United States: Removing Securities Act Class Actions To Federal Court

In 1998, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA)¹ to establish national uniform standards for securities litigation. Designed to prevent evasion of the substantive and procedural safeguards imposed in the Private Securities Litigation Reform Act (PSLRA),² SLUSA requires that certain securities-related class actions be brought only under federal law and, in some instances, in federal court. More than a decade later, the full impact of SLUSA on securities litigation is still not fully known. One unresolved issue that repeatedly arises under SLUSA is whether putative class actions filed in state court that assert claims only under the Securities Act of 1933 (the "Securities Act")³ may be removed to federal court. The United States District Courts that have addressed this issue are fairly evenly split for⁴ and against⁵ removability. The prohibition in 28 U.S.C. § 1447(d) against appeals of orders remanding cases to state court likely means that neither the Circuit Courts or the United States Supreme Court will resolve this issue any time soon. But, there are sound arguments that support the removability of Securities Act claims filed in state courts. Below, we discuss two of those arguments: (1) Section 16(c) of the Securities Act, as amended by SLUSA, allows the removal of Securities Act claims that are filed in state courts, and (2) SLUSA made federal courts the exclusive jurisdiction for certain class actions arising under the Securities Act.

Section 16(c) of the Securities Act Authorizes Removal of Securities Act Claims

Generally, federal claims are removable unless Congress expressly has stated otherwise.⁶ Before SLUSA, Section 22(a) of the Securities Act contained such a statement, limiting removal of federal claims with a wholesale bar on the removal of Securities Act cases filed in state courts of competent jurisdiction. SLUSA introduced an exception to Section 22(a)'s removal prohibitions; it now reads:

Except as provided in Section 16(c), no case arising under [the Securities] Act and brought in any State court of competent jurisdiction shall be removed to any court of the United States.⁷

The scope of the "[e]xcept as provided in Section 16(c)" exception to Section 22(a)'s ban on removal of Securities Act cases is hotly contested. Some courts have found that it applies only to state law securities class actions, while others have found that it applies to both state law and federal law securities class actions.⁸

Section 16(c) states that "[a]ny covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable . . . ."⁹ The clause "as set forth in subsection (b)" is the impetus for the competing interpretations of Section 16(c).

Section 16(b) of the Securities Act is a preclusion provision added by SLUSA; it states:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging €"

(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.¹⁰

Some courts have held that the "plain language" of Section 16(c) must mean that the cross reference to Section 16(b) imports that subsection in its entirety, meaning only state law claims precluded by Section 16(b) may be removed under Section 16(c).¹¹ In our view, a more nuanced and natural reading of the statute recognizes that, "as set forth in subsection (b)" is an adverbial phrase modifying the verb in the preceding clause: "involving."¹² It explains how a "covered class action" must involve a "covered security" to be subject to Section 16(c) €" and thus removable. Namely, it must involve allegations of "untruth, manipulation, and so on" as explained in subsections (1) and (2) of Section 16(b).¹³

This reading makes sense because "involving" is the only part of the phrase "covered class action brought in any State court involving a covered security" that needs further illumination. "[B]rought in any State court" is unambiguous, and Section 16 defines the phrases "covered class action" and "covered security."¹⁴ Incorporating the requirements for how a "covered class action" must "involve" a "covered security" from Section 16(b) into Section 16(c), however, was not subject to an easy fix when drafting SLUSA and required either the cross reference at issue or that the repetition of relevant portions of Section 16(b). Thus, reading Section 16(c)'s exception to allow removal of federal law claims coheres with the other provisions of SLUSA and the Securities Act without any internal conflict or redundancy.

Contrarily, interpreting Section 16(c) as limiting removal to state law securities class actions effectively reads SLUSA's amendment of Section 22(a)'s anti-removal provision out of existence. As mentioned above, Section 22(a) prohibits removal of claims "arising under the Securities Act." An amendment of that provision that creates an exception only for cases that arise under state law is unnecessary and meaningless because no state law claim can be accurately described as "arising under the Securities Act."¹⁵ Therefore, the broader reading of Section 16(c)'s exception that allows for removal of federal law claims better fits with SLUSA as a whole, because it avoids making parts of SLUSA superfluous.

SLUSA Made Federal Courts the Exclusive Jurisdiction for Certain Securities Act Class Actions.

Not only does SLUSA's amendment to Section 16(c) provide a basis for removing Securities Act claims, but some courts have also found that such claims are removable because, after SLUSA, no state court has subject matter jurisdiction over "covered class actions" asserting claims under the Securities Act.¹⁶ Therefore, because state courts are no longer "courts of competent jurisdiction" for such actions, they are not subject to the non-removal provision of Section 22(a).¹⁷

This argument stems from SLUSA's amendment of the jurisdictional provision of Section 22(a), which reads in relevant part:

The district courts of the United States . . . shall have jurisdiction of offenses and violations under this [Act] . . . concurrent with State and Territorial courts, except as provided in [Section 16] with respect to covered class actions . . . .¹⁸

Several courts have interpreted this amendment to mean that state courts have concurrent jurisdiction over Securities Act claims unless the lawsuit qualifies as a "covered class action" as that term is defined in Section 16(f).¹⁹

While the intent motivating the amendment to the jurisdictional provision of Section 22(a) admittedly is difficult to decipher, this interpretation is the most compatible with SLUSA's legislative history, which contains numerous statements that demonstrate Congress's intent that SLUSA create exclusive jurisdiction over all class action lawsuits involving nationally traded securities. Senator Gramm, the author of the legislation, summed up SLUSA succinctly: "What [SLUSA] says is that in the case of class-action suits, and class-action suits only, if a stock is traded on the national market, if it is a national stock, then the class-action suit has to be filed in Federal court."²⁰ Senator Gramm's statement echoes many others in SLUSA's legislative history. For example, Representative Anna G. Eshoo: "This is a narrowly focused bipartisan bill that closes a loophole in the 1995 Private Securities Litigation Reform Act that allowed for, or created really, a circumvention to State courts."²¹

A contradictory reading of SLUSA that allows state courts to continue to exercise concurrent jurisdiction over covered class actions, on the other hand, leads to absurd results. "The narrow reading granting remand [of removed Federal law covered class actions] creates a jurisdictional anomaly because it has the effect of prohibiting State securities fraud claims in State court, while allowing federal securities fraud class actions to be litigated there."²² Such a result is both counterintuitive and contrary to the purposes behind of SLUSA.

Kircher v. Putnam Funds Trust Does Not Support an Argument Against Removal.

Despite claims that Kircher v. Putnam Funds Trust²³supports an argument against removal, it does not. In Kircher, the Supreme Court addressed, among other things, the question of whether the universe of state law claims over which Section 16(c) grants jurisdiction²⁴ is co-extensive with the universe of claims precluded by Section 16(b). In deciding that Sections 16(b) and (c) cover the same state law claims for purposes of jurisdiction, the Supreme Court determined that the grant of jurisdiction in Section 16(c) was "confined to cases €Üset forth in subsection (b),' § 77p(c), namely, those with claims of untruth, manipulation, and so on."²⁵ The Court reasoned that the phrase "[set forth in subsection (b)] . . . has no apparent function unless it limits removal to covered class actions involving claims like untruth or deception." Id. In other words, the Court found that SLUSA's grant of jurisdiction in Section 16(c) was limited to "covered class actions" that involved "covered securities" in the manner laid out in Section 16(b). Accordingly, Kircher supports the reading of Section 16(c) we suggest above.

Conclusion.

Although the removability of Securities Act class actions from state to federal court is still an open question, interpreting SLUSA to allow for removal of any Securities Act claim that constitutes a "covered class action" involving a "covered security" is a more natural reading of the statute and gives meaning to all SLUSA's amendments to the Securities Act. Moreover, the purposes of SLUSA, as explained in the A legislative history, also support this reading of the statute, while a more narrow reading leads to the absurd result that state courts cannot hear state law securities class actions but can hear federal law securities class actions.

Footnotes

1. Pub. L. No. 105-353, 112 Stat. 3227 (1998).

2. Pub. L. No. 104-67, 109 Stat. 737 (1995).

3. 15 U.S.C. §§ 77a - 77aa (West 2011).

4. Lapin v. Facebook, Inc., No. C-12-3195 MMC, 2012 WL 3647409 (N.D. Cal. Aug. 23, 2012); Northumberland County Ret. Sys. v. GMX Res., Inc., 810 F. Supp. 2d 1282, (W.D. Okla. 2011); Knox v. Agria Corp., 613 F. Supp. 2d 419, 423-25 (S.D.N.Y. 2009); In re Fannie Mae 2008 Sec. Litig., Nos. 08 Civ. 7831 (PAC), 09 Civ. 1352 (PAC), 2009 WL 4067266 (S.D.N.Y. Nov. 24, 2009); Rubin v. Pixelplus Co., No. 06-CV-2964 (ERK), 2007 WL 778485 (E.D.N.Y. Mar. 13, 2007); Rovner v. Vonage Holdings Corp., C.A. No. 07-178 (FLW), 2007 WL 446658, at *3 (D.N.J. Feb. 7, 2007); Pinto v. Vonage Holdings Corp., C.A. No. 07-0062, 2007 WL 1381746, at *1 (D.N.J. May 7, 2007); Purowitz v. DreamWorks Animation SKG, Inc., No. CV 05-6090-MRP, 2005 U.S. Dist. LEXIS 46911, *2-3 (C.D. Cal. Nov. 14, 2005); Lowinger v. Johnston, No. 3:05-CV-316-H, 2005 WL 2592229 (W.D.N.C. Oct. 13, 2005); In re King Pharm., Inc., 230 F.R.D. 503, 505 (E.D. Tenn. 2004); Brody v. Homestore, Inc., 240 F. Supp. 2d 1122 (C.D. Cal. 2003); Kulinski v. Am. Elec. Power Co., No. Civ. A. C-2-03-412, 2003 WL 24032299 (S.D. Ohio Sept. 19, 2003); Alkow v. TXU Corp., Nos. 3:02-CV-2738-K, 3:02-CV-2739, 2003 WL 21056750 (N.D. Tex. May 8, 2003).

5. Young v. Pacific Biosciences of Cal., Nos. 5:11-VC-05668 EJD, 5:11-CV-05669 EJD, 2012 WL 851509, *2-4 (N.D. Cal. Mar. 13, 2012); W. Va. Laborers Trust Fund v. STEC Inc., No. SACV 11- 01171-JVS, 2011 WL 6156945, *3-5 (C.D. Cal. Oct. 7, 2011); Unschuld v. Tri-S Sec. Corp., No. 1:06-CV-02931-JEC, 2007 WL 2729011, *11 (N.D. Ga. Sept. 14, 2007); IRRA v. Lazard Ltd., No. 05-CV-3388 (RJDRML), 2006 WL 2375472, *1 (E.D.N.Y. Aug. 15, 2006); Pipefitters Local 522 & 633 Pension Trust Fund v. Salem Commc'ns Corp., No. CV 05-2730-RGK, 2005 U.S. Dist. LEXIS 14202, *6 (C.D. Cal. June 28, 2005); Higginbotham v. Baxter Int'l, Nos. 04-CV-4909, 04-CV-7096, 2005 WL 1272271, *2 (May 25, 2005); Zia v. Medical Staffing Network, 336 F. Supp. 1306, 1308-10 (S.D. Fl. 2004); In re Tyco Int'l, Ltd. Multidistrict Litig., 322 F. Supp. 2d 116 (D.N.H. 2004); Hawaii Structural Ironworkers Pension Trust Fund v. Calpine Corp., No. 03-CV-0714-BTM, 2003 WL 23509312 (S.D. Cal. Aug. 27, 2003); Nauheim v. Interpublic Grp. of Companies, No. 02- C-9211, 2003 WL 1888843, *3 (N.D. Ill. Apr. 15, 2003); In re Waste Mgmt., Inc. Secs. Litig., 194 F. Supp. 2d 590 (S.D. Tex. 2002).

6. See 28 U.S.C. § 1441(a) ("Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed . . .").

7. 15 U.S.C. § 77v(a) (amendment in italics). After SLUSA, Securities Act claims asserted by individuals continue to be subject to the nonremoval provision of Section 22(a).

8. See cases cited in footnotes 4 and 5 supra.

9. 15 U.S.C. § 77p(c).

10. 15 U.S.C. § 77p(b).

11. See, e.g., W. Va. Laborers Trust Fund, 2011 WL 6156945 at *3-5.

12. Contra In re Tyco, 322 F. Supp. 2d 116.

13. See Kircher v. Putnam Funds Trust, 547 U.S. 633, 643 (2006

14. 15 U.S.C. §§ 77p(f)(2)-(3).

15. See, e.g., Northumberland, 810 F. Supp. 2d at 1287; Brody, 240 F. Supp. 2d at 1124; Kulinski, 2003 WL 24032299, at *4; Alkow, 2003 WL 21056750, at *1; Contra In re Tyco, 322 F. Supp. 2d 116.

16. See, e.g., Knox, 613 F. Supp. 2d at 423-25 (holding that federal court had exclusive jurisdiction over class action asserting Securities Act claims); In re Fannie Mae 2008 Sec. Litig., 2009 WL 4067266 (same); Pinto, 2007 WL 1381746, at *1 (same); Rovner, 2007 WL 446658, at *3 (same); In re King Pharm., Inc., 230 F.R.D. at 505 (same).

17. 15 U.S.C. § 77v(a).

18. Id.

19. See cases cited in footnote 16 supra.

20. 143 Cong. Rec. S10475 (daily ed. Oct. 7, 1997) (Statement of Sen. Gramm) (emphasis added).

21. 144 Cong. Rec. H6059 (daily ed. July 21, 1998) (statement of Rep. Eshoo). Other statements also support this interpretation: Representative Christopher Cox: "To address this inequity and assert that national markets require nationally applied rules, this legislation will make federal courts the exclusive venue for large-scale securities fraud lawsuits involving securities subject to federal regulation under the 1996 National Markets Act." 144 Cong. Rec. H6060 (daily ed. July 21, 1998) (statement of Rep. Cox). Representative Michael Oxley: "This legislation before us today eliminates the State court loophole by creating a set of uniform standards for class action lawsuits and eliminates a lot of these fishing expeditions that take place as a result." 144 Cong. Rec. H6063 (daily ed. July 21, 1998) (statement of Rep. Oxley). Representative Zoe Lofgren: "The Securities Litigation Uniform Standards Act of 1998 will finally slam the door on strike suits by establishing Federal court as the exclusive venue for securities class actions." 144 Cong. Rec. E1383 (daily ed. July 22, 1998) (statement of Rep. Lofgren). Representative Tauzin: "[W]e are here tonight to perfect [the PSLRA], to say you cannot use the State courts to do the same illicit, abusive strike suits that you were formerly doing in Federal court." 144 Cong. Rec. H6058 (daily ed. July 21, 1998) (statement of Rep. Tauzin). SEC Chairman Arthur Levitt: "[T]he bill generally provides that class actions can be brought only in federal court where they will be governed by federal law." 144 Cong. Rec. S12444-45 (daily ed. Oct. 13, 1998) (letter from Arthur Levitt to Senators D'Amato, Gramm, Dodd).

22. Knox, 613 F. Supp. 2d at 423-25.

23. 547 U.S. 633, 643 (2006).

24. Another function of Section 16(c) is to convey jurisdiction to federal courts over state law claims that are "covered class actions" involving a "covered security" allegations of "untruth, manipulation, and so on." See Kircher, 547 U.S. at 643.

25. 547 U.S. at 642.

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