Also known as: safe harbor · safe-harbor rule · safe-harbor · safe harbour rule
Written by attorneys — see sources below.
A rule that shields a party from liability or penalty when the party complies with specified conditions or procedures. Compliance supplies a complete defense or exemption even if the underlying conduct would otherwise violate the governing standard.
Solomon Silver, defense counsel in a high-profile trial, held a press conference describing evidence he planned to introduce. The state bar charged him under a publicity rule containing a vague safe harbor for statements made without elaboration. The court dismissed the charge because the safe harbor language failed to give fair notice of what elaboration was prohibited.
Simon Stern received material nonpublic information from a corporate insider and disclosed it to the SEC before trading. Because the disclosure satisfied the conditions of the safe harbor described in the Dirks footnote, Stern avoided liability under Rule 10b-5 even though he later sold the stock.
In 1973, Raymond Dirks served as an officer of a New York broker-dealer firm that specialized in investment analysis of insurance company securities for institutional investors. On March 6, Dirks received information from Ronald Secrist, a former officer of Equity Funding of America, alleging that the company's assets were vastly overstated due to fraudulent corporate practices and that regulatory agencies had failed to act on employee charges of fraud. Secrist urged Dirks to verify the allegations and disclose them publicly. Dirks decided to investigate the claims. He traveled to Equity Funding's headquarters in Los Angeles, where he interviewed several officers and employees. While senior management denied any wrongdoing, Equity Funding employees corroborated the fraud allegations. Throughout his investigation, Dirks openly discussed the information with clients and investors, none of whom included Dirks or his firm in ownership or trading of Equity Funding stock. Some of these investors sold holdings totaling more than $16 million. Dirks also contacted William Blundell, the Wall Street Journal's Los Angeles bureau chief, and urged him to publish a story on the fraud. Blundell declined to write the story because he feared that publishing such damaging hearsay might be libelous. Over the two-week period of Dirks' activities, Equity Funding's stock price fell from $26 to less than $15 per share, prompting the New York Stock Exchange to halt trading on March 27. California insurance authorities then impounded the company's records and uncovered evidence of the fraud. Only then did the SEC file a complaint against Equity Funding. On April 2, the Wall Street Journal published a front-page story based largely on information assembled by Dirks. Equity Funding subsequently entered receivership. The SEC investigated Dirks' role and, following a hearing before an Administrative Law Judge, found that he had aided and abetted violations of federal securities laws by repeating the fraud allegations to investment community members who sold their Equity Funding stock. The SEC censured Dirks, recognizing his role in exposing the fraud. Dirks sought review in the Court of Appeals for the District of Columbia Circuit, which affirmed the SEC's decision. The Supreme Court granted certiorari to address the question presented.
View caseSkyline Construction employees used a file-sharing service operated by Sentinel Security to distribute copyrighted blueprints. The service provider invoked the safe harbor for technologies capable of substantial noninfringing uses. The court held the provider not liable for contributory infringement.
Respondents Grokster, Ltd. and StreamCast Networks, Inc. distribute free software products that enable computer users to share electronic files through peer-to-peer networks. Grokster's software employs FastTrack technology while StreamCast distributes Morpheus software that relies on Gnutella technology. Users of either product can send requests for files directly to the computers of others on the network, with results communicated back and files downloaded directly from peers' computers without any central server intercepting the content. A group of copyright holders including motion picture studios, recording companies, songwriters, and music publishers, referred to collectively as MGM, sued Grokster and StreamCast in the United States District Court for the Central District of California. MGM alleged that the companies knowingly and intentionally distributed their software to enable users to reproduce and distribute copyrighted works in violation of the Copyright Act. MGM commissioned a statistician to conduct a systematic search, and his study showed that nearly 90% of the files available for download on the FastTrack system were copyrighted works. Well over 100 million copies of the software in question are known to have been downloaded, and billions of files are shared across the FastTrack and Gnutella networks each month. Grokster and StreamCast concede the infringement in most downloads, and it is uncontested that they are aware that users employ their software primarily to download copyrighted files. From time to time, moreover, the companies have learned about their users' infringement directly, as from users who have sent e-mail to each company with questions about playing copyrighted movies they had downloaded, to whom the companies have responded with guidance. MGM notified the companies of 8 million copyrighted files that could be obtained using their software. After the notorious file-sharing service, Napster, was sued by copyright holders for facilitation of copyright infringement, StreamCast gave away a software program of a kind known as OpenNap, designed as compatible with the Napster program and open to Napster users for downloading files from other Napster and OpenNap users' computers. The evidence that Grokster sought to capture the market of former Napster users is sparser but revealing. Grokster launched its own OpenNap system called Swaptor and inserted digital codes into its Web site so that computer users using Web search engines to look for "Napster" or "[f]ree filesharing" would be directed to the Grokster Web site. StreamCast monitored both the number of users downloading its OpenNap program and the number of music files they downloaded. It also used the resulting OpenNap network to distribute copies of the Morpheus software and to encourage users to adopt it. Internal company documents indicate that StreamCast hoped to attract large numbers of former Napster users if that company was shut down by court order or otherwise, and that StreamCast planned to be the next Napster. Finally, there is no evidence that either company made an effort to filter copyrighted material from users' downloads or otherwise impede the sharing of copyrighted files. Grokster and StreamCast receive no revenue from users, who obtain the software itself for nothing. Instead, both companies generate income by selling advertising space, and they stream the advertising to Grokster and Morpheus users while they are employing the programs. After discovery, the parties on each side of the case cross-moved for summary judgment. The court nonetheless granted summary judgment in favor of Grokster and StreamCast as to any liability arising from distribution of the then current versions of their software. The Court of Appeals affirmed. The Supreme Court granted certiorari.
View caseSydney Santos purchased shares after corporate officers made optimistic earnings projections. When the projections proved false, Santos sued under the securities laws. The company relied on the safe harbor for forward-looking statements accompanied by meaningful cautionary language, defeating the scienter allegation at the pleading stage.
Petitioner Tellabs, Inc. manufactures specialized equipment used in fiber optic networks. During the time period relevant to this case, petitioner Richard Notebaert was Tellabs' chief executive officer and president. Respondents purchased Tellabs stock between December 11, 2000, and June 19, 2001. The shareholders alleged that Notebaert made statements indicating that demand for Tellabs' flagship networking device, the TITAN 5500, was continuing to grow when in fact demand for that product was waning. Notebaert made statements indicating that the TITAN 6500 was available for delivery and that demand for that product was strong and growing when in truth the product was not ready for delivery and demand was weak. Notebaert falsely represented Tellabs' financial results for the fourth quarter of 2000 and, in connection with those results, condoned the practice of channel stuffing under which Tellabs flooded its customers with unwanted products. Notebaert made a series of overstated revenue projections when demand for the TITAN 5500 was drying up and production of the TITAN 6500 was behind schedule. The first public glimmer that business was not so healthy came in March 2001 when Tellabs modestly reduced its first quarter sales projections. On June 19, 2001, the last day of the class period, Tellabs disclosed that demand for the TITAN 5500 had significantly dropped. Simultaneously, the company substantially lowered its revenue projections for the second quarter of 2001. The next day, the price of Tellabs stock, which had reached a high of $67 during the period, plunged to a low of $15.87. On December 3, 2002, the shareholders filed a class action in the District Court for the Northern District of Illinois. Their complaint stated, inter alia, that Tellabs and Notebaert had engaged in securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934. Tellabs moved to dismiss the complaint on the ground that the shareholders had failed to plead their case with the particularity the PSLRA requires. The District Court agreed and therefore dismissed the complaint without prejudice. The shareholders then amended their complaint, adding references to 27 confidential sources and making further, more specific allegations concerning Notebaert's mental state. The District Court again dismissed, this time with prejudice. The Court of Appeals for the Seventh Circuit reversed in relevant part. Like the District Court, the Court of Appeals found that the shareholders had pleaded the misleading character of Notebaert's statements with sufficient particularity. Unlike the District Court, however, the Seventh Circuit concluded that the shareholders had sufficiently alleged that Notebaert acted with the requisite state of mind. The Supreme Court granted certiorari to resolve the disagreement among the Circuits on whether and to what extent a court must consider competing inferences in determining whether a securities fraud complaint gives rise to a strong inference of scienter.
View caseStonehaven Properties sold a vehicle whose paint defect caused minor economic loss. A jury awarded substantial punitive damages. The company invoked the safe harbor limiting punitive awards to a single-digit multiple of compensatory damages. The court reduced the award to satisfy the constitutional guidepost.
In January 1990, Dr. Ira Gore, Jr., purchased a black BMW sports sedan for $40,750.88 from an authorized dealer in Birmingham, Alabama. The vehicle had been manufactured in Germany by BMW and shipped to the United States, where an independent service company in Brunswick, Georgia, determined that its finish had been damaged by acid rain during transit from Europe and refinished it at a cost of $601.37 before delivery to the Birmingham dealership. At the time of the purchase, BMW of North America, Inc., maintained a policy of not disclosing to dealers or customers that a new vehicle had been refinished if the cost of the repairs was less than 3 percent of the suggested retail price, and the refinishing cost for Gore's car amounted to approximately 1.5 percent of that price. After driving the car for about nine months, Gore took it to an independent detailer, who informed him that the car had been repainted. Gore then filed suit against BMW of North America, Inc., alleging fraud under Alabama law for the failure to disclose the repainting. At trial, BMW acknowledged that it had sold approximately 983 refinished cars as new in the United States since 1983, including 14 in Alabama, without disclosing the repairs when the cost exceeded $300 per vehicle. The jury awarded Gore $4,000 in compensatory damages, representing the difference in value between the car as delivered and its value had it not been refinished, along with $4 million in punitive damages. BMW moved to set aside the punitive damages award, introducing evidence that its nondisclosure policy aligned with the laws of roughly 25 states that required disclosure only for repairs exceeding 3 percent of the suggested retail price. The trial court denied the motion. On appeal, the Alabama Supreme Court affirmed the judgment but reduced the punitive damages to $2 million after applying factors from Green Oil Co. v. Hornsby and Pacific Mutual Life Insurance Co. v. Haslip, concluding that the jury's award was excessive but that $2 million remained permissible. The Supreme Court of the United States granted certiorari to review the case.
View caseSebastian Santos bought stock in a company whose public statements later proved misleading. Santos invoked the fraud-on-the-market presumption to prove reliance. The issuer failed to rebut the presumption with evidence that the statements did not affect the market price, so the safe harbor for price impact did not apply.
Between June 3, 1999, and December 7, 2001, Halliburton Company and one of its executives made a series of public statements about the company's potential liability in asbestos litigation, its expected revenue from construction contracts, and the anticipated benefits of a merger with another company. Respondent Erica P. John Fund, Inc., serving as lead plaintiff, alleged that these statements were materially false and misleading and were made to inflate the price of Halliburton's common stock. Halliburton later issued corrective disclosures that EPJ Fund contends caused the stock price to drop and produced losses for investors who had purchased shares during the class period. EPJ Fund moved in the United States District Court for the Northern District of Texas to certify a class of all investors who purchased Halliburton common stock during the class period. The district court determined that the proposed class satisfied the four threshold requirements of Federal Rule of Civil Procedure 23(a). It nevertheless denied certification under Rule 23(b)(3) because Fifth Circuit precedent at the time required securities fraud plaintiffs to prove loss causation at the class certification stage to rely on the presumption from Basic Inc. v. Levinson. The Fifth Circuit affirmed the denial of class certification on the same ground. The Supreme Court granted certiorari, vacated the judgment of the Fifth Circuit in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011), and remanded the case. On remand, Halliburton presented evidence that none of its alleged misrepresentations had actually affected the company's stock price and argued that this evidence rebutted the Basic presumption, so that individual issues of reliance would predominate. The district court declined to consider the price impact evidence at the certification stage and certified the class under Rule 23(b)(3). The Fifth Circuit affirmed the certification order. It acknowledged that Halliburton's price impact evidence could be used at trial on the merits but held that such evidence could not be considered at the class certification stage to rebut the presumption of reliance. The Supreme Court granted certiorari a second time to address whether Basic's presumption should be overruled or modified and whether defendants may present evidence of no price impact before class certification.
View caseNo. Safe harbor rules are not exclusive. Failure to comply does not raise a presumption that the underlying exemption or defense is unavailable, and pre-rule case law remains relevant.
A vague safe harbor violates the First Amendment when it fails to give fair notice of prohibited conduct and creates a risk of discriminatory enforcement against largely political speech.
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Yes. Reasonable reliance on an official written statement from the responsible agency supplies a defense even if a court later invalidates the statement.
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