When District Court Judge Melinda Harmon granted AllianceBernstein’s motion for summary judgment in the sprawling In re Enron Corp. Securities, Derivative and ERISA Litigation class action, the decision might have gone down as a minor footnote in the multibillion-dollar lawsuit. After all, Alliance Capital Management (AllianceBernstein’s predecessor) already was exonerated in other Enron-related cases. Its dismissal from a long list of defendants was a relatively small development compared to the

$7 billion in settlements Enron investors already reached with other financial institutions in the Texas case.

The language of the Houston District Court’s ruling, however, raised a stir among securities litigators–not because it dismissed the complaint, but because it asked the plaintiffs’ law firm–Lerach Coughlin Stoia Geller Rudman & Robbins–to pay AllianceBernstein’s legal fees for the summary-judgment phase.

“That kind of award is a rare beast,” says Lyle Roberts, a partner with LeBoeuf, Lamb, Greene & MacRae in Washington, D.C. “Plenty of cases are dismissed by the judge in an aggressive way, but the judge seldom awards legal fees or costs, even though such awards are allowed in the securities laws.”

If Judge Harmon’s decision survives appeal, it will send a message that plaintiffs’ lawyers can be held accountable in a loser-pays outcome.

“Litigators should be careful not to overreach,” Roberts says. “The court won’t be tolerant when it views the plaintiff as shooting at every possible target without any evidence.”

Control Person

The claim against Alliance focused on the idea of a “control person” under Section 15 of the Securities Act of 1933. The plaintiffs alleged Alliance Director Frank Savage, who was also an Enron director, signed a false and misleading SEC-registration statement related to $1.9 billion in Enron bonds in 2001. The plaintiffs claimed Alliance, as Savage’s employer, had control over Savage in his capacity as an Enron board member, and thus Alliance was liable for his misconduct under the 1933 Act.

While Judge Harmon acknowledged the plaintiffs brought the case against Alliance in good faith, she determined the Lerach firm should have dropped its claim soon after the discovery phase, rather than pressing its “control-person” hypothesis on scant evidence.

Judge Harmon noted that determining who controls whom for purposes of securities litigation is difficult because the legal standards for doing so are poorly defined.

Nevertheless, based on standards she cited from several cases– including Abbot v. Equity Group Inc. and Dennis v. General Imaging Inc.–Harmon determined the Lerach firm’s allegations were unsupported.

“Plaintiffs fail to prove any specific facts to conclude Alliance [had] the power to control Savage in his capacity as an outside director on Enron’s board, no less in his decision to sign the registration statement,” Harmon wrote.

The judge dismissed as insubstantial the few pieces of evidence Lerach did bring forward–such as one example in which an Alliance analyst sent Savage an e-mail saying Enron CEO Jeff Skilling had called another analyst an “asshole,” and a brief elevator exchange in which Savage stated a publicly reported Enron transaction was “a good deal.”

Given the weakness of Lerach’s evidence, Harmon said the firm should have realized the claims were unfounded after the discovery phase and should have dropped the case rather than continue pressing it forward into the judgment stage. Thus she dismissed the complaint and ruled the plaintiffs’ attorneys should pay Alliance’s defense costs for the judgment phase–sending a pointed message to securities litigators.

“The judge is saying, ‘Don’t waste my time,’” says Mark Kirsch, chair of U.S. litigation for Clifford Chance in New York, who defended AllianceBernstein. “Even if you bring a lawsuit in good faith, you are only entitled to carry it through if there is a good basis to do so.”

On The Hook

No self-respecting attorney is likely to acquiesce when accused of pursuing a case without merit, and accordingly the Lerach firm promises to appeal Judge Harmon’s ruling in this case.

“We didn’t do anything wrong, and we didn’t assert any claim that was unjustified,” says Bill Lerach, chairman of Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego. “We think an employer inherently has the power to control the employee, and that’s all we had to prove to have a valid claim.”

Interestingly, if the ruling is upheld despite Lerach’s appeal, the firm does not expect to contest the judge’s assertion that plaintiffs’ lawyers should cover Alliance’s fees. “In this field of law, if there is to be a fee-shifting award, the lawyers should step up to the plate and assume responsibility for fees,” Lerach says. “The clients should bear no financial risk in this kind of litigation, which is in the public interest.”

Notwithstanding Lerach’s agreement with the lawyer-responsibility principle, whether Judge Harmon’s order establishes a binding precedent for judges to hold lawyers accountable in a loser-pays scenario remains unclear. Harmon didn’t offer much guidance about the precedential effect of the decision. Rather, she wrote only, “it appears to this Court more appropriate that an award of fees and costs should be borne by counsel.” The order says nothing about the plaintiffs’ lawyers, but simply grants Alliance’s motion for fees and costs.

“Looking at the technical language, she didn’t circle back in her conclusion and say ‘I mean it; the law firm is on the hook,’” Roberts says. Nevertheless, the practical importance of the judge’s ruling is not necessarily in its technical precedent, but in the message it sends to litigants–namely, scattergun lawsuits can be costly if claims are not supported by strong evidence.

“When you know or should know your case has no merit, you are required to drop it,” Kirsch says. “You aren’t supposed to cross the finish line with a case if you don’t have reason to believe your claims are valid.”