Alito: The Business Friendly Justice?

Larry Ribstein has a great new post up on the jurisprudence of Third Circuit Judge Samuel Alito, a potential SCOTUS nominee. He sums up:

In short, Alito has displayed a marked tendency to enforce contracts as written, specifically including choice of law/forum and arbitration provisions that are intended to mitigate litigation costs. He’s also obviously aware of the problems that can be caused by lax proof standards and open-ended liability.

On the list that Prof. Ribstein has created, I was particularly interested in In re Burlington Coat Factories Sec. Lit. Prof. Ribstein says that decision involves a “deni[al] securities claims for failure to adequately allege scienter and materiality, and for lack of a duty to update.” My reading of the decision produced a somewhat more complicated picture, which may give some insights into Alito’s opinions about securities complaints.

First, unlike the district judge whose opinion the Third Circuit was passing on, Alito’s opinion is significantly more respectful of the pleading standard, reversing (in effect) a dismissal on materiality grounds. This decision – if representative of Alito’s larger jurisprudence – suggests that he is not particularly hostile to securities plaintiffs. In the end, the opinion does dismiss claims on 9(B) grounds, but with leave to re-plead.

Most significantly, the Judge appears to buy into the efficient capital markets hypothesis without hesitation, dismissing one claim which failed to result in a market reaction with the following reasoning.

In the context of an “efficient” market, the concept of materiality translates into information that alters the price of the firm’s stock. . . . This is so because efficient markets are those in which information important to reasonable investors (in effect, the market) … is immediately incorporated into stock prices. … Therefore, to the extent that information is not important to reasonable

investors, it follows that its release will have a negligible

effect on the stock price.

There are two basic problems with the idea that non-price-movement should mean immateriality as a matter of law. First, there will be times when market-wide distortions will dampen reaction to disclosures — which is why we require litigants to conduct expensive loss causation analyses which correct for the effect of the market-basket. Second, the behavioral finance literature, summarized by Ribstein (in a great paper) here, should give pause to judges, plaintiffs and others who seek to rely heavily on the ideal of a perfectly well-functioning market. To be fair, we can’t blame Judge Alito for not being aware of this literature back in 1997, but it would be interesting to know what he thinks today.

Needless to say, if I were on the judiciary committee, we’d have fewer questions on intellectually moribund subjects like con law, and many more of the following type(s): “How should judges go about evaluating the question of whether the stock market is fully efficient? Can securities class actions survive evidence of irrational decisionmaking?”

[UPDATE: I’ve investigated Judge Alito’s securities decisions further here.]

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10 Responses

  1. Paul Gowder says:

    Aaaaaah! I predicted him as one of the front runners, then what did I do this weekend as all the commentators were finally catching up?! Well, the odds on intrade seems just a little high, and the Bush administration just a little too unpredictable, so what do I do? Bet (small) against him. Late last night. Hunter S. Thompson would’ve understood this feeling…

  2. Judge Alito on Copyright

    Yesterday, Larry Ribstein offered a fascinating analysis of numerous of Judge Samuel Alito’s opinions in business law cases. Dave Hoffman, from his new berth at Concurring Opinions, has already followed up with some additional analysis of one o…

  3. Nate Oman says:

    “…we’d have fewer questions on intellectually moribund subjects like con law…”

    Indeed…

  4. SCOTUSblog says:

    Blog Round-up – Monday, October 31st.

    Blog Coverage of the Alito Nomination: ACSblog has this post on his life as a litigator. Think Progress offers this perspective with Alito’s views on women’s right, civil rights and other issues. Election Law Blog has this post on why…

  5. An Alito primer

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    UPDATED all day Monday, now without the distracting “UPDATE” notices throughout. Check back. Here are the best pre- — and post-! — announcement resources for those who want to learn about Judge Alito’s opinions and approach to constitutional law. Som…

  7. An Alito primer

    UPDATED all day Monday, now without the distracting “UPDATE” notices throughout. Check back. Here are the best pre- — and post-! — announcement resources for those who want to learn about Judge Alito’s opinions and approach to constitutional law. Som…

  8. SCOTUSblog says:

    Blog Round-up – Monday, October 31st.

    Blog Coverage of the Alito Nomination: ACSblog has this post on his life as a litigator. Think Progress offers this perspective with Alito’s views on women’s right, civil rights and other issues. Election Law Blog has this post on why…

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  10. IPTAblog says:

    Blawg Review #31

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