Anything but General: Pleading Scienter in Rule 9(b) Claims

The legal field has just finished reeling from the increased Rule 8 pleading requirements. In Twombly and Iqbal, the Supreme Court transformed the Rule 8 pleading standard by adding a new plausibility standard. Now after the dust has settled, circuit courts have changed the Rule 9(b) fraud pleading standards for scienter.

Federal Rule of Civil Procedure 9(b) creates a heightened pleading standard for fraud claims, and requires that lawyers plead circumstances of fraud with particularity. However, “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” F.R.C.P. 9(b). Past interpretations of the law required only basic statements alleging scienter to survive a motion to dismiss.

Now, more is required. Courts have increased the standard for pleading scienter under Rule 9(b), but not in a consistent fashion. Three distinct interpretations have emerged, and lawyers should be conscious of these interpretations when alleging fraud.

The Three Interpretations of Scienter Under Rule 9(b)

The Second Circuit created its own “strong inference” standard for scienter. The Second Circuit requires more than general allegations of intent to prove fraud. When pleading scienter, parties “must allege facts that give rise to a strong inference of fraudulent intent.” First Capital Asset Mgmt., Inc. v. Satinwood, Inc., 385 F.3d 159, 179 (2d Cir. 2004) (log-in required). This standard requires more than the explicit language of Rule 9(b), but is not as stringent as the strong inference test used for securities fraud. In 2007, the Supreme Court created a strict balancing test under the strong inference language of the Private Securities Litigation Reform Act (PLSRA). Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (2007). While the PLSRA test is reserved for scienter in securities fraud claims, the Second Circuit’s use of two different strong inference standards creates confusion.

The Second Circuit’s approach has not been adopted by other circuits. However, those seeking to plead any type of fraud in the Second Circuit should be conscious of the “strong inference” standard, and go beyond general statements when alleging intent. Plaintiffs can meet this standard by “(1) alleging facts to show that defendant[ ] had both motive and opportunity to commit fraud, or by (2) alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness.” PetEdge, Inc. v. Garg, No. 1:15-CV-9606-GHW, 2017 WL 564088, at *9 (S.D.N.Y. Feb. 10, 2017) (alteration in original) (log-in required).

Other circuits replaced the general scienter pleading standard of Rule 9(b) with the Twombly and Iqbal plausibility standard. The majority of circuits have required that plaintiffs plead more than general statements of fraudulent intent since Twombly and Iqbal. In Iqbal, the Court held that a claim “has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 667-78 (2009). While this statement was addressing Rule 8 pleading, courts have applied it to Rule 9(b) as well.

The First, Third, Fifth, Sixth, Seventh, and Eighth Circuits have all interpreted Rule 9(b)’s scienter standard as a plausibility standard in the post-Iqbal era. In these circuits, plaintiffs must allege facts that rise to the level of plausibility by providing “enough facts from which malice might reasonably be inferred.” Schatz v. Republican State Leadership Comm., 669 F.3d 50, 58 (1st Cir. 2012) (log-in required).

In other words, general allegations are no longer enough. Lawyers in these circuits should not rest on general statements of intent for fraud claims. Rather, lawyers should allege enough facts to support an inference of scienter.  

Few circuits still follow the exact language of Rule 9(b) and require only general allegations of intent. The Fourth, Eleventh, and D.C. Circuits have yet to require heightened pleading for scienter in fraud. In 2015, the Eleventh Circuit applied the Twombly and Iqbal plausibility standard for Rule 8 claims, but held that plaintiffs “may allege scienter generally” under Rule 9(b), ignoring the heightened standard proposed by other circuits. Urquilla-Diaz v. Kaplan Univ., 780 F.3d 1039, 1051 (11th Cir. 2015) (log-in required).

The D.C. Circuit and Fourth Circuit have not spoken on this issue recently, so change may be ahead. Those seeking to allege fraud in the Fourth Circuit or D.C. Circuit may choose to hold themselves to the higher plausibility standard to avoid risking dismissal.