Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (Supreme Court of the United States)
Tellabs, Inc. v.
What does the PSLRA's requirement of a "strong inference" of scienter mean, and how should courts evaluate a complaint's scienter allegations—particularly in light of competing inferences of nonfraudulent intent—on a Rule 12(b)(6) motion to dismiss?
Under the PSLRA, a §10(b)/Rule 10b-5 plaintiff must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). Evaluating this requirement, courts must: (1) accept all factual allegations in the complaint as true; (2) consider the complaint in its entirety, together with documents incorporated by reference and matters subject to judicial notice; and (3) assess whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, taking into account plausible opposing inferences. An inference of scienter is "strong" only if it is cogent and at least as compelling as any opposing inference of nonfraudulent intent. The Court assumed, without deciding, that "scienter" includes at least deliberate recklessness. See 551 U.S. at 321–24, 326–27.
A securities fraud complaint satisfies the PSLRA's scienter pleading requirement only if, after considering all alleged facts collectively and accounting for plausible nonculpable explanations, the inference that the defendant acted with scienter is cogent and at least as compelling as any opposing inference of nonfraudulent conduct. The Seventh Circuit's standard was too lenient; the judgment was vacated and the case remanded for application of the proper standard.
Tellabs is the leading case on scienter pleading under the PSLRA. It set the "cogent and at least as compelling" comparative standard, mandated a holistic assessment of the complaint, and required courts to weigh nonculpable explanations at the motion-to-dismiss stage. The decision influences whether securities fraud cases survive early dismissal and guides how plaintiffs draft complaints (e.g., detailing contemporaneous facts, internal reports, and context) and how defendants frame innocent inferences. It also interfaces with general pleading doctrine post-Twombly/Iqbal by reinforcing the need for particularized factual allegations rather than conclusory assertions.