104th CONGRESS 1st Session H. R. XX IN THE HOUSE OF REPRESENTATIVES Mr. Ramstad introduced the following bill; which was referred to the Committee on XXXXXXXXXXXXXXX A BILL To reform the Federal civil justice system; to reform product liability law; and to amend the Securities Exchange Act of 1934 to promote equity in private securities litigation. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, SECTION 1. SHORT TITLE. This Act may be cited as the ``Common Sense Legal Reforms Act of 1995''. TITLE I--CIVIL JUSTICE REFORM SEC. 101. AWARD OF ATTORNEY'S FEE TO PREVAILING PARTY IN FEDERAL CIVIL DIVERSITY LITIGATION. (a) Award of Attorney's Fee.--Section 1332 of title 28, United States Code, is amended by adding at the end the following: ``(e)(1) The district court that exercises jurisdiction in a civil action commenced under this section shall award to the party that prevails with respect to a claim in such action an attorney's fee determined in accordance with paragraph (2). ``(2) An attorney's fee awarded under paragraph (1) shall be a reasonable attorney's fee attributable to such claim, except that the fee awarded under such paragraph may not exceed-- ``(A) the actual cost incurred by the nonprevailing party for an attorney's fee payable to an attorney for services in connection with such claim; or ``(B) if no such cost was incurred by the nonprevailing party due to a contingency fee agreement, a reasonable cost that would have been incurred by the nonprevailing party for an attorney's noncontingent fee payable to an attorney for services in connection with such claim. ``(3) Notwithstanding paragraphs (1) and (2), the court in its discretion may refuse to award, or may reduce the amount awarded as, an attorney's fee under paragraph (1) to the extent that the court finds special circumstances that make an award of an attorney's fee determined in accordance with such subparagraph unjust.''. SEC. 102. HONESTY IN EVIDENCE. (a) Opinion Testimony by Experts.--Rule 702 of the Federal Rules of Evidence is amended-- (1) by inserting ``(a) In general.'' before ``If'', and (2) by adding at the end the following: ``(b) Adequate basis for opinion. Testimony in the form of an opinion by a witness that is based on scientific knowledge shall be inadmissible in evidence unless the court determines that such opinion is-- ``(1) based on scientifically valid reasoning; and ``(2) sufficiently reliable so that the probative value of such evidence outweighs the dangers specified in rule 403. ``(c) Disqualification. Testimony by a witness who is qualified as described in subsection (a) is inadmissible in evidence if such witness is entitled to receive any compensation contingent on the legal disposition of any claim with respect to which such testimony is offered.''. SEC. 103. PRODUCT LIABILITY REFORM. (a) Applicability and Preemption.--This section governs any product liability action brought in any State or Federal Court against any manufacturer or seller of a product on any theory for harm caused by the product. This section supersedes State law only to the extent that State law applies to an issue covered by this section. Any issue that is not covered by this section shall be governed by otherwise applicable State or Federal law. (b) Liability Rules Applicable to Product Sellers.-- (1) General rule.--Except as provided in paragraph 2, in a product liability action, a product seller shall be liable to a claimant for harm only if the claimant establishes that-- (A)(i) the product which allegedly caused the harm complained of was sold by the product seller, (ii) the product seller failed to exercise reasonable care with respect to the product, and (iii) such failure to exercise reasonable care was a proximate cause of the claimant's harm, (B)(i) the product seller made an express warranty applicable to the product which allegedly caused the harm complained of, independent of any express warranty made by the manufacturer as to the same product, (ii) the product failed to conform to the warranty, and (iii) the failure of the product to conform to the warranty caused the claimant's harm, or (C) the product seller engaged in intentional wrongdoing as determined under applicable State law and such intentional wrongdoing was a proximate cause of the harm complained of by the claimant. For purposes of subparagraph (A)(ii), a product seller shall not be considered to have failed to exercise reasonable care with respect to a product based upon an alleged failure to inspect a product where there was no reasonable opportunity to inspect the product in a manner which would, in the exercise of reasonable care, have revealed the aspect of the product which allegedly caused the claimant's harm. (2) Special rule.--In a product liability action, a product seller shall be liable for harm to the claimant caused by such product as if the product seller were the manufacturer of such product if-- (A) the manufacturer is not subject to service of process under the laws of the State in which the claimant brings the action, or (B) the court determines that the claimant would be unable to enforce a judgment against the manufacturer. (c) Limitations on Punitive Damages.-- (1) General limitation.--Punitive damages may to the extent permitted by applicable State law, be awarded against a manufacturer or product seller in a product liability action if the claimant establishes by clear and convincing evidence that the harm suffered was the result of conduct manifesting actual malice. (2) Limitation on amount.--The amount of punitive damages that may be awarded for a claim in any civil action subject to this section shall not exceed 3 times the amount awarded to the claimant for the economic injury on which such claim is based, or $250,000, whichever is greater. (d) Several Liability for Noneconomic Damages.--In any product liability action, the liability of each manufacturer or seller of the product involved in such action shall be several only and shall not be joint for noneconomic damages. Such manufacturer or seller shall be liable only for the amount of noneconomic damages allocated to such manufacturer or seller in direct proportion to such manufacturer's or such seller's percentage of responsibility as determined by the trier of fact. (e) Definitions.--For purposes of this section-- (1) the term ``claimant'' means any person who brings a product liability action and any person on whose behalf such an action is brought, including such person's decedent if such an action is brought through or on behalf of an estate or such person's legal representative if it is brought through or on behalf of a minor or incompetent, (2) the term `malice' means conduct that is either-- (A) specifically intended to cause serious personal injury, or (B) carried out with both a flagrant indifference to the rights of the claimant and an awareness that such conduct is likely to result in serious personal injury, (3) with respect to a product, the term ``manufacturer'' means-- (A) any person who is engaged in a business to produce, create, make, or construct the product and who designs or formulates the product or has engaged another person to design or formulate the product, (B) a product seller of the product who, before placing the product in the stream of commerce-- (i) designs or formulates or has engaged another person to design or formulate an aspect of the product after the product was initially made by another, and (ii) produces, creates, makes, or constructs such aspect of the product, or (C) any product seller not described in subparagraph (B) which holds itself out as a manufacturer to the user of the product, (4) the term ``product''-- (A) means any object, substance, mixture, or raw material in a gaseous, liquid, or solid state-- (i) which is capable of delivery itself, in a mixed or combined state, or as a component part or ingredient, (ii) which is produced for introduction into trade or commerce, (iii) which has intrinsic economic value, and (iv) which is intended for sale or lease to persons for commercial or personal use, and (B) does not include-- (i) human tissue, human organs, human blood, and human blood products, or (ii) electricity, water delivered by a utility, natural gas, or steam, (5) the term ``product seller''-- (A) means a person-- (i) who sells, distributes, leases, prepares, blends, packages, or labels a product or is otherwise involved in placing a product in the stream of commerce, or (ii) who installs, repairs, or maintains the harm-causing aspect of a product, and (B) does not include-- (i) a manufacturer, (ii) a seller or lessor of real property, (iii) a provider of professional services in any case in which the sale or use of a product is incidental to the transaction and the essence of the transaction is the furnishing of judgment, skill, or services, (iv) any person who acts only in a financial capacity with respect to the sale of a product, or (v) any person who leases a product under a lease arrangement in which the selection, possession, maintenance, and operation of the product are controlled by a person other than the lessor, (6) the term `punitive damages' means damages in addition to compensation for actual injury suffered, for purposes of imposing punishment for conduct engaged in with malice and to deter similar future conduct, but such term does not include compensation for actual injury, and (7) the term ``State'' means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, the Northern Mariana Islands, the Trust Territory of the Pacific Islands, and any other territory or possession of the United States, or any political subdivision thereof. SEC. 104. ATTORNEY ACCOUNTABILITY. (a) Truth in Attorneys' Fees.--It is the sense of the Congress that each State should require, under penalty of law, each attorney admitted to practice law in such State to disclose in writing, to any client with whom such attorney has entered into a contingency fee agreement-- (1) the actual services performed for such client in connection with such agreement, and (2) the precise number of hours actually expended by such attorney in the performance of such services. (b) Amendment to the Federal Rules of Civil Procedure.--Rule 11(c) of the Federal Rules of Civil Procedure (28 U.S.C. App.) is amended-- (1) in the matter preceding subdivision (1) by striking ``may'' and inserting ``shall''; (2) in the penultimate sentence of subdivision (1)(A) by striking ``may'' and inserting ``shall''; and (3) in subdivision (2)-- (A) by amending the first sentence to read as follows: ``A sanction imposed for a violation of this rule shall be sufficient to deter repetition of such conduct or comparable conduct by others similarly situated, and to compensate the parties that were injured by such conduct.''; and (B) in the second sentence by striking ``, if imposed on motion and warranted for effective deterrence,''. SEC. 105. NOTICE REQUIRED BEFORE COMMENCEMENT OF CIVIL ACTION. Chapter 99 of title 28, United States Code is amended by adding at the end the following: ÿ1A1632. Notice required before commencement of civil action ``(a) Dismissal of Civil Action.--Except as provided in subsection (c), the district court in which a civil action is commenced shall dismiss such action with respect to a defendant, without prejudice, if-- ``(1) not later than 60 days after such action is commenced, the defendant files a motion to dismiss such action on the basis that the plaintiff failed to comply with the requirement specified in subsection (b); and ``(2) the plaintiff fails to establish that before commencing such action the plaintiff complied with such requirement. ``(b) Requirement.--Not less than 30 days before commencing a civil action in a district court of the United States, the plaintiff shall transmit (by 1st class mail, postage prepaid, or contract for delivery by any company that in its regular course of business physically delivers correspondence as a commercial service to the public) to the defendant (at an address reasonably calculated to provide actual notice to such defendant) a written statement specifying the particular claims alleged in such action and the amount of damages claimed in such action. ``(c) Exceptions.--Subsection (a) shall not apply with respect to any civil action-- ``(1) to seize or forfeit assets subject to forfeiture; ``(2) commenced under title 11 of the United States Code; ``(3) commenced to establish a receivership or conservatorship; ``(4) based on the insolvency of the defendant, or the need to liquidate assets of the defendant to satisfy any requirement under Federal law; ``(5) if assets that are subject to such action or that would satisfy a judgment in such action are likely to be removed, dissipated, or destroyed by the defendant; ``(6) if the defendant is likely to flee; ``(7) if prior written notice of the filing of such action is required by any other law: ``(8) to enforce a civil investigative demand or an administrative summons; ``(9) if such action is-- ``(A) to foreclose a lien; ``(B) to obtain a temporary restraining order or preliminary injunction; or ``(C) to prevent the fraudulent conveyance of property; or ``(10) if such action involves exigent circumstances that compel immediate resort to the court. ``(d) Statute of Limitations.-- ``(1) Suspension Before Commencement of Action.--If the statute of limitations applicable to a claim would expire in the 30-day period beginning on the date the plaintiff transmits the notice required by subsection (b), such statute shall be suspended-- ``(A) during such 30-day period; or ``(B) during the 90-day period beginning on the date the plaintiff so transmits such notice if, in such 30-day period, the parties to such action so agree in writing. ``(2) Filing Civil Action After Dismissal.--If-- ``(A) a civil action is timely commenced in a district court with respect to a claim; ``(B) such action is dismissed under subsection (a); and ``(C) the statute of limitations applicable to such claim expires before the expiration of the 60-day period beginning on the date such action is dismissed; then the plaintiff in such action may commence a civil action based on such claim in such 60-day period notwithstanding such statute.''. (b) Conforming Amendment.--Chapter 99 of title 28, United States Code, is amended in the table of sections by adding at the end the following: ``1632. Notice required before commencement of civil action.''. SEC. 106. HOUSE COMMITTEE REPORTS. Clause 2(l) of rule XI of the Rules of the House of Representatives is amended by adding at the end the following new subparagraph: ``(8) Each report of a committee on each bill or joint resolution of a public character reported by that committee shall include the following information regarding that bill or joint resolution: ``(A) Whether that bill or joint resolution preempts the law of any State. ``(B) The retroactive applicability, if any, of that bill or joint resolution. ``(C) Whether that bill or joint resolution creates any private cause of action and, if so, a description of that relief and the terms and conditions for awarding attorneys fees, if any. ``(D) The applicability, if any, of that bill or joint resolution to the Federal Government or any of its agencies or instrumentalities.''. SEC. 107. EFFECTIVE DATE; APPLICATION OF AMENDMENTS. (a) Effective Date.--Except as provided in subsection (b), this title and the amendments made by this title shall take effect on the first day of the first month beginning more than 180 days after the date of the enactment of this Act. (b) Application of Amendments.--(1) The amendments made by sections 101 and 105 shall apply only with respect to civil actions commenced after the effective date of this title. (2) The amendments made by section 102 shall apply only with respect to cases in which a trial has commenced after the effective date of this title. (3) The amendments made by section 103 shall apply only with respect to claims arising after the effective date of this title. (4) The amendment made by section 106 shall apply to bills and joint resolutions reported by any committee at least 30 calendar days after the date of enactment of this Act. TITLE II--REFORM OF PRIVATE SECURITIES LITIGATION SEC.201. SHORT TITLE; TABLE OF CONTENTS. (a) Short Title.--This title may be cited as the ``Private Securities Litigation Reform Act of 1995''. (b) Table of Contents.--The table of contents for this title is as follows: Sec. 201. Short title; table of contents. Sec. 202. Prevention of lawyer-driven litigation. Sec. 203. Prevention of abusive practices that foment litigation. Sec. 204. Prevention of ``fishing expedition'' lawsuits. Sec. 205. Establishment of ``safe harbor'' for predictive statements. Sec. 206. Alternative dispute resolution procedure. Sec. 207. Amendment to Racketeer Influenced and Corrupt Organizations Act. SEC. 202. PREVENTION OF LAWYER-DRIVEN LITIGATION. (a) Plaintiff Steering Committees.--The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by adding at the end the following new section: ``SEC. 36. GUARDIAN AD LITEM AND CLASS ACTION STEERING COMMITTEES. ``(a) Guardian Ad Litem.--Except as provided in subsection (b), not later than 10 days after certifying a plaintiff class in any private action brought under this title, the court shall appoint a guardian ad litem for the plaintiff class from a list or lists provided by the parties or their counsel. The guardian ad litem shall direct counsel for the class as set forth in this section and perform such other functions as the court may specify. The court shall apportion the reasonable fees and expenses of the guardian ad litem among the parties. Court appointment of a guardian ad litem shall not be subject to interlocutory review. ``(b) Class Action Steering Committee.--Subsection (a) shall not apply if, not later than 10 days after certifying a plaintiff class, on its own motion or on motion of a member of the class, the court appoints a committee of class members to direct counsel for the class (hereafter in this section referred to as the `plaintiff steering committee') and to perform such other functions as the court may specify. Court appointment of a plaintiff steering committee shall not be subject to interlocutory review. ``(c) Membership of Plaintiff Steering Committee.-- ``(1) Qualifications.-- ``(A) Number.--A plaintiff steering committee shall consist of not fewer than 5 class members, willing to serve, who the court believes will fairly represent the class. ``(B) Ownership interests.--Members of the plaintiff steering committee shall have cumulatively held during the class period not less than-- ``(i) the lesser of 5 percent of the securities which are the subject matter of the litigation or securities which are the subject matter of the litigation with a market value of $10,000,000; or ``(ii) such smaller percentage or dollar amount as the court finds appropriate under the circumstances. ``(2) Named plaintiffs.--Class members who are named plaintiffs in the litigation may serve on the plaintiff steering committee, but shall not comprise a majority of the committee. ``(3) Noncompensation of members.--Members of the plaintiff steering committee shall serve without compensation, except that any member may apply to the court for reimbursement of reasonable out-of-pocket expenses from any common fund established for the class. ``(4) Meetings.--The plaintiff steering committee shall conduct its business at one or more previously scheduled meetings of the committee at which a majority of its members are present in person or by electronic communication. The plaintiff steering committee shall decide all matters within its authority by a majority vote of all members, except that the committee may determine that decisions other than to accept or reject a settlement offer or to employ or dismiss counsel for the class may be delegated to one or more members of the committee, or may be voted upon by committee members seriatim, without a meeting. ``(5) Right of nonmembers to be heard.--A class member who is not a member of the plaintiff steering committee may appear and be heard by the court on any issue in the action, to the same extent as any other party. ``(d) Functions of Guardian Ad Litem and Plaintiff Steering Committee.-- ``(1) Direct counsel.--The authority of the guardian ad litem or the plaintiff steering committee to direct counsel for the class shall include all powers normally permitted to an attorney's client in litigation, including the authority to retain or dismiss counsel and to reject offers of settlement, and the preliminary authority to accept an offer of settlement, subject to the restrictions specified in paragraph (2). Dismissal of counsel other than for cause shall not limit the ability of counsel to enforce any contractual fee agreement or to apply to the court for a fee award from any common fund established for the class. ``(2) Settlement offers.--If a guardian ad litem or a plaintiff steering committee gives preliminary approval to an offer of settlement, the guardian ad litem or the plaintiff steering committee may seek approval of the offer by a majority of class members if the committee determines that the benefit of seeking such approval outweighs the cost of soliciting the approval of class members. ``(e) Immunity From Liability; Removal.--Any person serving as a guardian ad litem or as a member of a plaintiff steering committee shall be immune from any liability arising from such service. The court may remove a guardian ad litem or a member of a plaintiff steering committee for good cause shown. ``(f) Effect on Other Law.--This section does not affect any other provision of law concerning class actions or the authority of the court to give final approval to any offer of settlement.''. (b) Additional Provisions Applicable to Class Actions.--Section 21 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is amended by adding at the end the following new subsection: ``(i) Disclosure of Settlement Terms to Class Members.--In any private action under this title that is certified as a class action pursuant to the Federal Rules of Civil Procedure, a proposed settlement agreement that is published or otherwise disseminated to the class shall include the following statements: ``(1) Statement of potential outcome of case.-- ``(A) Agreement on amount of damages and likelihood of prevailing.--If the settling parties agree on the amount of damages per share that would be recoverable if the plaintiff prevailed on each claim alleged under this title and the likelihood that the plaintiff would prevail-- ``(i) a statement concerning the amount of such potential damages; and ``(ii) a statement concerning the probability that the plaintiff would prevail on the claims alleged under this title and a brief explanation of the reasons for that conclusion. ``(B) Disagreement on amount of damages or likelihood of prevailing.-- If the parties do not agree on the amount of damages per share that would be recoverable if the plaintiff prevailed on each claim alleged under this title or on the likelihood that the plaintiff would prevail on those claims, or both, a statement from each settling party concerning the issue or issues on which the parties disagree. ``(C) Inadmissibility for certain purposes.--Statements made in accordance with subparagraphs (A) and (B) shall not be admissible for purposes of any Federal or State judicial or administrative proceeding. ``(2) Statement of attorneys' fees or costs sought.--If any of the settling parties or their counsel intend to apply to the court for an award of attorneys' fees or costs from any fund established as part of the settlement, a statement indicating which parties or counsel intend to make such an application, the amount of fees and costs that will be sought (including the amount of such fees and costs determined on a per- share basis, together with the amount of the settlement proposed to be distributed to the parties to suit, determined on a per-share basis), and a brief explanation of the basis for the application. Such information shall be clearly summarized on the cover page of any notice to a party of a proposed or final settlement. ``(3) Identification of representatives.--The name and address of one or more representatives of counsel for the plaintiff class who will be reasonably available to answer written questions from class members concerning any matter contained in any notice of settlement published or otherwise disseminated to class members. ``(4) Other information.--Such other information as may be required by the court, or by any guardian ad litem or plaintiff steering committee appointed by the court pursuant to this section.''. (c) Prohibition on Attorneys' Fees Paid From Commission Disgorgement Funds.--Section 21(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78u(d)) is amended by adding at the end the following new paragraph: ``(4) Prohibition on attorneys' fees paid from commission disgorgement funds.--Except as otherwise ordered by the court, funds disgorged as the result of an action brought by the Commission in Federal court, or of any Commission administrative action, shall not be distributed as payment for attorneys' fees or expenses incurred by private parties seeking distribution of the disgorged funds.''. SEC. 203. PREVENTION OF ABUSIVE PRACTICES THAT FOMENT LITIGATION. (a) Additional Provisions Applicable to Class Actions.--Section 21 of the Securities Exchange Act of 1934 (15 U.S.C. 78u) is further amended by adding at the end the following new subsections: ``(j) Recovery by Named Plaintiffs in Class Actions.--In any private action under this title that is certified as a class action pursuant to the Federal Rules of Civil Procedure, the share of any final judgment or of any settlement that is awarded to class plaintiffs serving as the representative parties shall be calculated in the same manner as the shares of the final judgment or settlement awarded to all other members of the class. Nothing in this subsection shall be construed to limit the award to any representative parties of actual expenses (including lost wages) relating to the representation of the class. ``(k) Named Plaintiff Threshold.--In any private action under this title, in order for a plaintiff or plaintiffs to obtain certification as representatives of a class of investors pursuant to the Federal Rules of Civil Procedure, the plaintiff or plaintiffs must show that they owned, in the aggregate, during the time period in which violations of this title are alleged to have occurred, not less than the lesser of-- ``(1) 1 percent of the securities which are the subject of the litigation; or ``(2) $10,000 (in market value) of such securities. A person may be a named plaintiff in no more than 5 class actions filed during any 3-year period. ``(l) Awards of Attorneys' Fees.-- ``(1) Payment by losing party.--If the court in any private action under this title enters a final judgment against a party litigant on the basis of a motion to dismiss, motion for summary judgment, or a trial on the merits, the court shall, upon motion by the prevailing party, order the losing party to pay the prevailing party reasonable attorneys' fees and other expenses incurred by the prevailing party. ``(2) Time for application.--A party seeking an award of fees and other expenses shall, within 30 days of a final, nonappealable judgment in the action, submit to the court an application for fees and other expenses. ``(3) Court discretion.--The court, in its discretion, may reduce the amount to be awarded pursuant to this section, or deny an award, to the extent that the prevailing party during the course of the proceedings engaged in conduct that unduly and unreasonably protracted the final resolution of the matter in controversy. ``(m) Conflicts of Interest.--In any private action under this title that is certified as a class action pursuant to the Federal Rules of Civil Procedure, if a party is represented by an attorney who directly owns or otherwise has a beneficial interest in the securities that are the subject of the litigation, the court shall make a determination of whether such interest constitutes a conflict of interest sufficient to disqualify the attorney from representing the party. ``(n) Settlement Discharge.-- ``(1) In general.--A defendant who settles any private action brought under this title at any time before verdict or judgment shall be discharged from all claims for contribution brought by other persons. Upon entry of the settlement by the court, the court shall enter a bar order constituting the final discharge of all obligations to the plaintiff of the settling defendant arising out of the action. The order shall bar all future claims for contribution or indemnity arising out of the action-- ``(A) by nonsettling persons against the settling defendant; and ``(B) by the settling defendant against any nonsettling defendants. ``(2) Reduction.--If a person enters into a settlement with the plaintiff prior to verdict or judgment, the verdict or judgment shall be reduced by the amount paid to the plaintiff by that person. ``(o) Contribution.--A person who becomes liable for damages in any private action under this title may recover contribution from any other person who, if joined in the original suit, would have been liable for the same damages. ``(p) Statute of Limitations for Contribution.--Once judgment has been entered in any private action under this title determining liability, an action for contribution must be brought not later than 6 months after the entry of a final, nonappealable judgment in the action. ``(q) Special Verdicts.--In any private action under this title in which the plaintiff may recover money damages, the court shall, when requested by a defendant, submit to the jury a written interrogatory on the issue of each such defendant's state of mind at the time the alleged violation occurred.''. (b) Receipt for Referral Fees.--Section 15(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c)) is amended by adding at the end the following new paragraph: ``(7) Receipt of referral fees.--No broker or dealer, or person associated with a broker or dealer, may solicit or accept remuneration for assisting an attorney in obtaining the representation of any customer in any private action under this title.''. SEC. 204. PREVENTION OF ``FISHING EXPEDITION'' LAWSUITS. The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 10 the following new section: ``SEC. 10A. REQUIREMENTS FOR SECURITIES FRAUD ACTIONS. ``(a) Intent.--In any private action under section 10(b)-- ``(1) the plaintiff may recover money damages from a defendant only on proof that the defendant made a material misstatement or omission concerning a security; ``(2) the plaintiff must prove that the defendant had actual knowledge that the statement was false at the time it was made or knowingly and intentionally omitted to state a fact with actual knowledge that such statement would at the time it was made be rendered false by such omission and with the purpose of rendering the statement false; and ``(3) the plaintiff's complaint shall allege specific facts demonstrating the state of mind of each defendant at the time the alleged violation occurred. ``(b) Misleading Statements and Omissions.--In any private action under section 10(b) in which the plaintiff alleges that the defendant-- ``(1) made an untrue statement of a material fact; or ``(2) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the plaintiff shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the plaintiff shall set forth all information on which that belief is formed. ``(c) Burden of Proof.--In any private action arising under section 10(b) based upon a material misstatement or omission concerning a security, the plaintiff must prove that he or she had actual knowledge of and actually relied on such statement in connection with the purchase or sale of a security and that the misstatement or omission proximately caused (through both transaction causation and loss causation) any loss incurred by the plaintiff. ``(d) Damages.--In any private action arising under section 10(b) based on a material misstatement or omission concerning a security, the plaintiff's damages shall not exceed the lesser of-- ``(1) the difference between the price paid by the plaintiff for the security and the market value of the security immediately after dissemination to the market of information which corrects the misstatement or omission; and ``(2) the difference between the price paid by the plaintiff for the security and the price at which the plaintiff sold the security after dissemination of information correcting the misstatement or omission.''. SEC. 205. ESTABLISHMENT OF ``SAFE HARBOR'' FOR PREDICTIVE STATEMENTS. (a) Consideration of Regulatory or Legislative Changes.--In consultation with investors and issuers of securities, the Securities and Exchange Commission shall adopt or amend its rules and regulations to create-- (1) clear and objective criteria that the Commission finds sufficient for the protection of investors, compliance with which shall be readily ascertainable by issuers prior to issuance of securities, by which forward-looking statements concerning the future economic performance of an issuer of securities registered under section 12 of the Securities Exchange Act of 1934 will be deemed not to be in violation of section 10(b) of that Act; and (2) procedures by which courts shall timely dismiss claims against such issuers of securities based on such forward-looking statements if such statements are in accordance with any criteria under paragraph (1). (b) Commission Considerations.--In developing rules in accordance with subsection (a), the Commission shall adopt-- (1) appropriate limits to liability for forward-looking statements; (2) procedures for making a summary determination of the applicability of any Commission rule for forward-looking statements early in a judicial proceeding to limit protracted litigation and expansive discovery; (3) rules incorporating and reflecting the scienter requirements applicable to any private actions under section 10(b) of the Securities Exchange Act of 1934; and (4) rules providing clear guidance to issuers of securities and the judiciary. (c) Securities Act Amendment.--The Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq.), is amended by adding at the end the following new section: ``SEC. 38. APPLICATION OF SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS. ``(a) In General.--In any private action under this title that alleges that a forward-looking statement concerning the future economic performance of an issuer registered under section 12 was materially false or misleading, if a party making a motion in accordance with subsection (b) requests a stay of discovery concerning the claims or defenses of that party, the court shall grant such a stay until it has ruled on any such motion. ``(b) Summary Judgment Motions.--Subsection (a) shall apply to any motion for summary judgment made by a defendant asserting that the forward-looking statement was within the coverage of any rule which the Commission may have adopted concerning such predictive statements, if such motion is made not less than 60 days after the plaintiff commences discovery in the action. ``(c) Dilatory Conduct; Duplicative Discovery.--Notwithstanding subsection (a) or (b), the time permitted for a plaintiff to conduct discovery under subsection (b) may be extended, or a stay of the proceedings may be denied, if the court finds that-- ``(1) the defendant making a motion described in subsection (b) engaged in dilatory or obstructive conduct in taking or opposing any discovery; or ``(2) a stay of discovery pending a ruling on a motion under subsection (b) would be substantially unfair to the plaintiff or other parties to the action.''. SEC. 206. ALTERNATIVE DISPUTE RESOLUTION PROCEDURE. The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by adding at the end the following new section: ``SEC. 39. ALTERNATIVE DISPUTE RESOLUTION PROCEDURE. ``(a) In General.-- ``(1) Offer to proceed.--Except as provided in paragraph (2), in any private action arising under this title, any party may, before the expiration of the period permitted for answering the complaint, deliver to all other parties an offer to proceed pursuant to any voluntary, nonbinding alternative dispute resolution procedure established or recognized under the rules of the court in which the action is maintained. ``(2) Plaintiff class actions.--In any private action under this title which is brought as a plaintiff class action, an offer under paragraph (1) shall be made not later than 30 days after a guardian ad litem or plaintiff steering committee is appointed by the court in accordance with section 38. ``(3) Response.--The recipient of an offer under paragraph (1) or (2) shall file a written notice of acceptance or rejection of the offer with the court not later than 10 days after receipt of the offer. The court may, upon motion by any party made prior to the expiration of such period, extend the period for not more than 90 additional days, during which time discovery may be permitted by the court. ``(4) Selection of type of alternative dispute resolution.--For purposes of paragraphs (1) and (2), if the rules of the court establish or recognize more than 1 type of alternative dispute resolution, the parties may stipulate as to the type of alternative dispute resolution to be applied. If the parties are unable to so stipulate, the court shall issue an order not later than 20 days after the date on which the parties agree to the use of alternative dispute resolution, specifying the type of alternative dispute resolution to be applied. ``(5) Sanctions for dilatory or obstructive conduct.--If the court finds that a party has engaged in dilatory or obstructive conduct in taking or opposing any discovery allowed during the response period described in paragraph (3), the court may-- ``(A) extend the period to permit further discovery from that party for a suitable period; and ``(B) deny that party the opportunity to conduct further discovery prior to the expiration of the period.''. SEC. 207. AMENDMENT TO RACKETEER INFLUENCED AND CORRUPT ORGANIZATIONS ACT. Section 1964(c) of title 18, United States Code, is amended by inserting ``, except that no person may bring an action under this provision if the racketeering activity, as defined in section 1961(1)(D), involves conduct actionable as fraud in the sale of securities'' before the period. SEC. 208. RULE OF CONSTRUCTION. Nothing in this title or in the amendments made by this title shall be deemed to create or ratify any implied right of action, or to prevent the Commission from restricting or otherwise regulating private actions brought under the Securities Exchange Act of 1934. SEC. 209. EFFECTIVE DATE. This title and the amendments made by this title are effective on the date of enactment of this Act and shall apply to cases pending on or commenced after such date of enactment.