Billy Tauzin

Mr. TAUZIN

Mr. TAUZIN. Mr. Chairman, citizens invest in money market funds that make investments, just as they invest in pension funds that are run by governments and by private entities that make investments. There is no difference. My question to the gentleman is this: Why should we say to a citizen that chose a private investment fund to make his investments, ``You're going to have a set of laws that relate to you, but if you invest in a government pension fund, you get a different set of laws that apply to you''? That is what is wrong.

Mr. TAUZIN. Mr. Chairman, will the gentleman yield on that point?

Mr. TAUZIN. If the gentleman would yield further, I just want to be absolutely clear that the amendment that the gentleman has offered goes further than exempting these kind of lawsuits from the liability standards, it exempts it from the entirety of this bill, is that correct?

Mr. TAUZIN. If the gentleman would yield further, then a lawyer who wants to pursue a case for one of these listed up here in front of us could still engage in a conflict-of-interest position that is prohibited by this bill, could still engage in payment of bounties prohibited by this bill?

Mr. TAUZIN. If the gentleman would yield further, the answer is that this amendment does, in fact, exempt cities and these funds from the other protections of this bill, conflict-of-interest, payment of bounties?

Mr. TAUZIN. If the gentleman will yield further, the question is, does this amendment also exempt these suits from the conflict-of- interest provisions, the payment of bounties, other problems we have had with lawsuits where lawyers are, in fact, sometimes engaged in a conflict-of-interest provision?

Mr. TAUZIN. I understand the gentleman to explain the amendment that it allows the municipalities to sue under the old liability regimes. The question is, does it also exempt the municipalities and pension funds from the other provisions, such as not paying bounties, conflict- of-interest provisions, and other protections of this bill?

Mr. TAUZIN. Does the gentleman's amendment exempt countries and municipalities from the other provisions of this bill?

Mr. TAUZIN. Mr. Chairman, will the gentleman yield?

Mr. TAUZIN. I thank the gentleman for yielding to me. Mr. Chairman, the gentleman from Michigan has asserted that the addition of the word ``deliberately,'' which is contained in the gentleman's substitute, is something new to the law. Let me beg to differ, and let me quote from the Supreme Court. The court said on page 212 of the decision, ``We note that such a reading cannot be harmonized,'' a reading of nonintentional fraud, ``with the history of this ruling. A history making clear that when the Commission adopted the rule, it was intended to apply only to activities that involved Scienter.'' Scienter is defined by the court on page 194. It means ``a mental state embracing intent,'' that is deliberateness, ``intent to deceive, manipulate, or defraud.'' I will quote from Sundstrand as well. This is the Sundstrand language, the definition of recklessness is ``the kind of recklessness that is equivalent to willful fraud.'' Willful, deliberate fraud. Further, ``Indeed the franking definition,'' which is what they used, ``of recklessness should be viewed as the functional equivalent of intent.'' Deliberateness is what the Supreme Court in Sundstrand talked about, is absolutely part of our law, and it should be part of it. And I thank the gentleman for yielding.

Mr. TAUZIN. If the gentleman has suggested it should come out as he and the gentlewoman have, we are saying OK, if you are going to take that out, that you are still talking about a deliberate refraining from taking steps to discover the truth or falsity of the statement.

Mr. TAUZIN. Let me answer your question.

Mr. TAUZIN. Reclaiming my time, I will be happy to respond; whatever time I have, I have got your question. The question is should the example that is quoted in Sundstrand of what is not negligence be contained in this bill. You have objected to that. The gentlewoman has asked we take it out. We are saying OK, if you really want to do that, let me answer the question----

Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, I rise in support of the substitute amendment. We are talking literally about the last sentence of the definition contained in the Sundstrand decision of recklessness. I want to point out for the members of the committee that the last sentence that is being debated here by the Eshoo amendment is contained in the Sundstrand decision. It is contained in the Sundstrand decision in further elaboration of what recklessness is not; Sundstrand adopts the language from the Oklahoma case which was the first case that was decided after the Supreme Court case of Hochfelder. It adopted that language and defined what recklessness is. That is in the bill exactly, indeed, as the court described it in the Sundstrand decision. But Sundstrand and the court in Sundstrand went a step further. It said not only is this what recklessness is, this is what it is not. And why was that important? It was important because in the original Supreme Court decision the Court made it very clear to its circuit courts who are going to be interpreting the law even more precisely than the Supreme Court did, it made it very clear, and here is a quote from Hochfelder, that ``When a statute,'' like 10(b)(5) ``when a statute speaks so specifically in terms of manipulation and deception and of implementing devices and contrivances, the commonly understood terminology of intentional wrongdoing, and when its history reflects no more expansive intent, we are quite unwilling to extend the scope of this statute to negligent conduct.'' In effect, what Hochfelder was saying was that this statute, 10(b)(5), that we are codifying and amending today, was clearly in its origination and in its history an intentional-fraud statute, not a negligence statute. Now, I know that there are many who would like to turn it into a negligence statute. That is not what it is. It is an intentional-fraud statute. The courts have interpreted that statute to say that when somebody's conduct is not quite clearly intentional but so reckless as to get real close to intentional misconduct, that that, too, can be used as a cause of action under the statute. Hochfelder was saying you still need to find some elements that lead you to that conclusion that recklessness is so severe that it is the equivalent of intentional wrongdoing, and so Sundstrand came along, the Oklahoma case came along interpreting that Supreme Court decision even further and defined recklessness in those terms. Let me quote from what is in the bill and what is in Sundstrand: ``Reckless conduct may be defined as a highly unreasonable omission involving not merely simple or even inexcusable negligence.'' Hear this again, ``Not even inexcusable negligence, but an extreme departure from the standards of ordinary care and which presents a danger of misleading buyers or sellers that is either known by the defendant or is so obvious that the actor must have been aware of it.'' Sunstrand is, in effect, saying that you have got to get awfully close to intentional negligence. What the gentleman is now offering in place of further clarifying language of what is not negligence that is contained in Sundstrand, verbatim, is a statement that is taken from other court decisions, again interpreting the Supreme Court decision saying ``deliberately refraining from taking steps to discover whether your statement is true or false is, indeed, recklessness.'' In effect, referring again, as the Supreme Court said you must refer to, some kind of deliberateness, some kind of intentional misconduct, something so close to the intent to defraud that it meets both the history, the intent, and the original language of section 10(b)(5). Let me say it again: There are many people who would like this section of the law to be a negligence section. It is not. This is a fraud section of law, and you can try to turn it into a negligence standard if you like by amendment. That is not what this law is all about. That is not what this section of litigation is all about. There are many lawyers who try to turn it into a negligence standard. The court in Sundstrand and the Supreme Court said that is not the law. This is a recklessness, almost right up there close to intent to defraud, and if you want to make sure that that is true, the gentleman's substitute amendment is not only right but eliminates, indeed, an example that is in Sundstrand, because I frankly think that is not good text in the law and substitutes instead a finding of the court.

Mr. TAUZIN. I continue to yield to my colleague, the gentleman from California.

Mr. TAUZIN. Mr. Chairman, I move to strike the requisite number of words. Mr. Chairman, there are two classes of stockholders whose interests can be affected by a 10B(5) statute. There is a class of investors who believes they have been defrauded, and they ought to be able to file a lawsuit. Under this bill they can file that suit. Any city, county, or individual in this country who believes they have been defrauded in their investments can file a suit, and if there is a fraudulent claim, they will have the full protections of joint and several liability that exists in current law. Under this bill the big change is that if you file a suit for something other than intentional fraud in this judge-made area of the law, you are going to have to specify who is guilty of the recklessness or who is guilty of the misconduct, and in the court proceedings they are going to find out what percent they contributed, and they will be liable for that percentage. It is called proportionate liability. So stockholders or investors, whether they be cities, counties, pension funds, or individuals who believe they have been caused to have a loss in their investments through someone's recklessness, can still file a lawsuit under this bill. They simply have to point to the guilty party, and the proportion of liability is assessed against that guilty party. That is the big change in this bill. But there is another class of stockholders who under current law are horribly affected under 10B(5) lawsuits. They are the stockholders who still own stock in the company that is being sued, who are still a part of the corporation that just got sued by one of these lawyers, and who find out that the value of their stock has been depressed because their company is suddenly involved in a big extended lawsuit that may be without merit. In fact, most of these cases are settled regardless of merit. In fact, one of the persons who went bankrupt as a result of some of these suits was quoted as saying, ``It wasn't the litigation we would lose that was the problem; it was the cost of winning that caused the greatest part of our financial distress.'' As companies around America are being sued under 10B(5) judge-made law, with deep pockets, or anybody who gets shotgun suits filed against them, finds out that their company is depressed and their stock is hurt, who do we find out is hurt then? It is the pension investor, the private investor, who still owns stock in that company and who finds out that the company is spending most of its money on lawyers and courtrooms instead of on creating products and creating jobs. Now, should it matter whether a lawsuit is brought by a government or by an individual when that is the result? This amendment will exempt all government suits under this 10B(5) filing, whether it was a derivative investment or not. The suit may be against a small company struggling to create jobs and indeed to return profits to its investors, as is often the case. Are we going to say that governments get better protections, that they can sue in deep pockets liability under this act, when citizens will be under this new standard? Are we going to say under our system of justice that governments have a better standing in court than citizens? If the reforms in this bill are not good for this country, and I firmly believe they are, I would not have engaged in this effort for 4 solid years to reform this section of law. If the Chairman of the SEC is correct when he said, ``There are two classes of stockholders whose rights must be balanced here,'' should we give government better protection under the law than we extend to citizens? Should we not have the same rules applying to government investors as we have applying to individual investors? If there is one thing Americans hate the most around here, it is when we apply different standards to government that we do to citizens. We just went through that in the first week of this Congress when we decided that the Congress should be accountable to the same laws we impose on businesses across America. Are we now going to say that when we are reforming this body of law, we are going to have a separate set of laws for government and a separate set of laws for citizens? I do not think we should do that. Let me concede, as my friend, the gentleman from Texas did, that I do not believe that governments bring frivolous lawsuits, but they do bring lawsuits against companies just like individuals do, and they ought to have the same rules apply to them as will apply to citizens in this case, and if Members believe as I do that we are reforming this law for the right reasons, they should vote against this amendment. If they do not, then they should vote for the amendment and vote against the bill.

Mr. TAUZIN. I yield to the gentleman from Texas.

Mr. TAUZIN. Reclaiming my time, this is not an additional amendment. This is a substitute for your own amendment. The idea is before I and other Members who support this bill are willing to accept your amendment which deletes language from the Sundstrand decision, we think you ought to have language that clarifies what the Supreme Court said. That is what this amendment does.

Mr. TAUZIN. We have been discussing that and other language taken from the Supreme Court decisions for some days now in an effort to try to make this bill more palatable to my friend from California who was going to offer this amendment.

Mr. TAUZIN. Mr. Chairman, I thank the gentleman from Texas [Mr. Fields] for yielding, and I, too, want to compliment the gentleman from California [Mr. Cox]. What he did was to listen very carefully to the concerns expressed by the gentlewoman and try to address them and answer them and bridge the gap. What he has done is not made up language. The language is from the latest expression of the courts, the U.S. District Court for the Southern District of New York, interpreting the Supreme Court decision in Hochfelder, and what the court said in that case, and I quote: When the defendant deliberately failed to acquire the information that would have indicated to her that statements were false or misleading, that constituted recklessness. That is the exact language the gentleman has presented to us today in this amendment. In quotes, ``The defendant deliberately refrained from taking steps to discover whether their statements were false or misleading constitutes recklessness,'' which is an exact statement of what the court said, not what the gentleman from California said.

Mr. TAUZIN. Mr. Chairman, will the gentleman yield?

Mr. TAUZIN. Mr. Chairman, will the gentleman yield?

Mr. TAUZIN

Mr. TAUZIN. Mr. Chairman, I yield 3 minutes to the gentleman from California [Mr. Berman].

Mr. TAUZIN. Mr. Chairman, I yield myself 6 minutes. Mr. Chairman, let me return the very fine compliments of the gentleman from Ohio [Mr. Oxley] the chairman of our subcommittee, for the work that was done in our Committee on Commerce on this bill. I should also quickly acknowledge the extraordinary efforts put in over the last 12 years of the former chairman of our committee, Mr. Dingell, who spoke earlier tonight. Mr. Dingell has been committed to the issue of product liability reform for many, many years. This was in 1988 when our committee finally agreed upon a product liability reform bill and produced it for the House, that bill unfortunately never made it to the House floor because it could not come out of the other subcommittee of jurisdiction. As a result, the product liability reform bill that Mr. Dingell and our committee fought so hard for in 1988 died its unnatural death in Congress and it has never until this day had a chance to be debated again. The bill we have before us is in many ways like that bill of 1988 and in many substantial ways very different. It is a bill that does, in fact, divide standards of liability between economic and noneconomic damages. Joint and several liability for economic losses, the losses you can put your finger on, the ones you can put an easy dollar equation on, and several proportionate liability for noneconomic losses, losses that are harder to estimate, the pain and suffering, the mental anguish and such that jurors very often award in numbers that surprise us. The bill also deals, as our bill did in 1988 with punitive damages, also it deals with them very differently and with a statute of repose although it deals with it very differently. I want to for a minute talk about those differences. In the statute of repose that we produced in 1988, a statute, a section of the bill that was designed to end liability for products that were manufactured many years ago, the statute of repose time was set at 25 years. This bill sets it at 15. We are told the reason it is set at 15 is to coincide more nearly with State statutes of repose which are generally in the 10- to 12-year range. But the big difference is that this statute of repose extends beyond capital goods, the goods that are normally depreciated, heavy machinery, and now extends to all products. That is a big change and one that we will want to debate I am sure when we get to the amendments on that section and on the bill. On the punitive damages area, there are two very--three very large differences as we look at the bill as it arises on the floor. The first large area of difference is the fact that the punitive damage cap, which is set in this bill which was apparently not in the bill in 1988, is set not only at $250,000 on products but it now is made to apply to all tort law and all civil suits, both State and Federal law, in civil actions for harm where plaintiffs, in fact, prove by a clear and convincing evidence conduct that was specifically intended to cause harm, intentional harm. There are two other differences. In the bill that we produced in 1988, we clearly said that the provisions on statute of repose did not apply to any plaintiff who did not have their medical bills paid. That bill, that provision, is still included in this bill, but I understand there will be an amendment from the other side to delete that language. I hope that does not occur, I hope we have a chance to debate the reason why that provision was in the 1988 bill and is currently contained in this statute. In the punitive damage area, there was an exemption from punitive damages for drugs that were previously approved by the FDA. That exemption has been deleted from this bill. There will be an attempt, I will join in that attempt, to reinstate that exemption. The reason is, punitive damages are designed in our civil procedure as a quasi-fine. How ludicrous it is to find a company for producing a product that we ourselves as a government approved. If that product causes some harm, it makes sense to make sure the harm is repaid, the harm is made whole, but should the government punish someone in a civil action or in a regulatory or criminal action for an action that the government itself approved? We are going to debate that tomorrow and I hope frankly we can come to the conclusion that that exemption ought to be returned to the bill as it did apply to the bill in 1988. As I said, the major difference in the punitive damage section is a cap in this application to all civil suits. We will debate that. I personally have a problem with punitive damages in civil suits, so capping them is not as severe a problem for me as it is for other folks. But I want to make a point that I hope we get a chance to make in debate tomorrow. I am disappointed frankly when I see the list of amendments that will be offered that we will not have an opportunity to offer more amendments in this section. Punitive damages are designed to punish a defendant who put us all at risk. My question is why should those damages go to the plaintiff? My question is why should not a very large percent of those damages go to the general public? If a company, a person, puts us all at risk with a product, the plaintiff obviously ought to receive some benefit for having brought that suit and called that to the court's attention and recovered some measure of damages for the rest of us. But a punitive damage award, a quasi-fine, ought to in fact insure to the benefit of the public at large. Some States have done that in their laws. We will have a chance to look at at least one amendment that does that but I would hope that the majority would permit us to look at different ways of characterizing punitive damages so that the public at large benefits when a fine is levied in a civil case in the form of a punitive damage. Mr. Chairman, I reserve the balance of my time.

Mr. TAUZIN. Mr. Chairman, I yield 4 minutes to the gentleman from Michigan [Mr. Dingell], the honorable ranking Member of our Committee on Commerce.