In an important decision concerning the standard for pleading scienter in securities fraud cases, the Supreme Court vacated a decision by the Seventh Circuit Court of Appeals, and ruled that the Private Securities Litigation Reform Act (PSLRA) requires courts to consider plausible competing inferences in determining whether a plaintiff has alleged facts sufficient to give rise to the “strong inference” of scienter that Congress mandated in the PSLRA. In reaching this decision, the Supreme Court rejected the Seventh Circuit’s standard that a plaintiff need only plead sufficient facts such that a reasonable person could infer that the defendant acted with the requisite intent to defraud shareholders to survive a motion to dismiss. Instead, the Supreme Court ruled that it was not sufficient for the inference of scienter to be “reasonable,” that courts must consider competing innocent inferences, and that a plaintiff’s allegations of scienter would only be sufficient “if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference.”

The Seventh Circuit had expressed concern that if a court were required to compare and assess competing inferences at the pleading stage, it might usurp the fact-finding role normally delegated to a jury pursuant to the Seventh Amendment. The Supreme Court disagreed, explaining that Congress has the authority to determine what must be pleaded to state a claim, thereby conferring upon courts the power to act as gatekeepers to prevent the submission of inadequately pleaded claims to a jury. The Supreme Court held that Congress unquestionably raised the pleading standards for scienter when it enacted the PSLRA. Accordingly, while confirming that courts must continue to assume the truth of a plaintiff’s allegations at the pleading stage, the Supreme Court ruled that the comparative assessment of plausible inferences to be drawn from such allegations would not deprive litigants of their constitutional right to a jury. (Tellabs, Inc. v. Makor Issues & Rights, Ltd., 2007 WL 1773208 (U.S. June 21, 2007))