OPINION OF THE COURT
TELLABS, INC. V. MAKOR ISSUES & RIGHTS, LTD.
551 U. S. ____ (2007)
SUPREME COURT OF THE UNITED STATES
NO. 06-484
TELLABS, INC., et al., PETITIONERS
v.
MAKOR ISSUES & RIGHTS, LTD., et al.
on writ of certiorari to the united states court of
appeals for the seventh circuit
[June 21, 2007]
Justice Ginsburg delivered the
opinion of the Court.
This Court has long recognized
that meritorious private actions to enforce federal antifraud
securities laws are an essential supplement to criminal
prosecutions and civil enforcement actions brought, respectively,
by the Department of Justice and the Securities and Exchange
Commission (SEC). See,
e.g.,
Dura Pharmaceuticals,
Inc. v.
Broudo,
544 U. S. 336, 345
(2005);
J. I. Case Co. v.
Borak,
377 U. S. 426, 432
(1964). Private securities fraud actions, however, if not
adequately contained, can be employed abusively to impose
substantial costs on companies and individuals whose conduct
conforms to the law. See
Merrill Lynch, Pierce, Fenner &
Smith Inc. v.
Dabit,
547 U. S. 71, 81 (2006). As a check
against abusive litigation by private parties, Congress enacted the
Private Securities Litigation Reform Act of 1995 (PSLRA), 109 Stat.
737.
Exacting pleading requirements are among the
control measures Congress included in the PSLRA. The Act requires
plaintiffs to state with particularity both the facts constituting
the alleged violation, and the facts evidencing scienter,
i.e., the defendant’s intention “to deceive, manipulate,
or defraud.”
Ernst & Ernst v.
Hochfelder,
425 U. S. 185, 194, and n. 12 (1976);
see 15 U. S. C. §78u–4(b)(1),(2). This case concerns the
latter requirement. As set out in §21D(b)(2) of the PSLRA,
plaintiffs must “state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind.” 15 U. S. C. §78u–4(b)(2).
Congress left the key term “strong inference”
undefined, and Courts of Appeals have divided on its meaning. In
the case before us, the Court of Appeals for the Seventh Circuit
held that the “strong inference” standard would be met if the
complaint “allege[d] facts from which, if true, a reasonable person
could infer that the defendant acted with the required intent.” 437
F. 3d 588, 602 (2006). That formulation, we conclude, does not
capture the stricter demand Congress sought to convey in
§21D(b)(2). It does not suffice that a reasonable factfinder
plausibly could infer from the complaint’s allegations the
requisite state of mind. Rather, to determine whether a complaint’s
scienter allegations can survive threshold inspection for
sufficiency, a court governed by §21D(b)(2) must engage in a
comparative evaluation; it must consider, not only inferences urged
by the plaintiff, as the Seventh Circuit did, but also competing
inferences rationally drawn from the facts alleged. An inference of
fraudulent intent may be plausible, yet less cogent than other,
nonculpable explanations for the defendant’s conduct. To qualify as
“strong” within the intendment of §21D(b)(2), we hold, an inference
of scienter must be more than merely plausible or reasonable—it
must be cogent and at least as compelling as any opposing inference
of nonfraudulent intent.
I
Petitioner Tellabs, Inc.,
manufactures specialized equipment used in fiber optic networks.
During the time period relevant to this case, petitioner Richard
Notebaert was Tellabs’ chief executive officer and president.
Respondents (Shareholders) are persons who purchased Tellabs stock
between December 11, 2000, and June 19, 2001. They accuse Tellabs
and Notebaert (as well as several other Tellabs executives) of
engaging in a scheme to deceive the investing public about the true
value of Tellabs’ stock. See 437 F. 3d, at 591; App.
94–98.[
Footnote 1]
Beginning on December 11, 2000,
the Shareholders allege, Notebaert (and by imputation Tellabs)
“falsely reassured public investors, in a series of statements …
that Tellabs was continuing to enjoy strong demand for its products
and earning record revenues,” when, in fact, Notebaert knew the
opposite was true.
Id., at 94–95, 98. From December 2000
until the spring of 2001, the Shareholders claim, Notebaert
knowingly misled the public in four ways. 437 F. 3d, at 596.
First, he made statements indicating that demand for Tellabs’
flagship networking device, the TITAN 5500, was continuing to grow,
when in fact demand for that product was waning.
Id., at
596, 597. Second, Notebaert made statements indicating that the
TITAN 6500, Tellabs’ next-generation networking device, was
available for delivery, and that demand for that product was strong
and growing, when in truth the product was not ready for delivery
and demand was weak.
Id., at 596, 597–598. Third, he
falsely represented Tellabs’ financial results for the fourth
quarter of 2000 (and, in connection with those results, condoned
the practice of “channel stuffing,” under which Tellabs flooded its
customers with unwanted products).
Id., at 596, 598.
Fourth, Notebaert made a series of overstated revenue projections,
when demand for the TITAN 5500 was drying up and production of the
TITAN 6500 was behind schedule.
Id., at 596, 598–599.
Based on Notebaert’s sunny assessments, the Shareholders contend,
market analysts recommended that investors buy Tellabs’ stock. See
id., at 592.
The first public glimmer that business was not
so healthy came in March 2001 when Tellabs modestly reduced its
first quarter sales projections.
Ibid. In the next months,
Tellabs made progressively more cautious statements about its
projected sales. On June 19, 2001, the last day of the class
period, Tellabs disclosed that demand for the TITAN 5500 had
significantly dropped.
Id., at 593. Simultaneously, the
company substantially lowered its revenue projections for the
second quarter of 2001. The next day, the price of Tellabs stock,
which had reached a high of $67 during the period, plunged to a low
of $15.87.
Ibid.
On December 3, 2002, the Shareholders filed a
class action in the District Court for the Northern District of
Illinois.
Ibid. Their complaint stated,
inter
alia, that Tellabs and Notebaert had engaged in securities
fraud in violation of §10(b) of the Securities Exchange Act of
1934, 48 Stat. 891, 15 U. S. C. §78j(b), and SEC Rule 10b–5,
17 CFR §240.10b–5 (2006), also that Notebaert was a “controlling
person” under §20(a) of the 1934 Act, 15 U. S. C. §78t(a), and
therefore derivatively liable for the company’s fraudulent acts.
See App. 98–101, 167–171. Tellabs moved to dismiss the complaint on
the ground that the Shareholders had failed to plead their case
with the particularity the PSLRA requires. The District Court
agreed, and therefore dismissed the complaint without prejudice.
App. to Pet. for Cert. 80a–117a; see
Johnson v.
Tellabs,
Inc., 303 F. Supp. 2d 941, 945 (ND
Ill. 2004).
The Shareholders then amended their complaint,
adding references to 27 confidential sources and making further,
more specific, allegations concerning Notebaert’s mental state. See
437 F. 3d, at 594; App. 91–93, 152–160. The District Court
again dismissed, this time with prejudice. 303 F. Supp. 2d, at
971. The Shareholders had sufficiently pleaded that Notebaert’s
statements were misleading, the court determined,
id., at
955–961, but they had insufficiently alleged that he acted with
scienter,
id., at 954–955, 961–969.
The Court of Appeals for the Seventh Circuit
reversed in relevant part. 437 F. 3d, at 591. Like the
District Court, the Court of Appeals found that the Shareholders
had pleaded the misleading character of Notebaert’s statements with
sufficient particularity.
Id., at 595–600.
Unlike the District Court, however, the Seventh Circuit
concluded that the Shareholders had sufficiently alleged that
Notebaert acted with the requisite state of mind. Id., at
603–605.
The Court of Appeals recognized
that the PSLRA “unequivocally raise[d] the bar for pleading
scienter” by requiring plaintiffs to “plea[d] sufficient facts to
create a strong inference of scienter.” Id., at 601
(internal quotation marks omitted). In evaluating whether that
pleading standard is met, the Seventh Circuit said, “courts
[should] examine all of the allegations in the complaint and then …
decide whether collectively they establish such an inference.”
Ibid. “[W]e will allow the complaint to survive,” the
court next and critically stated, “if it alleges facts from which,
if true, a reasonable person could infer that the defendant acted
with the required intent … . If a reasonable person could not
draw such an inference from the alleged facts, the defendants are
entitled to dismissal.” Id., at 602.
In adopting its standard for the
survival of a complaint, the Seventh Circuit explicitly rejected a
stiffer standard adopted by the Sixth Circuit, i.e., that
“plaintiffs are entitled only to the most plausible of competing
inferences.” Id., at 601, 602 (quoting Fidel v.
Farley, 392 F. 3d 220, 227 (CA6 2004)). The Sixth
Circuit’s standard, the court observed, because it involved an
assessment of competing inferences, “could potentially infringe
upon plaintiffs’ Seventh Amendment rights.” 437 F. 3d, at 602.
We granted certiorari to resolve the disagreement among the
Circuits on whether, and to what extent, a court must consider
competing inferences in determining whether a securities fraud
complaint gives rise to a “strong inference” of scienter.[Footnote 2] 549 U. S. ___
(2007).
II
Section 10(b) of the
Securities Exchange Act of 1934 forbids the “use or employ, in
connection with the purchase or sale of any security … , [of] any
manipulative or deceptive device or contrivance in contravention of
such rules and regulations as the [SEC] may prescribe as necessary
or appropriate in the public interest or for the protection of
investors.” 15 U. S. C. §78j(b). SEC Rule 10b–5 implements
§10(b) by declaring it unlawful:
“(a) To employ any device, scheme, or
artifice to defraud,
“(b) To make any untrue statement of a material fact
or to omit to state a material fact necessary in order to make the
statements made … not misleading, or
“(c) To engage in any act, practice, or course of
business which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any
security.” 17 CFR §240.10b–5.
Section 10(b), this Court has implied
from the statute’s text and purpose, affords a right of action to
purchasers or sellers of securities injured by its violation. See,
e.g., Dura Pharmaceuticals, 544 U. S., at 341.
See also id., at 345 (“The securities statutes seek to
maintain public confidence in the marketplace … . by deterring
fraud, in part, through the availability of private securities
fraud actions.”); Borak, 377 U. S., at 432 (private
securities fraud actions provide “a most effective weapon in the
enforcement” of securities laws and are “a necessary supplement to
Commission action”). To establish liability under §10(b) and Rule
10b–5, a private plaintiff must prove that the defendant acted with
scienter, “a mental state embracing intent to deceive, manipulate,
or defraud.” Ernst & Ernst, 425 U. S., at 193–194, and
n. 12.[Footnote 3]
In an ordinary civil
action, the Federal Rules of Civil Procedure require only “a short
and plain statement of the claim showing that the pleader is
entitled to relief.” Fed. Rule Civ. Proc. 8(a)(2). Although the
rule encourages brevity, the complaint must say enough to give the
defendant “fair notice of what the plaintiff’s claim is and the
grounds upon which it rests.” Dura Pharmaceuticals, 544 U.
S., at 346 (internal quotation marks omitted). Prior to the
enactment of the PSLRA, the sufficiency of a complaint for
securities fraud was governed not by Rule 8, but by the heightened
pleading standard set forth in Rule 9(b). See Greenstone
v. Cambex Corp., 975 F. 2d 22, 25 (CA1 1992) (Breyer,
J.) (collecting cases). Rule 9(b) applies to “all averments of
fraud or mistake”; it requires that “the circumstances constituting
fraud … be stated with particularity” but provides that “[m]alice,
intent, knowledge, and other condition of mind of a person, may be
averred generally.”
Courts of
Appeals diverged on the character of the Rule 9(b) inquiry in
§10(b) cases: Could securities fraud plaintiffs allege the
requisite mental state “simply by stating that scienter existed,”
In re GlenFed, Inc. Securities Litigation, 42
F. 3d 1541, 1546–1547 (CA9 1994) (en banc), or were they
required to allege with particularity facts giving rise to an
inference of scienter? Compare id., at 1546 (“We are not
permitted to add new requirements to Rule 9(b) simply because we
like the effects of doing so.”), with, e.g.,
Greenstone, 975 F. 2d, at 25 (were the law to permit
a securities fraud complaint simply to allege scienter without
supporting facts, “a complaint could evade too easily the
‘particularity’ requirement in Rule 9(b)’s first sentence”).
Circuits requiring plaintiffs to allege specific facts indicating
scienter expressed that requirement variously. See 5A C. Wright
& A. Miller, Federal Practice and Procedure §1301.1,
pp. 300–302 (3d ed. 2004) (hereinafter Wright & Miller).
The Second Circuit’s formulation was the most stringent. Securities
fraud plaintiffs in that Circuit were required to “specifically
plead those [facts] which they assert give rise to a strong
inference that the defendants had” the requisite state of
mind. Ross v. A. H. Robins Co., 607 F. 2d
545, 558 (1979) (emphasis added). The “strong inference”
formulation was appropriate, the Second Circuit said, to ward off
allegations of “fraud by hindsight.” See, e.g.,
Shields v. Citytrust Bancorp, Inc., 25 F. 3d
1124, 1129 (1994) (quoting Denny v. Barber, 576
F. 2d 465, 470 (CA2 1978) (Friendly, J.)).
Setting a uniform
pleading standard for §10(b) actions was among Congress’ objectives
when it enacted the PSLRA. Designed to curb perceived abuses of the
§10(b) private action—“nuisance filings, targeting of deep-pocket
defendants, vexatious discovery requests and manipulation by class
action lawyers,” Dabit, 547 U. S., at 81 (quoting
H. R. Conf. Rep. No. 104–369, p. 31 (1995) (hereinafter
H. R. Conf. Rep.))—the PSLRA installed both substantive and
procedural controls.[Footnote
4] Notably, Congress prescribed new procedures for the
appointment of lead plaintiffs and lead counsel. This innovation
aimed to increase the likelihood that institutional
investors—parties more likely to balance the interests of the class
with the long-term interests of the company—would serve as lead
plaintiffs. See id., at 33–34; S. Rep. No. 104–98,
p. 11 (1995). Congress also “limit[ed] recoverable damages and
attorney’s fees, provide[d] a ‘safe harbor’ for forward-looking
statements, … mandate[d] imposition of sanctions for frivolous
litigation, and authorize[d] a stay of discovery pending resolution
of any motion to dismiss.” Dabit, 547 U. S., at 81. And in
§21D(b) of the PSLRA, Congress “impose[d] heightened pleading
requirements in actions brought pursuant to §10(b) and Rule 10b–5.”
Ibid.
Under the PSLRA’s
heightened pleading instructions, any private securities complaint
alleging that the defendant made a false or misleading statement
must: (1) “specify each statement alleged to have been misleading
[and] the reason or reasons why the statement is misleading,” 15 U.
S. C. §78u–4(b)(1); and (2) “state with particularity facts
giving rise to a strong inference that the defendant acted with the
required state of mind,” §78u–4(b)(2). In the instant case, as
earlier stated, see supra, at 5, the District Court and
the Seventh Circuit agreed that the Shareholders met the first of
the two requirements: The complaint sufficiently specified
Notebaert’s alleged misleading statements and the reasons why the
statements were misleading. 303 F. Supp. 2d, at 955–961; 437
F. 3d, at 596–600. But those courts disagreed on whether the
Shareholders, as required by §21D(b)(2), “state[d] with
particularity facts giving rise to a strong inference that
[Notebaert] acted with [scienter],” §78u–4(b)(2). See
supra, at 5.
The “strong inference”
standard “unequivocally raise[d] the bar for pleading scienter,”
437 F. 3d, at 601, and signaled Congress’ purpose to promote
greater uniformity among the Circuits, see H. R. Conf. Rep.,
p. 41. But “Congress did not … throw much light on what facts …
suffice to create [a strong] inference,” or on what “degree of
imagination courts can use in divining whether” the requisite
inference exists. 437 F. 3d, at 601. While
adopting the Second Circuit’s “strong inference” standard, Congress
did not codify that Circuit’s case law interpreting the standard.
See §78u–4(b)(2). See also Brief for United States as Amicus
Curiae 18. With no clear guide from Congress other than its
“inten[tion] to strengthen existing pleading requirements,”
H. R. Conf. Rep., p. 41, Courts of Appeals have diverged
again, this time in construing the term “strong inference.” Among
the uncertainties, should courts consider competing inferences in
determining whether an inference of scienter is “strong”? See 437
F. 3d, at 601–602 (collecting cases). Our task is to prescribe
a workable construction of the “strong inference” standard, a
reading geared to the PSLRA’s twin goals: to curb frivolous,
lawyer-driven litigation, while preserving investors’ ability to
recover on meritorious claims.
III
A
We establish the following prescriptions:
First, faced with a Rule 12(b)(6) motion to dismiss a
§10(b) action, courts must, as with any motion to dismiss for
failure to plead a claim on which relief can be granted, accept all
factual allegations in the complaint as true. See
Leatherman v. Tarrant County Narcotics Intelligence
and Coordination Unit, 507 U. S. 163, 164
(1993). On this point, the parties agree. See Reply Brief 8; Brief
for Respondents 26; Brief for United States as Amicus
Curiae 8, 20, 21.
Second, courts must consider the
complaint in its entirety, as well as other sources courts
ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss,
in particular, documents incorporated into the complaint by
reference, and matters of which a court may take judicial notice.
See 5B Wright & Miller §1357 (3d ed. 2004 and Supp. 2007). The
inquiry, as several Courts of Appeals have recognized, is whether
all of the facts alleged, taken collectively, give rise to
a strong inference of scienter, not whether any individual
allegation, scrutinized in isolation, meets that standard. See,
e.g., Abrams v. Baker Hughes Inc., 292
F. 3d 424, 431 (CA5 2002); Gompper v. VISX,
Inc., 298 F. 3d 893, 897 (CA9 2002). See also Brief for
United States as Amicus Curiae
25.
Third, in determining whether the
pleaded facts give rise to a “strong” inference of scienter, the
court must take into account plausible opposing inferences. The
Seventh Circuit expressly declined to engage in such a comparative
inquiry. A complaint could survive, that court said, as long as it
“alleges facts from which, if true, a reasonable person could infer
that the defendant acted with the required intent”; in other words,
only “[i]f a reasonable person could not draw such an inference
from the alleged facts” would the defendant prevail on a motion to
dismiss. 437 F. 3d, at 602. But in §21D(b)(2), Congress did
not merely require plaintiffs to “provide a factual basis for
[their] scienter allegations,” ibid. (quoting
In re Cerner Corp. Securities Litigation, 425
F. 3d 1079, 1084, 1085 (CA8 2005)), i.e., to allege
facts from which an inference of scienter rationally could
be drawn. Instead, Congress required plaintiffs to plead with
particularity facts that give rise to a “strong”—i.e., a
powerful or cogent—inference. See American Heritage Dictionary 1717
(4th ed. 2000) (defining “strong” as “[p]ersuasive, effective, and
cogent”); 16 Oxford English Dictionary 949 (2d ed. 1989) (defining
“strong” as “[p]owerful to demonstrate or convince” (definition
16b)); cf. 7 id., at 924 (defining “inference” as “a
conclusion [drawn] from known or assumed facts or statements”;
“reasoning from something known or assumed to something else which
follows from it”).
The
strength of an inference cannot be decided in a vacuum. The inquiry
is inherently comparative: How likely is it that one conclusion, as
compared to others, follows from the underlying facts? To determine
whether the plaintiff has alleged facts that give rise to the
requisite “strong inference” of scienter, a court must consider
plausible nonculpable explanations for the defendant’s conduct, as
well as inferences favoring the plaintiff. The inference that the
defendant acted with scienter need not be irrefutable,
i.e., of the “smoking-gun” genre, or even the “most
plausible of competing inferences,” Fidel, 392 F. 3d,
at 227 (quoting Helwig v. Vencor, Inc., 251
F. 3d 540, 553 (CA6 2001) (en banc)). Recall in this regard
that §21D(b)’s pleading requirements are but one constraint among
many the PSLRA installed to screen out frivolous suits, while
allowing meritorious actions to move forward. See supra,
at 9, and n. 4. Yet the inference of scienter must be more
than merely “reasonable” or “permissible”—it must be cogent and
compelling, thus strong in light of other explanations. A complaint
will survive, we hold, only if a reasonable person would deem the
inference of scienter cogent and at least as compelling as any
opposing inference one could draw from the facts alleged.[Footnote 5]
B
Tellabs contends that when competing
inferences are considered, Notebaert’s evident lack of pecuniary
motive will be dispositive. The Shareholders, Tellabs stresses, did
not allege that Notebaert sold any shares during the class period.
See Brief for Petitioners 50 (“The absence of any allegations of
motive color all the other allegations putatively giving rise to an
inference of scienter.”). While it is true that motive
can be a relevant consideration, and personal financial gain may
weigh heavily in favor of a scienter inference, we agree with the
Seventh Circuit that the absence of a motive allegation is not
fatal. See 437 F. 3d, at 601. As earlier stated,
supra, at 11, allegations must be considered collectively;
the significance that can be ascribed to an allegation of motive,
or lack thereof, depends on the entirety of the
complaint.
Tellabs also maintains that several of the
Shareholders’ allegations are too vague or ambiguous to contribute
to a strong inference of scienter. For example, the Shareholders
alleged that Tellabs flooded its customers with unwanted products,
a practice known as “channel stuffing.” See supra, at 3.
But they failed, Tellabs argues, to specify whether the channel
stuffing allegedly known to Notebaert was the illegitimate kind
(e.g., writing orders for products customers had not
requested) or the legitimate kind (e.g., offering
customers discounts as an incentive to buy). Brief for Petitioners
44–46; Reply Brief 8. See also id., at 8–9 (complaint
lacks precise dates of reports critical to distinguish legitimate
conduct from culpable conduct). But see 437 F. 3d, at 598,
603–604 (pointing to multiple particulars alleged by the
Shareholders, including specifications as to timing). We agree that
omissions and ambiguities count against inferring scienter, for
plaintiffs must “state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind.” §78u–4(b)(2). We reiterate, however, that the court’s job
is not to scrutinize each allegation in isolation but to assess all
the allegations holistically. See supra, at 11; 437
F. 3d, at 601. In sum, the reviewing court must ask: When the
allegations are accepted as true and taken collectively, would a
reasonable person deem the inference of scienter at least as strong
as any opposing inference? [Footnote 6]
IV
Accounting for its construction of
§21D(b)(2), the Seventh Circuit explained that the court “th[ought]
it wis[e] to adopt an approach that [could not] be misunderstood as
a usurpation of the jury’s role.” 437 F. 3d, at 602. In our
view, the Seventh Circuit’s concern was undue.[Footnote 7] A court’s comparative assessment of
plausible inferences, while constantly assuming the plaintiff’s
allegations to be true, we think it plain, does not impinge upon
the Seventh Amendment right to jury trial.[Footnote 8]
Congress, as creator of federal statutory
claims, has power to prescribe what must be pleaded to state the
claim, just as it has power to determine what must be proved to
prevail on the merits. It is the federal lawmaker’s prerogative,
therefore, to allow, disallow, or shape the contours of—including
the pleading and proof requirements for—§10(b) private actions. No
decision of this Court questions that authority in general, or
suggests, in particular, that the Seventh Amendment inhibits
Congress from establishing whatever pleading requirements it finds
appropriate for federal statutory claims. Cf. Swierkiewicz
v. Sorema N. A., 534 U. S. 506, 512–513
(2002); Leatherman, 507 U. S., at 168 (both recognizing
that heightened pleading requirements can be established by Federal
Rule, citing Fed. Rule Civ. Proc. 9(b), which requires that fraud
or mistake be pleaded with particularity).[Footnote 9]
Our decision in Fidelity & Deposit
Co. of Md. v. United States, 187 U. S. 315 (1902), is
instructive. That case concerned a rule adopted by the Supreme
Court of the District of Columbia in 1879 pursuant to rulemaking
power delegated by Congress. The rule required defendants, in
certain contract actions, to file an affidavit “specifically
stating … , in precise and distinct terms, the grounds of his
defen[s]e.” Id., at 318 (internal quotation marks
omitted). The defendant’s affidavit was found insufficient, and
judgment was entered for the plaintiff, whose declaration and
supporting affidavit had been found satisfactory. Ibid.
This Court upheld the District’s rule against the contention that
it violated the Seventh Amendment. Id., at 320. Just as
the purpose of §21D(b) is to screen out frivolous complaints, the
purpose of the prescription at issue in Fidelity & Deposit
Co. was to “preserve the courts from frivolous defen[s]es,”
ibid. Explaining why the Seventh Amendment was not
implicated, this Court said that the heightened pleading rule
simply “prescribes the means of making an issue,” and that, when
“[t]he issue [was] made as prescribed, the right of trial by jury
accrues.” Ibid.; accord Ex parte Peterson,
253 U. S. 300,
310 (1920) (Brandeis, J.) (citing Fidelity & Deposit
Co., and reiterating: “It does not infringe the constitutional
right to a trial by jury [in a civil case], to require, with a view
to formulating the issues, an oath by each party to the facts
relied upon.”). See also Walker v. New Mexico &
Southern Pacific R. Co., 165 U. S. 593, 596
(1897) (Seventh Amendment “does not attempt to regulate matters of
pleading”).
In the instant case, provided that the
Shareholders have satisfied the congressionally “prescribe[d] …
means of making an issue,” Fidelity & Deposit Co., 187
U. S., at 320, the case will fall within the jury’s authority to
assess the credibility of witnesses, resolve any genuine issues of
fact, and make the ultimate determination whether Notebaert and, by
imputation, Tellabs acted with scienter. We emphasize, as well,
that under our construction of the “strong inference” standard, a
plaintiff is not forced to plead more than she would be required to
prove at trial. A plaintiff alleging fraud in a §10(b) action, we
hold today, must plead facts rendering an inference of scienter
at least as likely as any plausible opposing inference. At
trial, she must then prove her case by a “preponderance of the
evidence.” Stated otherwise, she must demonstrate that it is
more likely than not that the defendant acted with
scienter. See Herman & MacLean v. Huddleston,
459 U. S. 375,
390 (1983).
* * *
While we reject the Seventh Circuit’s
approach to §21D(b)(2), we do not decide whether, under the
standard we have described, see supra, at 11–14, the
Shareholders’ allegations warrant “a strong inference that
[Notebaert and Tellabs] acted with the required state of mind,” 15
U. S. C. §78u–4(b)(2). Neither the District Court nor the
Court of Appeals had the opportunity to consider the matter in
light of the prescriptions we announce today. We therefore vacate
the Seventh Circuit’s judgment so that the case may be reexamined
in accord with our construction of
§21D(b)(2).
The judgment of the Court of Appeals is
vacated, and the case is remanded for further proceedings
consistent with this opinion.
It is so
ordered.
Footnote 1
The Shareholders brought suit against Tellabs executives
other than Notebaert, including Richard Birck, Tellabs’ chairman
and former chief executive officer. Because the claims against the
other executives, many of which have been dismissed, are not before
us, we focus on the allegations as they relate to Notebaert. We
refer to the defendant-petitioners collectively as
“Tellabs.”
Footnote 2
See, e.g., 437 F. 3d 588, 602 (CA7 2006)
(decision below); In re Credit Suisse First Boston
Corp., 431 F. 3d 36, 49, 51 (CA1 2005); Ottmann
v. Hanger Orthopedic Group, Inc., 353 F. 3d 338,
347–349 (CA4 2003); Pirraglia v. Novell, Inc.,
339 F. 3d 1182, 1187–1188 (CA10 2003); Gompper v.
VISX, Inc., 298 F. 3d 893, 896–897 (CA9 2002);
Helwig v. Vencor, Inc., 251 F. 3d 540, 553
(CA6 2001) (en banc).
Footnote 3
We have previously reserved the question whether reckless
behavior is sufficient for civil liability under §10(b) and Rule
10b–5. See Ernst & Ernst v. Hochfelder,
425 U. S. 185, 194, n. 12 (1976).
Every Court of Appeals that has considered the issue has held that
a plaintiff may meet the scienter requirement by showing that the
defendant acted intentionally or recklessly, though the Circuits
differ on the degree of recklessness required. See
Ottmann, 353 F. 3d, at 343 (collecting cases). The
question whether and when recklessness satisfies the scienter
requirement is not presented in this
case.
Footnote 4
Nothing in the Act, we have previously noted, casts doubt
on the conclusion “that private securities litigation [i]s an
indispensable tool with which defrauded investors can recover their
losses”—a matter crucial to the integrity of domestic capital
markets. See Merrill Lynch, Pierce, Fenner & Smith
Inc. v. Dabit, 547 U. S. 71, 81 (2006) (internal
quotation marks omitted).
Footnote 5
Justice Scalia objects to this standard on the ground
that “[i]f a jade falcon were stolen from a room to which only A
and B had access,” it could not “possibly be said there
was a ‘strong inference’ that B was the thief.” Post, at 1
(opinion concurring in judgment) (emphasis in original). I suspect,
however, that law enforcement officials as well as the owner of the
precious falcon would find the inference of guilt as to B quite
strong—certainly strong enough to warrant further investigation.
Indeed, an inference at least as likely as competing inferences
can, in some cases, warrant recovery. See Summers v.
Tice, 33 Cal. 2d 80, 84–87, 199 P. 2d 1, 3–5 (1948)
(in bank) (plaintiff wounded by gunshot could recover from two
defendants, even though the most he could prove was that each
defendant was at least as likely to have injured him as the other);
Restatement (Third) of Torts §28(b), Comment e, p. 504
(Proposed Final Draft No. 1, Apr. 6, 2005) (“Since the publication
of the Second Restatement in 1965, courts have generally accepted
the alternative-liability principle of [Summers v.
Tice, adopted in] §433B(3), while fleshing out its
limits.”). In any event, we disagree with Justice Scalia that the
hardly stock term “strong inference” has only one invariably right
(“natural” or “normal”) reading—his. See post, at
3.
Justice Alito agrees with Justice Scalia, and
would transpose to the pleading stage “the test that is used at the
summary-judgment and judgment-as-a-matter-of-law stages.”
Post, at 3 (opinion concurring in judgment). But the test
at each stage is measured against a different backdrop. It is
improbable that Congress, without so stating, intended courts to
test pleadings, unaided by discovery, to determine whether there is
“no genuine issue as to any material fact.” See Fed. Rule Civ.
Proc. 56(c). And judgment as a matter of law is a post-trial
device, turning on the question whether a party has produced
evidence “legally sufficient” to warrant a jury determination in
that party’s favor. See Rule
50(a)(1).
Footnote 6
The Seventh Circuit held that allegations of scienter
made against one defendant cannot be imputed to all other
individual defendants. 437 F. 3d, at 602–603. See also
id., at 603 (to proceed beyond the pleading stage, the
plaintiff must allege as to each defendant facts sufficient to
demonstrate a culpable state of mind regarding his or her
violations) (citing Phillips v. Scientific-Atlanta,
Inc., 374 F. 3d 1015, 1018 (CA11 2004)). Though there is
disagreement among the Circuits as to whether the group pleading
doctrine survived the PSLRA, see, e.g., Southland
Securities Corp. v. Inspire Ins. Solutions Inc., 365
F. 3d 353, 364 (CA5 2004), the Shareholders do not contest the
Seventh Circuit’s determination, and we do not disturb
it.
Footnote 7
The Seventh Circuit raised the possibility of a Seventh
Amendment problem on its own initiative. The Shareholders did not
contend below that dismissal of their complaint under §21D(b)(2)
would violate their right to trial by jury. Cf. Monroe
Employees Retirement System v. Bridgestone Corp., 399
F. 3d 651, 683, n. 25 (CA6 2005) (noting possible Seventh
Amendment argument but declining to address it when not raised by
plaintiffs).
Footnote 8
In numerous contexts, gatekeeping judicial determinations
prevent submission of claims to a jury’s judgment without violating
the Seventh Amendment. See, e.g., Daubert v.
Merrell Dow Pharmaceuticals, Inc., 509 U. S. 579, 589
(1993) (expert testimony can be excluded based on judicial
determination of reliability); Neely v. Martin K. Eby
Constr. Co., 386 U. S. 317, 321
(1967) (judgment as a matter of law); Pease v.
Rathbun-Jones Engineering Co., 243 U. S. 273, 278
(1917) (summary judgment).
Footnote 9
Any heightened pleading rule, including Fed. Rule Civ.
Proc. 9(b), could have the effect of preventing a plaintiff from
getting discovery on a claim that might have gone to a jury, had
discovery occurred and yielded substantial evidence. In recognizing
Congress’ or the Federal Rule makers’ authority to adopt special
pleading rules, we have detected no Seventh Amendment
impediment.
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