strong proponent of the Private Securities Litigation Reform Act (PSLRA), intended to prevent frivolous securities lawsuits, Judge Gorsuch’s opinions while on the bench will likely express a strong commitment to upholding what he believes is PSLRA’s “simple and straightforward causation requirement” obligating plaintiffs to plead each misleading statement with particularity. Indeed, he has previously shown support for similar precedent in his approval of a United States Supreme Court case for which he wrote an amicus curiae brief for the U.S. Chamber of Commerce, Dura Pharmaceutical v. Broudo, a securities class action case which held unanimously against the class action plaintiffs.
Interestingly, despite the significant increase in the filing of securities class actions in the last year, more cases in 2016 were dismissed than settled for the first time since the passage of the PSLRA. Half of those dismissals occurred within 11 months of filing, the fastest pace since the passage of the PSLRA.
The increasing number of dismissals may predict the coming changes to the landscape of securities class actions as Judge Gorsuch awaits confirmation. If confirmed, Judge Gorsuch will likely be yet another obstacle to plaintiffs who already face high hurdles in order to escape dismissal on the merits of their claims. As a result, future plaintiffs may likely choose to file other claims more amenable to success on the merits, significantly slowing the sudden surge in securities class actions filings that firms experienced last year.