Larry E. Ribstein*
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit1 finds Congress and the Supreme Court caught in the conflict between three significant policy goals. The first is the need to rein in litigation that increasingly threatens to swamp every type of business in liability and precaution costs. The second is a perceived need to control securities fraud, particularly in the wake of the stock market collapse and revelations of fraud at Enron and other companies. The third policy goal is the need to preserve our federal system by appropriately limiting the federal government’s power. The conflict arises because Congress seemingly must expand federal power to control state courts and legislatures that seek to encourage local litigation. At the same time, controlling state fraud litigation seemingly increases the need for more federal antifraud law, further expanding federal power and shrinking the states’ role in making corporate and securities laws.
By broadly interpreting Congress’ preemption of state securities fraud remedies and extending the dominance of federal law, Dabit missed an opportunity to encourage Congress to consider how to reconcile these conflicting policy goals. This article shows that there is, in fact, a way out of the dilemma by which Congress can control abusive state and federal litigation without either unduly expanding federal power or sacrificing the states’ role in remedying fraud: Congress can preserve the states’ power to remedy securities fraud under their corporation laws. This would activate the corporate law
* Mildred Van Vorhees Jones Chair, University of Illinois College of Law. Thanks to Rich Booth, Jim Cox, David Hyman, and Richard Painter for valuable comments, and for comments at a University of Illinois College of Law workshop.
1 S. Ct. 1503 (2006).