For the Supreme Court to issue a unanimous opinion, legal minds as vastly different as Antonin Scalia and Ruth Bader Ginsburg, must find agreement, as well as everyone in between.
That rarely happens on contentious or unclear issues. Unanimity on the court usually signals that the resulting opinion is a simple application of common sense with which no reasonable person could disagree. This has occurred many times at the Obama administration's expense, but this week the court issued a unanimous opinion that instead puts a key White House ally — the trial lawyer lobby — on the spot.
In Omnicare v. Laborers District Council, all nine justices agreed that when shareholders sue a corporation for making false statements of opinion in their filings, they must establish that the statements were knowingly false. This may seem like a minor or obscure matter, but the decision nibbles around the edges of an increasingly lucrative (for trial lawyers) field of lawsuits — those brought by aggrieved shareholders, often as class-action cases, when their stock loses value.
In financial markets whose existence depends on everyone's ability to win or to lose money, it isn't hard to understand how enough frivolous lawsuits of this kind could result in disaster. If they become too common, companies will hesitate to go public at all.
More to the point, such suits are frequently filed as a nuisance — a form of legal extortion — in the knowledge that most companies would rather settle than fight. In many cases, they are filed by investors as leverage. A shareholder lawsuit can delay large merger and acquisition deals. The companies being sued can be forced to pay out settlements as ransom so that they can move forward with multibillion-dollar deals.
In this context, fair procedural curbs on such lawsuits make sense — and all nine justices agreed that this curb does. In her opinion, Justice Elena Kagan noted that the securities law in question "does not allow investors to second-guess inherently subjective and uncertain assessments" by management just because they ended up losing money on the stock.
According to a study released last year by the U.S. Chamber Institute for Legal Reform, investor lawsuits have historically cost shareholders more than seven times what plaintiffs ultimately receive. And a large share of the riches in such cases — $19 billion of the $90 billion in judgments and settlements won between 1996 and 2014 — goes to trial lawyers.
This isn't to say that all such lawsuits are unjustified — and in fact, the justices remanded this case to a lower court to decide a separate issue. But this ruling leaves one less justification for lawsuits by people upset they lost money on a stock. That means all participants in the stock market can feel a bit more comfortable about keeping legal profiteers at bay, and executives can share their honest opinions about their companies without fear that they will be sued as a result.
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