(Article from Securities Law Alert, August/September 2019)
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On September 12, 2019, the Third Circuit held that the Securities Litigation Uniform Standards Act (“SLUSA”) does not preclude plaintiffs from bringing individual suits under state law after opting out from a securities-related class action unless the opt-out suit and the class action were “somehow combined, in whole or in part, for case management or for resolution of at least one common issue.”North Sound Capital v. Merck & Co., 2019 WL 4309663 (3d Cir. 2019) (Krause, C. J.). The court found that SLUSA generally does not preclude opt-out suits that did not “coincide for some period” with a class action because “[i]f two cases never overlap, a court cannot combine them.”
Background
SLUSA precludes a “covered class action” alleging state law-based securities claims. 15 U.S.C. § 78bb(f)(1). SLUSA’s “mass action provision” defines a “covered class action” to include “any group of lawsuits filed in or pending in the same court and involving common questions of law or fact, in which . . . (I) damages are sought on behalf of more than 50 persons; and (II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose.” 15 U.S.C. § 78bb(f)(5)(B)(ii).
The district court held that SLUSA precluded opt-out suits that were filed after the dismissal of the relevant class actions, even though the cases were at no point combined and were never pending at the same time. North Sound Capital LLC v. Merck & Co., 314 F. Supp. 3d 589 (D.N.J. 2018). The court reasoned that the absence of “a carve-out for opt-out actions” in SLUSA “indicates that Congress envisioned the aggregation of opt-out suits with related class actions under SLUSA’s grouping provision.” The court noted that SLUSA’s mass action provision refers to suits that “proceed as a single action for any purpose,” and determined that “the phrase ‘for any purpose’ should be given an expansive construction . . . consistent with [SLUSA’s] legislative history.” The court concluded that the opt-out suits had “proceeded as a single action” with the class actions because of “the procedural history of, and degree of informal coordination between” the opt-out suits and the class actions. Plaintiffs appealed.
SLUSA Preclusion Does Not Generally Apply to Opt-Out Suits That Did Not “Coincide for Some Period” With a Covered Class Action
The Third Circuit “consider[ed] what Congress meant by the broader phrase ‘otherwise proceed as a single action for any purpose.’” The court found that “[b]y qualifying ‘single action’ with the prepositional phrase ‘for any purpose,’ Congress clarified that the lawsuits need not proceed together for all—or even most—purposes; a group of lawsuits may satisfy the statutory requirement even if a court contemplates separate trials, judgments, or hearings.” However, the court determined that “at a minimum, suits do not ‘proceed as a single action’ unless they are somehow combined for the joint management of a common stage of the proceedings (such as discovery) or the resolution of a common question of law or fact.”
The court found that “as a general matter, cases cannot ‘proceed as a single action’ unless they coincide for some period.” The court explained that it was “hard-pressed to imagine any scenario in which two cases that never overlap could function as a single lawsuit on any dimension, as the mass action provision requires.” The court made it clear that it did “not read the single action requirement to mean that cases must be coextensive with one another but rather that they be at least partially coordinated, which would seem invariably to require that they coincide for some period.”
The court found that its “common-sense interpretation” of the phrase at issue “draws further support from the time-honored canon ejusdem generis, which teaches that where general words follow an enumeration of two or more things, those successive words refer only to persons or things of the same general kind or class specifically mentioned.” The court noted that “[t]he preceding verbs ‘joined’ and ‘consolidated’ are nearly synonymous when used to refer to the union of lawsuits,” and “illustrate[ ] what Congress meant by the phrase ‘otherwise proceed as a single action.’”
The court held that the mass action provision’s “single-action requirement cannot be contorted enough to cover ‘functional coordination,’ as opposed to actual coordination.” The court reasoned that requiring only “functional coordination” would mean that “the mere existence of a class action would preclude individual plaintiffs from bringing state-law claims, even if individual plaintiffs do not participate at all in the class proceedings and, when presented with the opportunity, opt out of the class action.” Such an interpretation would “foster the complete preemption of state-law securities claims—precisely what Congress chose not to do in adopting SLUSA.” Moreover, the court observed that “it would raise serious due process concerns if Congress conditioned the extinguishment of opt-out investors’ state-law claims on whether an unaffiliated party had elected to bring a putative class action.” The court found “the mass action provision evinces no intent to press these constitutional boundaries.”