We are grateful for Professor Lipton’s detailed attention to our recent article, Abandoned and Split, But Never Reversed: Borak and Federal Derivative Litigation. Professor Lipton argues that we are in error when we conclude that federal derivative Section 14(a) claims have no place in the law. We are not persuaded and remain resolute that current Supreme Court doctrine compels the conclusion that federal derivative Section 14(a) claims cannot and should not exist. Three simple arguments suffice to rebut Professor Lipton’s analysis.
First, Professor Lipton fails to cite a powerful line of Supreme Court precedent that is fatal to her analysis. The Section 14(a) private right of action, whether direct or derivative, is implied. It is not express. The Supreme Court has evolved from a 1960’s philosophy that supported expansive, muscular implications and interpretations of private rights to a contemporary approach that abhors such implication. Courts today are instructed to avoid implying new private rights. They are also commanded to interpret “grandfathered” implied rights as narrowly as possible. For example, in Alexander v. Sandoval, the Court explained that Borak represents an “acien regime” that the Court has subsequently “abandoned” and “not returned to since…. Having sworn off the habit of venturing beyond Congress’s intent, [the Court will] not accept [the] invitation to have one last drink.” And, in the field of securities litigation, the Court, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., stated that “[c]oncerns with the judicial creation of a private cause of action caution against its expansion. The decision to extend the cause of action is for Congress, not for [the courts].” Accordingly, courts “must give ‘narrow dimensions … to a right of action Congress did not authorize.’”
The commandment of narrow interpretation, however, is nowhere cited in Professor Lipton’s analysis. Instead, Professor Lipton’s analysis requires consistent and repeated repudiation of that commandment. Indeed, whenever Professor Lipton addresses an ambiguity in the law, real or imagined, the ambiguity is resolved in a pro-plaintiff, expansive manner. We do precisely the opposite. We resolve ambiguities in a manner that narrows the effect of the implied right. We do so, not for policy reasons, but because the Supreme Court has instructed the courts to apply narrowing interpretations to all implied private rights of action. The difference between Professor Lipton’s analytic technique and ours is thus far more fundamental than an abstract academic difference over interpretive styles. It is a question of fidelity to controlling Supreme Court precedent. Ignoring controlling precedent does not make it disappear. This observation alone is sufficient to reject Professor Lipton’s analysis.
Second, just as the plain text and legislative history of the Exchange Act provide no support for the implication of a private Section 14(a) right of action, direct or derivative, they also provide no support for the implication of a federal derivative claim that would differ in any respect from state law derivative claims. Put another way, if the implication of a Section 14(a) private right of action is a step too far under current precedent, then the compound implication of a private right that can be enforced through an implied federal derivative cause of action is a fortiori two steps too far.
Third, there is an essential illogic to the proposition that the corporation that issued a defective proxy statement can seek redress for the proxy statement that it issued. That is the gravamen of a federal derivative Section 14(a) claim: Because the putative plaintiff stands in the shoes of the corporate entity, the entity is essentially suing itself for a false statement that it made. Put starkly, this is a liar suing itself over a lie that it told. Whatever Congress intended in adopting Section 14(a), there is no reason to believe that Congress expected that Section 14(a) would support such claims.
Professor Lipton offers multiple additional critiques of our article, but a more detailed response is, we believe, unnecessary. There is virtue in brevity, and these three simple observations are, we believe, sufficient to rebut Professor Lipton’s analysis.
