Industry groups back lawsuit legislation

Electronic News, April 4, 1994

WASHINGTON, D.C.--The American Electronics Association (AEA) and Semiconductor Industry Association (SIA) are backing legislation introduced by Senators Chris Dodd (D-Conn.) and Peter Domenici (R.N.M.) that seeks to curtail "the rising number of frivolous and meritless lawsuits filed by shareholders against publicly traded companies." The legislation would change some of the procedures for litigating class action shareholder suits; limit damages to actual losses; encourage alternative dispute resolution, and provide judicial discretion for imposing penalties for frivolous lawsuits.

"During the last three years, settlements in 60 suits filed against Silicon Valley companies alone have totalled more than $500 million," said Andrew Procassini, SIA president. "These settlements represent a tax on innovation and job creation, and it is time to place reasonable restrictions on the legal process to ensure that only legitimate cases are filed."

"By and large, these lawsuits are not brought by investors, but by slick attorneys who know how to take advantage of the legal system, all at the expense of the high-tech industry," said John Mancini, senior vice president of the AEA. "In simple terms, there's a lot of legalized extortion going on."

Mr. Procassini said: "We represent high-technology companies, may of which have experienced or live under the constant threat of securities lawsuits arising from conditions over which they have no control. This legislation will ensure that companies can operate in an environment that encourages innovation and dynamic change, while still allowing plaintiffs to successfully sue firms guilty of defrauding investors."

Mr. Mancini noted that volatile stock prices--a situation common to young, high-growth technology companies--often lead to the filing of lawsuits. "These suits often have no just cause, and are filed solely for the purpose of extracting settlements from corporations. The plaintiffs are usually investors who own only a few shares in the defendant corporation," he emphasized. "Most companies settle, regardless of their merits, because they can't afford the risk, expense and distraction of a jury trial."

During the last five years, one out of every eight corporations traded on the New York Stock Exchange has been sued for securities fraud, and at least one-third of the top 100 public companies in Silicon Valley has been sued for securities fraud, the AEA said. "Unless you believe that fraud on a massive scale is going on in thousands of companies, something is clearly wrong with the current system," said Mr. Mancini. "High-technology companies are disproportionately becoming targets of this litigation because of greater-than-average stock volatility.

"In the past two years, technology companies have accounted for well over half the reported settlements on these lawsuits, and the average settlement amount in these suits as $8.6 million," AEA said. "The time has come for high-tech companies to fight back," said Mr. Mancini, "and we are delighted that Senator Dodd is taking the leadership to help us end these meritless and baseless suits. Congressman (W. J.) Tauzin has introduced similar legislation in the House of Representatives, and we are prepared to do whatever is necessary to get these reforms passed. These reforms will not restrict or limit private actions where investors have, in fact, been defrauded. Rather, reform is needed to restrict the frivolous and meritless suits which deleteriously affect most publicly traded high-tech companies," he concluded.