United States: Third Circuit Reverses Dismissal Of State Law Securities Claims Against Pharmaceutical Manufacturer By Investors Who Opted Out Of Settled Federal Class Action, Holding That Securities Litigation Uniform Standards Act Did Not Preclude Opt-Out Claims

Last Updated: September 23 2019
Article by Shearman & Sterling LLP

On September 12, 2019, the United States Court of Appeals for the Third Circuit reversed the dismissal of state law securities actions by individual investors who elected to opt out of a related class action against a pharmaceutical company (the “Company”).  North Sound Capital LLC v. Merck & Co. Inc., Nos. 18-2317 (3d Cir. Sept. 12, 2019).  Opt-out plaintiffs—individual investors who opted out of the class action and who filed separate state law actions against the Company—brought individual actions asserting claims under New Jersey common law, and included allegations that the District Court noted “track, sometimes verbatim, those filed in the class actions.”  The District Court held that such opt-out actions were precluded by the Securities Litigation Uniform Standards Act (“SLUSA”) and dismissed the individual actions.  The Third Circuit reversed, finding that SLUSA does not prohibit investors who opt out of a class action from bringing individual actions under state law.

Class plaintiffs brought suit after the stock of two pharmaceutical companies (which later merged to form the Company) dropped between 2007 and 2008.  Class plaintiffs alleged the companies made material misrepresentations and omissions in violation of federal securities laws in touting the efficacy and commercial viability of these drugs while allegedly seeking to delay the release of damaging information from clinical trials, attempting to alter the findings of the trials, and concealing their role in pushing for different results.  After the companies eventually released the negative results of the clinical trials, the stock price declined significantly.  Four years after the case was filed—after the claims survived a motion to dismiss and a motion for summary judgment—the District Court granted class certification and allowed investors the right to opt out within 45 days, which the individual plaintiffs exercised.  The District Court subsequently approved a settlement between class plaintiffs and the Company and offered the investors who opted out an opportunity to re-join and share in the recovery.  Sixteen opt-out investors declined to do so and brought individual suits against the Company, making similar allegations as those in the class action with an additional state law fraud claim.  After the federal claims were brought in and the opt-out actions were dismissed based on the statute of repose, the Company moved to dismiss the surviving state law claims, arguing that such claims were precluded under SLUSA because they were “joined, consolidated, or otherwise proceed[ing] as a single action for any purpose” with the class action.  The District Court noted this appeared to be an issue of first impression and ultimately dismissed the state law claims.  The District Court noted that Congress did not “explicitly exempt opt-out suits from SLUSA,” which suggests that Congress “envisioned the aggregation of opt-out suits with related class actions,” and the legislative history of SLUSA required the District Court to “construe the definition of a ‘covered class action’ broadly.”  Opt-out plaintiffs appealed.

The Third Circuit first noted that in the wake of class actions shifting to state courts as the result of the Private Securities Litigation Reform Act, Congress enacted SLUSA to preclude “investors from litigating their state-law claims alleging securities fraud through a ‘covered class action.’”  The Court then turned to SLUSA’s definition of a “covered class action.”  The Court noted that all parties agreed that the first part of the definition—“any lawsuit that seeks to recover damages for more than 50 persons or on a representational basis”—was inapplicable because the total number of investors in the opt-out lawsuits was lower than that threshold.  The second part of the definition, which the Court referred to as the “mass-action provision,” covers lawsuits that “1) are ‘filed in or pending in the same court’; (2) involve common legal or factual questions; (3) seek damages for more than 50 persons; and (4) ‘are joined, consolidated, or otherwise proceed as a single action for any purpose.’”  The Court noted that, given that plaintiffs were fewer than 50, the “mass-action provision” would not apply “unless the individual opt-out lawsuits and the settled class actions together satisfy the statutory definition.”  Because there was no dispute that the class actions and the individual lawsuits were both filed in the same court and involved substantially the same facts, the question accordingly turned on the fourth prong:  whether the class actions and these subsequent opt-out suits were “joined, consolidated, or otherwise proceed[ed] as a single action for any purpose.”

Opt-out plaintiffs argued that their individual actions did not satisfy the “single-action” requirement because “they have never proceeded as a single action with the class actions.”  By contrast, the Company argued that the “single-action” requirement merely required a “functional relationship” between the two suits.  The Third Circuit focused on a textual analysis drawing from Black’s Law Dictionary and Supreme Court precedent.  The Court considered the “joined, consolidated” language of the statute and found that the legal definitions of the words as defined by Black’s Law Dictionary most closely capture the intent of Congress (“to combine or unite in time, effort, action,” and “to unite or unify into one mass or body,” respectively).  The Court also noted that the Supreme Court has used versions of the words interchangeably when interpreting other federal rules.  Similarly, the Third Circuit relied on Supreme Court precedent and the Black’s Law Dictionary definition in interpreting the phrase “otherwise proceed” in the mass-action provision.  In rejecting the Company’s argument that “proceed” should be read to mean “to come forth from a source,” the Third Circuit noted that such a reading was unpersuasive as the SLUSA provision did not use “the preposition ‘from’ nor does it identify any source from which the lawsuits must arise.”  Instead, the Court found that “proceed” should be understood as defined in Black’s Law Dictionary (“to carry on a legal action or process”)—and such a definition would be “consistent with the meaning of joinder and consolidation” and other federal rules.  Regarding the reference to “a single action for any purpose,” the Third Circuit concluded that Congress had sought to clarify that matters were not required to proceed together for most or all purposes, and could still meet the statutory definition even if they had separate trials, judgments, or hearings.  The Court noted that for cases to “be at least partially coordinated,” however, the cases must “coincide [and overlap]” for a period of time.  Employing principles of statutory interpretation as further support for its reading of the provision, the Court observed that because “otherwise” follows a synonymous list of words such as “joined” and “consolidated,” the canon of ejusdem generis (“of the same kind”) provides that there is a “commonality between those preceding words and the phrase “proceed as a single action.”  The Court rejected the Company’s argument that “any” would allow for an expansive reading of the provision, emphasizing that they “do not read statutes in little bites.”

The Third Circuit then considered and rejected the Company’s policy argument that SLUSA should be broadly interpreted such that “federal fraud standards [are uniformly applied].”  Noting that Congress has “repeatedly declined” broad preemption of state law securities claims in drafting legislation, the Court found that under the Company’s interpretation, “the mere existence of a class action would preclude individual plaintiffs from bringing state-law claims” even if individual plaintiffs opt out—which the Court concluded would render SLUSA more prohibitive than Congress intended.  Citing the Supreme Court’s decision in Cyan, the Court stated that “courts have ‘no license to disregard clear language based on an intuition that Congress must have intended something broader.’”  The Court further noted that the Company’s reading of the statute implicated constitutional concerns, because barring opt-out plaintiffs’ state law claims merely because “an unaffiliated party” filed a putative class action would raise Fifth and Fourteenth Amendment due process concerns.

Having concluded that actual coordination was necessary for two matters to be considered a “single action” for the purposes of SLUSA’s mass-action provision, and that actions would not meet this requirement unless they were “somehow combined, in whole or in part, for case management or for resolution of at least one common issue,” the Court found no evidence of such coordination here between the class action and the individual lawsuits.  The Court emphasized that the actions did not temporally overlap and that the mere fact that the Company had already engaged in discovery in the class action that would equally apply to the opt-out cases does not establish “coordination” for SLUSA purposes and would allow only “a hermetically sealed opt-out investor” to proceed with their action.

Circuit Judge Shwartz dissented, arguing that opt-out plaintiffs’ participation in the pretrial proceedings was an important element in whether or not they would be precluded from bringing their own individual suits.  Judge Shwartz noted that the opt-out plaintiffs’ complaints were “virtually identical” to the class action complaint and that the opt-out plaintiffs benefitted from the class action’s discovery (which they intended to “heavily” rely on) rendering their “opt-out actions [as] functionally proceed[ing] as a single action with the class actions.”

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Ogletree, Deakins, Nash, Smoak & Stewart
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions