I recently had occasion to review a number of motion-to-dismiss rulings, including some in which denial of the motion seemed to be an easy call.  I’ve since been mulling over whether there are circumstances in which it would be strategically advantageous not to make a motion to dismiss in a Reform Act case, or a motion to dismiss for failure to make a demand on the board in a derivative case.  I have never foregone such a motion, even when it was relatively weak.  But is that the right strategic and economic approach?*

Routine motions to dismiss are certainly part of the predominant, formulaic approach to securities litigation defense.  As I noted in my recent Law360 Q&A, a formulaic approach can yield inefficiency and insufficient strategic thought.  Two obvious examples are class certification and document discovery:

  • Courts rarely deny class certification motions based on shortcomings in the proposed class representative – and often, even if they did, it would not be to the advantage of the defense.  Yet in virtually every case, defense attorneys travel around the country to take depositions of class representatives to support futile class certification oppositions.
  • The universe of important documents in a securities case usually distills to a relatively small number.  Yet in virtually every case, defense attorneys review every page of a vast number of documents collected as potentially responsive to overreaching document requests – ignoring the efficiency and other advantages of a more strategic approach.

I’ve vowed to take a more strategic and efficient approach in these and other areas.  A superior defense doesn’t require that we do everything, including tasks with little or no strategic value.  It means that we position the case for the best possible resolution.  That goal involves strategic and economic considerations.

So, then, what about motions to dismiss:  are there circumstances in which it would make sense to forego one?  It’s hard to imagine all conceivable circumstances under which this question may be posed, but I think the answer is probably “no.”  But in all cases, including those in which the motion to dismiss is weak, we need to think about how we use the motion to the defendants’ strategic advantage.

In my experience, there is a small group of cases – maybe 10% of those filed – that are bound to get past a motion to dismiss.  In those cases, neither the quality of the lawyers, on either side, nor the temperament or ability of the judge even matters.  Among these cases, some are meritorious and some aren’t.  Sometimes the initial allegations appear strong, although the plaintiffs’ ultimate case is not, and sometimes they involve high-profile situations or defendants, in which a judge is almost certain to allow the plaintiffs a chance to develop their case.  Regardless, these are all hard cases that are not going to be dismissed on a motion.

I can make a strong prima facie strategic case for not moving to dismiss this class of case, especially cases that are ultimately defensible.  The motion to dismiss is the judge’s first look at the case.  Judges are people, and they form first impressions.  The emphasis that a motion to dismiss can bring to the one-sided presentation of the “evidence” in the complaint can do harm to later rulings.  So, I could argue that a better strategy is to answer the complaint and wait for a chance to make a good first impression with the judge, at a time when the defendants can introduce favorable evidence.  This strategy also has the benefit of saving the client and/or carriers a substantial amount of money.

On balance, however, I think that other strategic considerations outweigh the advantages of foregoing motions to dismiss.  The vast majority of securities and derivative complaints are potentially dismiss-able.  Plaintiffs assume that a motion to dismiss will be made and – because of the high pleading standards required for complaints in Reform Act cases, and to excuse demand in derivative cases – they fear dismissal even in the strongest cases.  Thus, to not make a motion to dismiss would be significant, and would suggest to plaintiffs (and to the judge, too, if she or he is experienced in securities cases) that the plaintiffs’ case is extraordinarily strong.  It might even seem to be a concession of some kind.  Just as importantly, a motion to dismiss is the defendants’ only real leverage before summary judgment, and because of the discovery stay, the defendants have an informational advantage during the motion-to-dismiss process (setting aside the availability of a books and records inspection in the context of derivative litigation).

The combination of these factors strongly suggests that defendants make a motion to dismiss, even if they know it is very unlikely to succeed – but that they do so within a larger strategic framework geared toward the best ultimate resolution of the case.  In a great many cases, mediating while the motion to dismiss is still pending will be the right strategy, to take advantage of the leverage and the informational advantage that defendants have during this time.  This strategy requires the utmost strategic thought and risk analysis at the outset of the case, and then impeccable communication among the defendants, defense counsel, and the insurers and broker.  Even if this process leads these parties to the conclusion that it is better to continue to litigate the case, rather than attempt an early settlement, it will lend strategic shape and direction to the litigation process.

The worst strategy – although it unfortunately seems to be a prevalent one – is to simply litigate the case full tilt, without serious evaluation of whether an early settlement is strategically or economically wise, and without adequate communication with the client or the carriers about the risks of the case.

 

* I don’t include merger cases in this analysis, because they present special considerations – principally quick settlements and multi-jurisdictional issues – that often make a motion to dismiss impractical.

 

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Photo of Douglas W. Greene Douglas W. Greene

Doug Greene is one of the United States’ most experienced and successful securities litigators. He has focused his practice exclusively on securities and corporate governance litigation since 1997 and is among a small group of practitioners nationwide who handle such matters full time. From his home base in Seattle, he defends clients around the country and the world.

Doug spent the first 20 years of his career at national law firms. In 2012, Doug moved his practice to Lane Powell to establish a securities litigation practice that combines national experience and regional economics. He is Chair of the Firm’s Securities Litigation Practice Group.

As a securities litigator, Doug defends public companies and their directors and officers in securities class actions, litigation concerning mergers and acquisitions, shareholder derivative actions, and U.S. Securities and Exchange Commission investigations and enforcement proceedings. He also conducts internal corporate investigations.

Doug has been recognized as a “Leading Lawyer” in securities litigation by Chambers USA: America’s Leading Lawyers for Business, whose sources praised his “incredible skills,” “strategy,” and “ability to articulate arguments in a succinct and passionate manner.” They also appreciated his “client focus” and “availability 24/7.”

Outside of handling client matters, Doug devotes a significant amount of time to developing and sharing his knowledge of securities and corporate governance litigation law and practice. He is a frequent public speaker and author, and is the founder of and principal contributor to Lane Powell’s blog D&O Discourse, the first and only blog devoted to providing opinion from a defense perspective on shareholder litigation matters.

Doug serves in leadership positions in several professional organizations:

  • Advisory Board Member, National Association of Corporate Directors, Northwest Chapter (2012-Present)
  • Board of Advisors, Securities Reform Act Litigation Reporter (2008-Present)
  • Member, Securities Committee, Washington State Bar Association (2003-Present)
  • Co-chair, D&O Liability Conference, American Conference Institute, New York (September 17-18, 2015)
  • Co-chair, D&O Liability Conference, American Conference Institute, New York (September 30 – October 1, 2014)
  • Co-chair, Cyber Security Event, National Association of Corporate Directors, Northwest Chapter (September 23, 2014)

Before joining Lane Powell in 2012, Doug was a Partner at Wilson Sonsini Goodrich & Rosati, K&L Gates and Perkins Coie.

  • Craig Bachman

    Very nice piece.