SLUSA, SCOTUS, and Unintended Consequences
posted by Dave Hoffman
Yesterday’s unanimous securities opinion in Merrill Lynch v. Dabit was unsurprising, but somewhat interesting. [More here on the same topic from Ribstein.] Some background. In 1975, the Court (in Blue Chip Stamps v. Manor Drugs [BCS],) held that private parties lack standing under the ’33 and ’34 Securities Acts to bring causes of action for fraud that fails to result in either the purchase or sale of securities. The Court reasoned that the statutory hook, “in connection with purchase or sale,” should not be read to mean merely holding on to securities. Chief Justice Rehnquist’s opinion evinced considerable fear of encouraging “vexatious litigation”: his decision explicitly rested on prudential concerns.
In Merrill Lynch, the Court considered this same “in connection with language” in a different statute, the Securities Litigation Uniform Standards Act of 1998 (SLUSA). SLUSA was passed (according to the Court) to deal with the “unintended consequence” of the allegedly onerous Private Securities Litigation Reform Act of 1995: forum shopping by the class action securities bar.* SLUSA, in relevant part, thus preempted state class actions “by any private party alleging [fraud...] in connection with the purchase or sale of a covered security…”].
The Second Circuit below had reasoned that Congress must have intended this “in connection with” requirement as a gloss on BCS. Thus, it held that state securities class actions that remained in the space left open by BCS survived SLUSA as well.
Not so fast, said Justice Stevens. Because BCS was just a standing decision, not flowing from the “text of Rule 10b-5,” and because more recent decisions found liability in the absence of purchase or sale, and because the SEC has long advanced this broad interpretation of the “in connection with” requirement, Justice Stevens held that SLUSA preempts even state court class actions that couldn’t be brought in federal court.
Why is this interesting? For at least three reasons.
1. Justice Stevens holds open (in n. 13), but broadly hints at, the possibility that BCS may itself not survive reconsideration in a appropriate case. One of the equities supporting Chief Justice Rehnquist’s standing analysis in BCS was the availability of state law causes of action; moreover, as Justice Stevens argued in Merrill, the general “in connection with” analysis in BCS has been undermined by later cases’ readings of the in connection with requirement. Thus, at least on a first read through, I think BCS is ripe for reversal. This would be a big deal, opening the door for a major expansion of federal securities liability. Now that is an unintended consequence.**
2. The Court suggests (on p. 16 of the slip opinion) that the federalism concerns normally at play in preemption analyses should have less force where “the actual assertion” of the state cause of action was moribund, instead of “a historically entrenched state-law remedy.” This part of the analysis is in considerable tension with Justice Stevens’ assertion that permitting claims like this would create “wasteful, duplicative litigation.” If, in the thirty years after BCS most plaintiffs did not bring state law causes of action for holder claims, and almost none brought them between 1995 (the PSLRA) and 1998 (SLUSA), why would they start now? But either way, it is (to me) interesting that the strength of a state’s federal(ist) interest should depend not on its inherent authority to regulate corporate governance issues, but on how much plaintiffs have taken advantage of its laws. If a state wants to push back against federal regulation, does that mean it ought to be encouraging plaintiffs to file in state court? [Today, one day only, a discount on filing fees in Philadelphia County! File one, get one free!]
3. The Court suggests that the presumption against preemption doesn’t have as much force (p. 15) where preemption is not total, and individual plaintiff causes of action remain even in the absence of a class mechanism. This immediately suggests (to me) that defense attorneys in other contexts (mass tort!) ought to consider pushing congress for such class-preemption bills using relatively vague preemption language. The Court has now told us that it won’t look behind statutory language to find the rule’s real, practically-remedy-denying, effect.
*[Note: Justice Steven's seeming surprise at this tactic is itself strange. What would he have expected plaintiffs to do? Go home? Some bad consequences are so proximate that legal authorities should be presumed to have not minded their occurring, or even intended them. Like John Yoo’s torture memo and Abu Ghraib.]
**[See Note 1.]