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US Supreme court strikes against frivolous litigation

On April 19, a unanimous US Supreme Court helped biotech companies ward off future frivolous lawsuits by demanding that investors demonstrate they lost money directly as a result of companies’ fraudulent actions.

Merely stating stocks were bought at apparently inflated prices does not amount to showing shareholders suffered a calculable economic loss, the Court found. The decision reversed a lower court’s ruling.

In 1997, Dura Pharmaceuticals had projected rising profits from drug sales and FDA approval for its new asthma-drug dispenser. One year later both projections proved wrong, at which point Dura’s stock price collapsed and angry investors started a class action lawsuit.

According to Jack Auspitz, an expert in securities litigation at law firm Morrison & Foerster in New York, the decision is important because it sets high standards for plaintiffs from the moment they file their first complaint. Dismissal of such early motions is often a company’s best chance to walk away without harm, Auspitz says, since most class action suits are settled before trial. He adds, “The requirements [prescribed by the Dura decision should help biotech companies with often volatile stock prices defeat meritless lawsuits.”

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