By Lisa Seachrist
WASHINGTON — The Senate overwhelmingly passed legislation Wednesday evening that ties up a loophole permitting frivolous securities lawsuits, which are barred in federal courts, from finding a home in state courts.
The Senate voted 79-21 in favor of the Securities Litigation Uniform Standards Act of 1998, S. 1260, which requires all class action suits involving 25 or more plaintiffs to be filed in federal court and subject to the federal rules of adequacy enacted in 1995.
"This is a tremendous victory for biotech," said Chuck Ludlam, vice president for government relations at the Biotechnology Industry Organization (BIO). "This vote plugs an egregious loophole in the Private Security Litigation Reform Act of 1995. It stops plaintiffs' attorneys from basically robbing our companies with meritless strike suits."
Frivolous lawsuits plagued the biotech industry in the early 1990's. Falling share prices provoked lawsuits against Immunex Corp., of Seattle; Xoma Corp., of Berkeley, Calif.; and Biogen Inc., of Cambridge, Mass. Typically, the allegation in these suits was that company management overstated the likelihood of regulatory success of products and, as a result, mislead stockholders.
Biotech executives have argued their companies are ripe targets for such suits because of the volatility of their stocks as lead drug candidates travel the bumpy road of the drug development and approval process. Too often, they said, it made more business sense to settle the lawsuits rather than spend precious research funds fighting them.
Cases Move To State Courts After 1995 Federal Law
In 1995, Congress overrode a presidential veto to raise the pleading standards in such cases in federal court and create safe harbors for companies to make forward looking statements, largely protecting them from this type of securities litigation. However, the suits simply moved from federal courts, where 85 percent of the litigation took place before 1995, to state courts, where the federal provisions do not apply.
S. 1260, which was sponsored by Sen. Phil Gramm (R-Texas), and co-sponsored by Sen. Christopher Dodd (D-Conn.) moves all class action securities legislation that involves stocks traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq into federal court.
"The Senate vote was the best possible sign," said BIO President Carl Feldbaum at the organization's annual legislative day Thursday. "This issue was becoming increasingly important to us as many of our companies were being saddled with these frivolous lawsuits. It really had the potential to become a standard of business."
A similar bill, H. 1689, sponsored by Rick White (R-Wash.) and Anna Eshoo (D-Calif.) awaits committee action. However, Commerce Committee Chairman Tom Bliley (R-Va.) is pushing to have the bill passed through committee and on the House floor for a vote before the August recess. *