The Reform Act’s heightened pleading standards were designed to increase the number of securities class actions dismissed at the pleading stage.  An unintended consequence, however, has been a liberal application of the already liberal standards for amendment under Rule 15.  In Eminence Capital v. Aspeon, Inc., the Ninth Circuit explained the rationale for this approach:

“We need to bear in mind that we are not operating in the world of notice pleadings. In this technical and demanding corner of the law, the drafting of a cognizable complaint can be a matter of trial and error.”

Often, the result is a lengthy and frustrating cycle of amended complaints and motions to dismiss, which allows foredoomed cases to drag on for years at significant cost and hassle to companies and their directors, officers, and insurers – not to mention the burden placed on the court system.  On the other hand, judges are concerned that if they dismiss cases with prejudice too early in the process, their decisions are more likely to be vulnerable on appeal.

A better approach is long overdue, and some judges are clearly searching for one.  I’d like to share a refreshing approach used by a judge in a recent dismissal of a case we are defending, and ask readers to share other constructive solutions to this dilemma.  I’ll catalogue the responses in a future post.  It would be useful to have a checklist of alternatives to the standard approach, so that defendants can make the best possible arguments against leave to amend.

My recent positive experience was in In re L&L Energy, Inc. Securities Litigation.  On December 3, 2012, Judge Robert Lasnik, former Chief Judge of the Western District of Washington, dismissed the plaintiffs’ Second Amended Complaint (the first litigated complaint). This dismissal is one of only a few dismissal orders in the many cases against China-oriented companies that allege fraud based on differences between financial statements filed in China and the United States.  (The decision will be published in the Federal Supplement.)

Judge Lasnik also rejected the plaintiffs’ boilerplate request for leave to amend.  Instead, he only allowed them the opportunity to file a separate motion for leave to amend, supported by a proposed amended complaint.

This approach has the advantage of forcing plaintiffs to make a Rule 15 showing – that amendment would not be futile – with a proposed amended complaint, before they are allowed to file it and force defendants into another costly and time-consuming motion to dismiss.  If an approach such as this were used more frequently, it would weed out weak cases faster while still allowing the plaintiffs an opportunity to attempt to cure the flaws the dismissal order identifies.  There are cases, however, that call for a first-motion dismissal with prejudice with no such opportunity.

Judge Lasnik used the same procedure in another case I defended, In re Jones Soda Co. Securities Litigation.  There, as in L&L Energy, Judge Lasnik dismissed the complaint on the first motion to dismiss.  The plaintiffs then filed a motion for leave to amend, which the defendants opposed and the Court denied, finding that the proposed amendment would be futile.  The plaintiffs appealed the denial of leave to amend, and the Ninth Circuit affirmed.

Again, I ask the readers to share their own positive leave-to-amend experiences, either in the comments below, or in emails or calls to me.  You can find my contact information here.

Happy Holidays.  D&O Discourse will resume in early January 2013.  Upcoming posts include a discussion of the core operations inference by my partner Claire Davis, who joined Lane Powell from Wilson Sonsini earlier this month, and a review of emerging issues in securities litigation.