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.
Still interested? Check out Jennifer O’Hare’s article on this very topic. Empirical work by Richard Painter on the need for SLUSA in the first place is here.
*[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.]
March 22, 2006 at 1:00 am
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Responses (12)
Maryland Conservatarian - March 22, 2006 at 11:52 am
“Like John Yoo’s torture memo and Abu Ghraib.”
Wow – I’m impressed – you managed to get an Iraq war slam in on the administration in the midst of an analysis of a unanimous SCOTUS decision on Security Law….never mind that John Yoo’s memos had absolutely nothing to do with what happened at Abu Ghraib, it sounded clever and probably played well in the faculty lounge.
jd politely declines (Lynn) - March 22, 2006 at 12:22 pm
MD C.,
Having watched the trend of your comments on this site, I wonder whether you just have a cynical sense of humor – that would be far more appreciated in person – or you just lack any general sense of civility. In the latter event, I think I have no business to police … but want to say, anyway:
The intentions of your behavior are questionable: that you write not to address any substantive points of the themed blog, but to harass the poster.
I recognize blog authors hold themselves and their opinions out for public review, and should expect public critique among the praise. However, I often suspect the annonymity (sp?) of author comments breeds a lack tactfulness that can be perceived as disrespect.
Ted - March 22, 2006 at 5:27 pm
Perhaps Stevens would reverse Blue Chip Stamps, but his opinion explicitly endorses the Rehnquist rationale behind that decision (one that Thurgood Marshall joined). I don’t see any desire among Roberts/Scalia/Thomas/Alito/Breyer/Kennedy to create a brand new federal cause of action that wasn’t explicitly endorsed by Congress by reversing a thirty-year-old Supreme Court opinion that says it doesn’t exist. (It’s not like the prudential considerations that motivated Blue Chip Stamps have even been mildly ameliorated: litigation is more expensive than ever, and the plaintiffs’ bar is more sophisticated about filing multi-billion-dollar strike suits.) And Ginsburg and Stevens and Souter would have to recognize that reversing Blue Chip Stamps–a case where Congress has the power to act to change a statutory interpretation–undermines the rationale for stare decisis for Roe, a case where Congress doesn’t have the power to act.
If Blue Chip Stamps is getting modified, it would be to narrow the scope of private causes of action, rather than to expand it, but it’s not getting reversed.
Dave Hoffman - March 23, 2006 at 12:09 am
Ted, Interesting comment. I can’t agree with you that Stevens’ opinion endorses BCS when read as a whole – indeed, I think he again and again suggests that BCS rests on loose footing and should be reconsidered. I also don’t agree that BCS says that the cause of action doesn’t exist under the statute: it says that as a matter of standing doctrine, it shouldn’t. Standing decisions- disguised merit inquiries or not – are simply different from ordinary statutory interpretation in my book, and should have less precedential weight. Your argument in any event would suggest that the Court never will overturn a statutory interpretation in light of later experience for fear of undermining Roe/Casey, which I don’t think is the case. As for the policy considerations, I’d argue that in the right political climate (think the year post-Enron) concerns about frivolous litigation (whether or not grounded in myth or actual data) would bow to the desire to federalize more of corporate law. And I can’t get over that footnote, where Stevens acknowledges that BCS rested, in part, on the availability of alternative relief that no longer will exist. He didn’t have to write that footnote, and 7 other Justices didn’t have to fail to write concurrences. Obviously, predicting what the Court will do is difficult, but my best guess is that BCS is vulnerable.
As for the other two comments, my preference is to let commentators fight out/police the norms that will govern our comment threads, as long as it doesn’t get libelous. Speech beats speech. Some of the time.
Ted - March 23, 2006 at 11:58 am
And Stevens and seven justices didn’t have to say “As the Blue Chip Stamps Court observed, class actions brought by holders pose a special risk of vexatious litigation. 421 U. S., at 739. It would be odd, to say the least, if SLUSA exempted that particularly troublesome subset of class actions from its pre-emptive sweep. See Kircher, 403 F. 3d, at 484.” And it would be especially odd that, after Congress endorsed the policy considerations in BCS in PSLRA and SLUSA, and after the problem of runaway litigation is twice as large as it was when BCS was decided, the Supreme Court swept BCS away to permit standing for a “particularly troublesome subset of class actions,” when Congress expressly chose not to do so in expanding the securities laws in Sarbanes-Oxley. FN13 is just as easily read as saying that one of the two BCS rationales is no longer needed to support BCS.
My second argument is that the argument for overturning BCS is substantially weaker than the argument for overturning the contemporaneous Roe, and, given that it’s gotten to the point that the only rationale the Court has for not overturning Roe is stare decisis (especially if we are to believe Breyer and look to international-law sources), one would hardly expect the liberal wing of the Court to start battering at the principle of stare decisis. It’s not beyond the Court to act intellectually dishonestly and say stare decisis doesn’t apply to BCS but does apply to Roe, but, at that point, we might as well join Tribe in throwing up our hands and saying constitutional law is beyond commentary.
Lex Aquila - March 23, 2006 at 12:01 pm
Prediction: Justice Stevens will not find anything close to a Majority of Justices of the Court willing to relax the BCS standing requirement under the 33 and 34 Acts. I agree that he somehow slipped that into the footnote, but I serious doubt Roberts, Scalia, Kennedy, Thomas, Alito agree to relax the standing requirement for the IMPLIED private right of action (post-Erie federal common law). After all, Congress and the President knew of this standing requirement when they enacted SLUSA. If SLUSA means what the Court says, then Congress and the President intended the result achieved.
Dave Hoffman - March 23, 2006 at 3:24 pm
Ted: Your first argument depends on the proposition that the “problem of runaway litigation is twice as large as it was when BCS was decided.” This is both an empirical and a normative claim, and I can’t agree with you on either end. But that is a story for another post.
Your second argument depends on the claim that “it’s gotten to the point that the only rationale the Court has for not overturning Roe is stare decisis . . .” This too seems contestable, at least for some. But the bigger point that I made previously is that your argument suggests that the Court will never overturn any decision until it overturns Roe. That simply can not be right.
Lex Aquila: Can you tell me more about the import of your parenthetical about post-Erie federal common law?
The 10b-5 Daily - March 23, 2006 at 4:24 pm
Dabit Roundup
There has been a considerable amount of media and blog coverage of the Dabit decision. Here is a partial roundup: Media – Articles can be found in Bloomberg, the Financial Times, the New York Times, and the Washington Post. Blog…
Ted - March 23, 2006 at 6:44 pm
But the bigger point that I made previously is that your argument suggests that the Court will never overturn any decision until it overturns Roe. That simply can not be right.
It’s not right, but it’s also not my argument. My argument is that, to the extent the five left-most justices are intellectually honest, the Court will not overturn any decision unless there is a reason to distinguish the failure to observe stare decisis in that decision from a decision to respect Roe in a case reevaluating it.
So, for example, the Court can happily unanimously reverse previous antitrust decisions where the economic grounding for that decision has been disproved, because the Court has created a doctrine that recognizes that its earlier antitrust decisions are wildly mistaken, and that stare decisis doesn’t require it to ignore those mistakes.
And there’s a possibility of the Court continuing to retreat from Lopez and Seminole Tribe: those were controversial constitutional decisions that departed from precedent, mostly 5-4, and relatively recent.
I don’t think the McConnell case will last through the decade. Again, a recent 5-4, not entirely consistent with earlier traditional, a constitutional decision, and wrong, all arguments for disregarding stare decisis.
There’s a slim chance that the Court will move back to the right on some capital punishment cases and reverse some of the poorer-reasoned 21st-century cases, but they probably won’t have the opportunity to do so.
But a 1975 6-3 decision of statutory interpretation that the business community has relied upon, as has Congress in the process of three revisions of the securities laws in the last decade, to expand standing for a judicially-created cause of action that wasn’t in the original statute? Extraordinarily unlikely.
Lex Aquila - March 24, 2006 at 8:05 pm
For more on why I refer to post-Erie federal common law see Scalia’s concur in part/dissent in part in the matter of Sosa v. Alvarez-Machain. After Erie, the Court purportedly views the federal common law as severely constrained (as against the power, for instance, of state common law judges or the federal judiciary operating under the “subtle fallacy” of Swift v. Tyson). Scalia refers to these implied rights of action as stemming from the “heady days” of the Court, in which it was thought the Court could still–even after Holmes’ supposedly disasterous critique in the Taxicab case and the opinion in Erie–essentially create rights of action where Congress had failed to do so. (Citing Bivens, I think.)
I’m staying pedestrian, because my point about Erie wasn’t supposed to be some stinging critique of the post. Instead, I’m just suggesting that the Court today–faced with a case calling for the recognition of the implied private cause of action–would be even-odds or better not to recognize such a claim. Against the backdrop of a less cavalier approach to implied rights of action, I do not see a majority of the Court retreating from the hardly unreasonable proposition that, for the limited purpose of a judicially created private right of action, “in connection with the purchase or sale” means that for standing purposes the fraud has to result in the purchase or sale of securities.
I agree that it is hard to rationalize in the abstract why the same language means different things. Moreover, if the Congress wished to overrule a nonconstitutional implied right of action or impose more stringent standing requirements it could do so. But, where the Court has found a claim implied (read created it), I stand by my earlier suggestion that the Court is unlikely to further relax standing requirements–Justice Stevens’ footnote notwithstanding.
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