Williams v. WMX Technologies, Inc. ( 1997 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-20461
DENNIS WILLIAMS,
RICHARD DREILING,
Plaintiffs-Appellees,
versus
WMX TECHNOLOGIES, INC. formerly known as
Waste Management, Inc. and
ENVIRONMENTAL INDUSTRY ASSOCIATIONS,
formerly known as National Solid Waste Management
Association; DEAN L. BUNTROCK,
Defendants-Appellants.
Appeals from the United States District Court
For the Southern District of Texas
April 24, 1997
Before HIGGINBOTHAM, DAVIS, and BARKSDALE, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This is a class action suit alleging fraud in the sale of
securities. WMX, EIA, and Dean Buntrock bring this interlocutory
appeal from the district court’s denial of their motion to dismiss
Williams and Dreiling’s complaint. We find that the amended
complaint failed to allege fraud with particularity, reverse the
order of the district court, and remand with instructions to
dismiss.
I.
In 1987, news services over much of the world followed the
plight of a barge heaped with New York state garbage off the coast
with no landfill willing to take its waste. This event seeded a
public perception that the United States was running out of space
to dispose of its trash. Much public discussion followed.
Finally, on January 19, 1995, the Wall Street Journal published an
article detailing the history of this “crisis,” postulating that we
were never really running out of disposal space. This article also
attributed much of the media’s attention about declining landfill
space to large garbage companies willing to exploit public fear of
a garbage crisis.
On February 24, 1995, Dennis Williams and Richard Dreiling
filed this suit alleging that WMX, a national garbage hauling
service, and its president, Dean Buntrock, defrauded the public,
government agencies, and local trash haulers who sold out to WMX by
perpetuating the “garbage crisis” myth. Plaintiffs also sought to
represent a class of purchasers of “securities, including the
common stock of WMX for a period beginning January 1, 1987, and
ending December 31, 1993.” The putative class has not been
certified. Williams and Dreiling were co-owners of Texas
Sanitation Industries, sold to WMX in exchange for WMX stock. On
June 6, 1995, Williams and Dreiling filed an amended pleading,
adding EIA, a trade group formed to lobby for the interest of the
garbage companies, as a defendant and modifying its claims to
allege violations of RICO and aiding and abetting a 10b-5
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violation. Williams and Dreiling alleged that EIA was liable for
the fraud committed by WMX because it is linked both operationally
and financially with WMX and that it participated in disseminating
false and misleading material in the market.
In their amended complaint, Williams and Dreiling alleged that
during the time they were contemplating whether to sell TSI for
stock, an employee of WMX, Lynn Lantrip, stated that: 1) there
existed a shortage of landfill capacity; 2) TSI would soon have no
place to dump the trash it hauled; 3) WMX could soon be unable to
accept any trash hauled by TSI; and 4) WMX owned and controlled
more landfill capacity than any other company in the United States.
Their brief also alleged that WMX’s January 1992 prospectus falsely
stated that:
Suitable sanitary landfill facilities have become
increasingly difficult to obtain because of land
scarcity, local resident opposition and expanding
governmental regulation. The scarcity of sites and
increased volume of wastes have resulted in more
intensive use of existing sanitary landfill facilities.
As its existing facilities become filled, the solid waste
disposal operations of the Company are and will continue
to be materially dependent on its ability to purchase,
lease or obtain operating rights for additional sites and
obtain the necessary permits from regulatory authorities
to operate them. There can be no assurance that
additional sites can be obtained or that existing
facilities can continue to be operated. However,
management believes that the facilities currently
available to the Company are sufficient to meet the needs
of its current operations for the foreseeable future.
Attached to the amended complaint were 62 newspaper articles
alleged to contain public misrepresentations by WMX and EIA, some
of which were excerpted in the body of the amended complaint.
Williams and Dreiling urged that these articles demonstrated that
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WMX and EIA conspired to perpetrate the “mass deception” that there
was a garbage crisis.
The district court denied a motion to dismiss the amended
complaint under Fed. R. Civ. P. 9(b) and 12(b)(6), and a motion to
reconsider, but granted a request to certify the interlocutory
ruling for appeal. Judge Hittner found that whether the pleading
of fraud met the particularity requirement presented a close
question. We granted the requested leave to appeal.
II.
The amended complaint alleged violations of RICO predicated on
mail and wire fraud, misrepresentations in violation of 10b-5, and
state law claims of fraud and negligent misrepresentation. We must
decide if the amended complaint was detailed enough to survive the
motion to dismiss, an attack leveled at all claims, resting as they
do upon the same asserted “fraud”.
Fed. R. Civ. P. 9(b) applies to securities fraud and RICO
claims resting on allegations of fraud. Tuchman v. DSC
Communications Corp., 14 F.3d 1061, 1068 (5th Cir. 1994)(securities
fraud); Tel-Phonic Serv., Inc. v. TBS Int’l, Inc., 975 F.2d 1134,
1139 (5th Cir. 1992)(RICO). WMX contends that 9(b) also applies to
the state law claims of common law fraud and negligent
misrepresentation. Because Williams and Dreiling do not attempt to
distinguish these claims in their brief, and because the state law
claims rely upon the same misrepresentations as the federal claims,
we do not distinguish between them here. See Shushany v. Allwaste,
Inc., 992 F.2d 517, 520 n.5 (5th Cir. 1993). We see no principled
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reason why the state claims of fraud should escape the pleading
requirements of the federal rules, and the parties have not urged
a separate focus upon state law claims of negligent
misrepresentation.
The elements of fraud include: 1) a misstatement or omission;
2) of material fact; 3) made with the intent to defraud; 4) on
which the plaintiff relied; and 5) which proximately caused the
plaintiff’s injury. Cyrak v. Lemon, 919 F.2d 320 (5th Cir. 1990).
Pleading fraud with particularity in this circuit requires “time,
place and contents of the false representations, as well as the
identity of the person making the misrepresentation and what [that
person] obtained thereby.” Tuchman v. DSC Communications Corp., 14
F.3d 1061, 1068 (5th Cir. 1994); see also Melder v. Morris, 27 F.3d
1097, 1100 n.5 (5th Cir. 1994); Shushany v. Allwaste, 992 F.2d 517,
520 (5th Cir. 1993).
As the Second Circuit has noted, articulating the elements of
fraud with particularity requires a plaintiff to specify the
statements contended to be fraudulent, identify the speaker, state
when and where the statements were made, and explain why the
statements were fraudulent. Mills v. Polar Molecular Corp., 12
F.3d 1170, 1175 (2d Cir. 1993). We agree with the Second Circuit’s
approach. This suit was filed prior to the effective date of the
Private Securities Litigation Reform Act, and while its provisions
do not apply, the Act adopted the same standard we apply today.
See H.R. Conf. Rep. No. 369, 104th Cong., 1st Sess. 41 (1995); 15
U.S.C. § 78u-4(b).
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The cry of pleading technicalities must be put in perspective.
The rules of civil procedure adopted in 1938 implemented a profound
change in the role of pleading in defining issues for trial. In
the main, the complaint became an ignition point for discovery.
Issues were to be “defined” by discovery, not pleading. Our
reverential treatment of the large achievements of the 1938 rules
may not have fully counted its price, or at least the price over
time seems to have gone up as pretrial process dwarfs actual
trials. We do not fully understand the extent of these
difficulties or their cause. It does remain clear that ready
access to the discovery engine all the while has been held back for
certain types of claims. An allegation of fraud is one. Rule 9(b)
demands a larger role for pleading in the pre-trial defining of
such claims.
That said, the requirement for particularity in pleading fraud
does not lend itself to refinement, and it need not in order to
make sense. Directly put, the who, what, when, and where must be
laid out before access to the discovery process is granted. So
today we neither set springs for the unwary nor insist on
“technical” pleading requirements. We remind that this bite of
Rule 9(b) was part of the pleading revolution of 1938. In short,
we apply the rule with force, without apology. At the same time,
we read Rule 9(b) as part of the entire set of rules, including
Rule 8(a)’s insistence upon “simple, concise, and direct”
allegations. Relatedly, while 9(b) stands as an exception to an
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overarching policy of immediate access to discovery, it did not
reflect a subscription to fact pleading.
The inferior courts have emphasized that Rule 9(b)’s ultimate
meaning is context-specific. When a limitation period looms large
and the context strongly suggests that claimed “fraud” walks close
to non-actionable expression of opinion, 9(b) takes on especial
force. Finally, we must not dim the beacon of Rule 8(f) that “all
pleadings shall be construed as to do substantial justice.” We
must give a fair opportunity to plead.
A complaint can be long-winded, even prolix, without pleading
with particularity. Indeed, such a garrulous style is not an
uncommon mask for an absence of detail. The amended complaint
here, although long, states little with particularity. Williams
and Dreiling allege that the “fraud” was implemented by false
statements in WMX’s prospectus, its face-to-face negotiations for
the purchase of competitors’ companies, and in false disseminations
to the market. First, they claim that a representative of WMX,
Lynn Lantrip, made face-to-face misrepresentations to them at a
meeting to discuss the sale of their trash hauling company to WMX.
Second, they claim that WMX’s prospectus contained
misrepresentations, presumably in the only language from the
prospectus included in the amended complaint. This is an excerpt
from a section of the prospectus entitled “Risk Factors.” The
final basis for Williams and Dreiling’s allegations of fraud is a
collection of newspaper articles, few of which are excerpted in the
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complaint. We will consider each of these allegations for their
particularization of fraud.
A. The Discussion with Lynn Lantrip
Williams and Dreiling claim that they sold their company in
large part on the perception of a landfill crisis and
misrepresentations made by Lynn Lantrip that encouraged this
perception. The amended complaint does not state a place or time
that these representations were made. WMX suggests a motive for
Williams and Dreiling’s apparent reluctance to be particular:
because they received WMX stock on February 26, 1992, and this suit
was filed on February 24, 1995, the allegedly fraudulent
misstatements occurred outside the limitations period established
in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S.
350 (1991). Because we do not reach the question of limitations,
we do not address WMX’s assertion. At a minimum, Rule 9(b)
requires that the plaintiff specify the particulars of “time,
place, and contents of the false representations.” Tuchman, 14
F.3d at 1068. The allegations of face-to-face fraudulent acts by
Lantrip fail for lack of particularity.
B. The Prospectus
Williams and Dreiling broadly allege that WMX’s prospectus, as
excerpted in their complaint, contained fraudulent statements about
the future of landfill availability. However, it is not clear from
the amended complaint which assertions in the excerpted prospectus
statement they are challenging as false. The amended complaint
merely excerpts the prospectus and provides no analysis of its
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contents or falsity. On its face, the statement seems to say no
more than the future of WMX as a waste disposal company is
materially dependent on its ability to find space to dump its
waste. The statement also says that new landfills have been hard
to locate, but that WMX presently has sufficient facilities
available for the disposal of waste. The language of the excerpt
is equivocal, which is appropriate because the “risk factors”
section of a prospectus is not intended to make promises or claims
regarding the future, but is meant to warn investors of factors
that can affect a company’s future performance. Williams and
Dreiling’s lack of specificity as to which portion is false and why
prevents this portion of the complaint from meeting the standard of
pleading set out in Rule 9(b).
C. The Newspaper Articles
The allegations of fraud perpetrated in the press suffer from
the same deficiencies as Williams and Dreiling’s other allegations.
They do not attempt to parse the articles to demonstrate which
statements were fraudulent and attributable to WMX, EIA, or
Buntrock. Although newspaper articles attached to a pleading may
be considered by this court, Lovelace v. Software Spectrum, Inc.,
78 F.3d 1015, 1017 (5th Cir. 1996), plaintiffs must also “set forth
an explanation as to why the statement or omission complained of
was false or misleading.” In re GlenFed, Inc., Sec. Litig., 42
F.3d 1541, 1548 (9th Cir. 1994)(en banc).
The articles are referenced in a section of the complaint
titled “The Myth is Perpetrated in the Marketplace,” which reads:
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WMX and its trade association the NSWMA were
disseminating the false and fraudulent myth of a landfill
crises [sic] in a huge number of ways and means.
Attached hereto as Exhibit “1" are excerpts of news
articles that either quote WMX and/or NSWMA, or, on
information and belief, rely on information supplied by
these defendants.
The failure of this section of the complaint to identify specific
statements made by any of the defendants is fatal to Williams and
Dreiling’s action. See generally, Hershfang v. Citicorp, 767
F. Supp. 1251, 1259 (S.D.N.Y. 1991)(decrying the use of “a patchwork
of newspaper clippings” to establish a claim of securities fraud).
These vague pleadings illustrate the practical basis for the
requirement that a plaintiff point to specific statements made by
the defendants. Many of the newspaper excerpts attached to
Williams and Dreiling’s complaint quote the NSWMA, the predecessor
to the EIA, without specifying who gave information to the paper.
These excerpts, standing alone, cannot satisfy the “who, what,
when, where, and how” required by Rule 9(b). Melder v. Morris, 27
F.3d 1097, 1100 n.5 (5th Cir. 1994)(citing DiLeo v. Ernst & Young,
901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. 941 (1990)).
San Leandro Emergency Medical Group Profit Sharing Plan v. Philip
Morris Co., 75 F.3d 801 (2d Cir. 1996), is not to the contrary. In
Philip Morris, the court found that unattributed newspaper
statements were actionable where the article contained numerous
other attributed quotes. Id. at 810. Here, the article excerpts
contain no quotes from named officers or directors of WMX.
Many of the other article excerpts cited by Williams and
Dreiling are along the lines of the one from the August 30, 1989,
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Houston Post. The excerpt of an article titled “Waste firm, 17
subdivisions sharing profits from trash recycling program” reads:
The program to encourage recycling not only gives Waste
Management a cash dividend -- the other 50 percent from
the sale of recyclables -- but saves valuable space in
the company’s landfills.
This excerpt discloses nothing about a statement by an employee of
WMX or EIA. Indeed, it is unclear what fraudulent assertion
Williams and Dreiling are challenging. The only statement that can
be construed as commenting upon landfill availability is that space
in landfills is valuable, hardly actionable.
Other articles are just as innocuous. It is unclear what
purpose Williams and Dreiling have in mind when they cite articles
that attribute to the NSWMA the notion that, although ensuring
adequate garbage disposal now ranks third on a list of problems
facing local officials, it had previously been ranked second.
Similar infirmities pervade all of the articles attached to the
complaint. This lack of specificity stands in contrast to the
widespread nature of the conspiracy that Williams and Dreiling
attempt to allege.
Excerpts of the articles that appear in the body of the
complaint are unaccompanied by specific allegations. No attempt is
made to isolate statements and particularize their falsity. In a
section of the complaint titled “WMX/NSWMA Spread the Myth of a
Landfill Crisis,” Williams and Dreiling cite a Wall Street Journal
article asserting that “Big trash-handling companies certainly knew
there was no landfill crisis but helped spread the word of one
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anyway. . . .” Complaint, at 8. This section of the complaint
continues, noting that the article stated that:
Dean L. Buntrock, chairman and chief executive
officer of WMX Technologies, Inc., had loaded up on dump
space in the 1970s and 1980s. He had also started a
trade group and lobbying arm, the National Solid Waste
Management Association. After the Mobro voyage, the
group was widely quoted asserting that dump capacity was
shrinking.
. . .
WMX was . . . telling customers as recently as 1993:
“This nation is quickly running out of places to dispose
of trash.”
These excerpts are insufficient to put any of the defendants on
notice as to which of their assertions are challenged. Indeed the
excerpts do not quote a defendant, they merely say that the
defendants were widely quoted or paraphrase previous statements.
III.
We find that the amended complaint failed to state claims of
fraud with the particularity required by Fed. R. Civ. P. 9(b).
Plaintiffs have failed in two attempts to plead with particularity.
Their efforts have been carefully reviewed by an able district
judge. The order of the district court denying the defendants’
motion to dismiss is REVERSED and this case is REMANDED to the
district court with instructions to dismiss.
REVERSED and REMANDED with instructions.
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