Misrepresentation Must Be A 'Cause In Fact'

Dura Pharmaceuticals, Inc., ET AL. v. Broudo ET AL.
Supreme Court Opinion, 9th Circuit Court Opinion

Ah, an easier one, a unanimous court. This is about some people that bought Dura Pharmaceutical stock at an over valued price because of less-than-accurate press releases by the company.

The 9th circuit overturned the lower court's decision because the lower court did not consider the misrepresentations collectively, and thus misinterpreted "whether the total of [the accusations] even though individually lacking, are sufficient to create a strong inference that defendants acted with deliberate or conscious recklessness." This court reasoned that if the price of the stock was artificially inflated that the plaintiffs "were harmed when they paid more for the stock than it was worth," and that "it is at that time that damages are to be measured."

The Supreme Court recognized that this statement of the law is different than that in other jurisdictions, and thus decided to reconcile it. The Court reasoned that at "the moment the transaction takes place, the plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value." Furthermore, since stocks are bought 'with an eye to the future,' the most that can be said is "that the highest purchase price will sometimes play a role in bringing about future loss." Therefore, the misrepresentation cannot be considered to be a proven cause in fact.

The Court decided that the 9th circuit's logic cannot be reconciled with other common law. I have been studying this Restatement (Second) of Torts in a class, so its cool to see it applied today. Causation in fact is a big deal in this area, and I can only say that the debate between these two opinions seems to have come out on the right side, since the fact that those people paying an inflated price may be ripped off doesn't mean that they will be ripped off.