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Read My Lipsky: Reliance on Consent Orders in Pleadings

Consent orders are used to resolve government enforcement actions through a court-approved settlement. Although consent orders often include detailed factual and legal findings, defendants typically deny or neither admit nor deny those findings. Nevertheless, some private plaintiffs have relied extensively on findings from consent orders to plead claims that piggyback off of enforcement actions. Whether private plaintiffs may properly rely on consent orders in their pleadings is the subject of this Comment.

Many district courts cite a Second Circuit opinion from 1976, Lipsky v. Commonwealth United Corp., for the proposition that allegations derived from consent orders must be struck as “immaterial” under Rule 12(f) of the Federal Rules of Civil Procedure. Other courts have also held that plaintiffs cannot satisfy the duty of independent investigation under Rule 11(b)(3) if they rely on only consent orders as sources of information. More recently, however, some courts have challenged the reasoning of Lipsky and permitted plaintiffs to derive allegations from consent orders.

This Comment clarifies existing law governing reliance on consent orders. It argues that Rules 11(b)(3) and 12(f)—and even the Lipsky decision if properly construed—permit plaintiffs to rely on consent orders as sources of factual information. By relying on consent orders to allege facts, plaintiffs appropriately signal that they believe the allegations are true and that admissible evidence in support of the allegations will likely be found after further investigation or discovery.

The rule proposed in this Comment, however, may unsettle regulatory policy that favors negotiated settlements of enforcement actions. If courts uniformly permit private plaintiffs to rely on consent orders, then defendants may have fewer incentives to settle enforcement actions. This Comment invites further discussion regarding the policy implications of that rule.