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Congress targets class-action suits

A House bill could close a loophole on shareholder lawsuits that have been flooding state courts and hectoring high-tech companies.

Rep. Rick White (R-Washington) and Rep. Anna Eshoo (D-California) today will introduce a bill to close a loophole on shareholder lawsuits that have been flooding state courts since Congress established rigorous requirements for federal court filings.

The bill, called the Securities Litigation Clarification Act, would require that any class-action suits involving nationally traded securities be filed in federal courts, where tougher rules apply.

Trial lawyers, the bill's sponsors say, are now filing securities class-action lawsuits in state courts to avoid more stringent federal rules dictated by the Private Securities Litigation Reform Act of 1995. Such suits, they add, are usually settled out of court--even if they lack merit--because companies find it more economical to reach quick agreement with lawyers rather than go through drawn-out court proceedings.

"This initiative is needed to complete the work we began in the last Congress," said Rep. Eshoo. "Instead of curbing frivolous lawsuits based...a loophole in the law merely channeled them to state courts. Our bill would close this loophole by returning these suits back to the federal system, where a uniform standard would be used to judge whether or not the suits have any validity."

Studies support proponents' claims that the number of stockholder class-action suits filed in state courts has increased since the 1995 securities law made it more difficult for plaintiffs to file in federal court.

A recent Stanford Law study, shows that about 26 percent of litigation has moved from federal to state court. Michael Perino, who co-authored the study, said in an earlier interview that this shift is likely the result of a "substitution effect" where plaintiffs file in state court when the underlying facts don't satisfy federal pleading requirements.

High-tech companies face a disproportionately large number of such suits because of the cutting-edge nature of their products and the resulting volatility of their stock prices. According to the Stanford study, 34 percent of securities class-action suits involve high-tech companies.