The Supreme Court's decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, involves the reconciliation of three significant policy goals – controlling abusive litigation, deterring securities fraud, and preserving our federal system by limiting the federal government's power. These goals seem to conflict in that controlling litigation involves expanding federal power, thereby foreclosing potential state approaches to controlling fraud. In Dabit, the Court opted to broadly interpret the federal government's preemption of state securities remedies, thereby giving momentum to the federalization of corporate law. This article shows that forcing Congress to attend more closely to the role of state law might have encouraged a better reconciliation of the three policy goals. Specifically, Congress can control abusive litigation without sacrificing the states’ role in remedying fraud by preserving fraud remedies imposed under state corporation laws. Letting firms choose the applicable state law would motivate states to develop reasonable remedies rather than to invite abusive litigation. A viable state fraud remedy would, in turn, free Congress and the courts to examine the appropriate extent of federal fraud remedies.


Law and Economics

Date of this Version

July 2006