class action

Chadbourne and Parke LLP v. Troice (12-79); Willis of Colorado Inc. v. Troice (12-86); Proskauer Rose LLP v. Troice (12-88)

Issues: 

The Supreme Court has consolidated for oral argument three Fifth Circuit cases that deal with the Securities Litigation Uniform Standards Act (SLUSA). These cases address a circuit split as to the standard for determining when an alleged misrepresentation is "material" enough to the purchase or sale of a covered security to satisfy the "in connection with" requirement and thus trigger SLUSA’s preclusive effect.

The Securities Litigation Uniform Standards Act (“SLUSA”) precludes certain state-law class actions when a “misrepresentation” is made “in connection with the purchase or sale of a covered security.” The Supreme Court will address a circuit split over the scope and meaning of this standard; in particular, at what point an alleged misrepresentation is sufficiently related to the sale or purchase of a covered security to satisfy the "in connection with" requirement. The Court has consolidated for oral argument three state law securities class actions from the Fifth Circuit Court of Appeals. The district court, adopting the Eleventh Circuit’s test, found that SLUSA precluded the plaintiffs' claims because misrepresentations were made in connection with the sale of SLUSA-covered securities. The Fifth Circuit, adopting the Ninth Circuit’s test, reversed and reinstated the plaintiffs' state law class-actions. The Court’s ruling will implicate the scope and application of SLUSA, SLUSA's impact on state-law class actions, and SLUSA's effect on U.S. securities markets.

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Questions as Framed for the Court by the Parties: 

Chadbourne & Parke LLP V. Troice

The Securities Litigation Uniform Standards Act ("SLUSA") precludes most state-law class actions involving "a misrepresentation" made "in connection with the purchase or sale of a covered security." 15 U.S.C. § 78bb(f)(1)(A). The circuits, however, are divided over the standard for determining whether an alleged misrepresentation is sufficiently related to the purchase or sale of a covered security to satisfy the "in connection with" requirement. The Fifth Circuit in this case adopted the Ninth Circuit standard and held that the complaint here was not precluded by SLUSA, expressly rejecting conflicting Second, Sixth, and Eleventh Circuit standards for construing the "in connection with" requirement, all of which would result in SLUSA preclusion here. 

Additionally, and also in conflict with several other circuits, the Fifth Circuit held that SLUSA does not preclude actions alleging aiding and abetting of fraud in connection with SLUSA-covered security transactions when the aiders and abettors themselves did not make any representations concerning a SLUSA-covered security. 

The questions presented are: 

  1. Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions In SLUSA-covered securities. 
  2. Whether SLUSA precludes class actions asserting that defendants aided and abetted SLUSA-covered securities fraud when the defendants themselves did not make misrepresentations about the purchase or sale of SLUSA-covered securities. 

 

Willis of Colorado Inc. v. Troice

The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") precludes state law class actions that allege a misrepresentation or omission "in connection with" the purchase or sale of a covered security. 15 U.S.C. § 78bb(f)(1). The complaints at issue in this case plainly included such alleged misrepresentations. The district court, applying Eleventh Circuit precedent, recognized as much and dismissed the complaints. However, the Fifth Circuit disagreed and, purporting to apply the Ninth Circuit's test, found the fact that the complaints included alleged misrepresentations in connection with a covered security insufficient to invoke SLUSA because the complaints also included other misrepresentations that were not made "in connection with" a covered securities transaction. In doing so, the Fifth Circuit acknowledged that it was departing from the holding of the Eleventh Circuit and several other circuits. 

The question presented is whether a covered state law class action complaint that unquestionably alleges "a" misrepresentation "in connection with" the purchase or sale of a SLUSA-covered security nonetheless can escape the application of SLUSA by including other allegations that are farther removed from a covered securities transaction.

 

Proskauer Rose LLP v. Troice

  1. Does the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), 15 U.S.C. §§ 77p(b), 78bb(f)(1), prohibit private class actions based on state law only where the alleged purchase or sale of a covered security is "more than tangentially related" to the "heart, crux or gravamen" of the alleged fraud? 
  2. Does SLUSA preclude a class action in which the defendant is sued for aiding and abetting fraud, but a non-party, rather than the defendant, made the only alleged misrepresentation in connection with a covered securities transaction? 

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Facts

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Oxford Health Plans, LLC v. Sutter

Over a decade ago, Petitioner Oxford Health Plans, LLC (Oxford) agreed to pay Respondent Dr. Ivan Sutter for providing medical services to members of Oxford’s managed care network. Their contract contains a broad arbitration clause which prohibits litigation of their disputes in court and instead requires that they arbitrate their disputes. In 2002, Sutter complained that Oxford failed to pay him and other primary health care providers for medical services. After an arbitrator decided that their contract clause allowed “class arbitration,” or the consideration of an arbitration claim on behalf of a group of similar claims, Oxford went to federal court to vacate the arbitration award, arguing that the arbitrator exceeded his power to arbitrate. Both the District Court and the United States Court of Appeals for the Third Circuit denied Oxford’s motion to vacate and instead upheld the arbitrator’s decision to hear Sutter’s claim in class arbitration. Oxford argues that the arbitrator’s decision for class arbitration must be vacated because Oxford and Sutter never agreed to class arbitration in their contract exchanging medical services for compensation. In contrast, Sutter argues that the Court should uphold the award because the arbitrator acted within his powers and based his decision on the terms of the agreement between the parties. Oxford warns that a holding for Sutter would discourage parties from agreeing to arbitration to avoid the risk of being saddled with the costs of class arbitration. In contrast, Sutter argues that a holding for Oxford would encourage parties to challenge arbitration decisions in court, undermining the purpose of arbitration to avoid the costs of litigation, and effectively prevent individuals from pursuing their small claims by robbing them of the opportunity to present their claims as a group rather than individually.

Questions as Framed for the Court by the Parties: 

In Stolt-Nielsen v. AnimalFeeds International Corp., 130 S. Ct. 1758, 1776 (2010), this Court made clear that "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to arbitration." In this case, an arbitrator concluded that the parties affirmatively consented to class arbitration on the basis of a contract provision stating: "No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration."

The question presented is:

Whether an arbitrator acts within his powers under the Federal Arbitration Act (as the Second and Third Circuits have held) or exceeds those powers (as the Fifth Circuit has held) by determining that parties affirmatively "agreed to authorize class arbitration," Stolt-Nielsen, 130 S. Ct. at 1776, based solely on their use of broad contractual language precluding litigation and requiring arbitration of any dispute arising under their contract.

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Issue

Can an arbitrator decide that a contract broadly requiring arbitration of disputes also allows for "class arbitration" or the hearing of a claim on behalf of an entire group of similar claims?

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American Express Company, et al. v. Italian Colors Restaurant, et al.

Italian Colors Restaurant, along with other merchants, sued American Express in a class action lawsuit for alleged antitrust violations for compelling merchants to accept American Express credit cards and pay exorbitant rates. In the agreements those merchants signed with American Express, they agreed to use bilateral arbitration rather than class actions in resolving any disputes. Italian Colors argues that this bilateral arbitration clause would create prohibitive costs for any pursuit of their legal rights. This effectively immunizes American Express from any liability under the Sherman Antitrust Act. Therefore, courts must not enforce the arbitration agreement in this context. American Express contends that courts should adhere to the terms of arbitration agreements unless the terms would violate substantive United States law. From a policy standpoint, Italian Colors claims that arbitration is a poor vehicle to vindicate antitrust claims because the length of time an arbitral proceeding would take would create problems for potential claimants, creating difficulty in pursuing a claim before the statute of limitation expires and removing a disincentive for corporate abuse. American Express notes the myriad benefits of arbitration over litigation, specifically arguing that arbitration is more beneficial to lower income plaintiffs and less subject to abuse by frivolous or vengeful lawsuits.

Questions as Framed for the Court by the Parties: 

Whether federal arbitration law recognizes an “effective vindication” exception to class-arbitration waivers that allows courts to ignore arbitration agreements and permit class-action lawsuits where individual plaintiffs’ claims are so small that no single plaintiff would rationally bring a bilateral, one-on-one arbitration to vindicate federal rights.

Issue

Can courts refuse to enforce class-arbitration waivers and permit class-action lawsuits where a plaintiff’s individual claim is worth much less than the cost of bringing that claim? 

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Standard Fire Insurance Co. v. Knowles

After suffering property damage in a 2010 hailstorm, Greg Knowles filed a class action lawsuit in Miller County, Arkansas, against the Standard Fire Insurance Company ("Standard Fire") for failure to pay a contractor's retention fee. Standard Fire tried to remove the case to federal court under the Class Action Fairness Act of 2005 (“CAFA”), alleging that the amount in controversy exceeded $5,000,000. Pursuant to CAFA, a federal court has jurisdiction over a class action only if the amount in controversy exceeds $5,000,000. The district court remanded the case to state court because Knowles's complaint stipulated that he would not seek more than $5,000,000 in damages for the class. Standard Fire argues that Knowles cannot defeat removal under CAFA by using a stipulation because it would bind absent class members before class certification and before Knowles could be declared an adequate class representative. Knowles argues that as master of his complaint, he is free to limit his claims, and that class members are not adversely affected by the stipulation. The Supreme Court will determine whether a named plaintiff in a class action, before being declared an adequate class representative, can limit the entire class's claims to $5,000,000 in damages in order to defeat an attempt to remove the case to federal court.

Questions as Framed for the Court by the Parties: 

When a named plaintiff attempts to defeat a defendant's right of removal under the Class Action Fairness Act of 2005 by filing with a class action complaint a “stipulation” that attempts to limit the damages he “seeks” for the absent putative class members to less than the $5,000,000 threshold for federal jurisdiction, and the defendant establishes that the actual amount in controversy, absent the “stipulation,” exceeds $5,000,000, is the "stipulation" binding on absent class members so as to destroy federal jurisdiction?

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Amgen v. Connecticut Retirement Plans (11-1085)

In 2004, biotechnology company Amgen Inc. was selling securities of two drugs that stimulate the production of red blood cells. After the Food and Drug Administration held an advisory committee meeting in May 2004 about the safety of those drugs, the market prices of their corresponding securities dropped. On behalf of the shareowners who suffered, Connecticut Retirement Plans and Trust Funds sought to certify the class of investors who held stock in Amgen at that time to sue Amgen for fraud regarding any misrepresentations of the drugs. Amgen argues that this kind of class action requires a plaintiff to show material reliance of the class of investors as part of the question as to whether a class exists. In contrast, Connecticut Retirement argues that during this class certification stage a plaintiff need not go beyond demonstrating that investors share a common question of reliance as a class rather than as individuals. If Amgen wins, then plaintiffs of securities fraud may face an unwieldy burden of proof at an early stage in litigation. If Connecticut Retirement wins, then defendants of securities fraud may face unfair pressures to settle cases.

Questions as Framed for the Court by the Parties: 

1. Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.

2. Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.

Issue(s)

1. To establish a class of investors in a lawsuit alleging securities fraud, must a plaintiff show that the defendant’s allegedly untrue statements materially affected the security’s price?

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ADDITIONAL SOURCES

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Comcast Corp. v. Behrend

Respondent Caroline Behrend et al., cable television subscribers, brought an antitrust class action against Petitioner Comcast Corporation alleging anticompetitive activity. In order to be certified as a class, Respondents had to present evidence that they suffered damages on a class-wide basis. The evidence they submitted consisted of a damages model prepared by their expert witness. Comcast challenges the District Court’s reliance upon that evidence, claiming that it is inadmissible under standards set forth in Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U. S. 579 (1993). In this case, the Supreme Court will address whether evidence presented in support of class certification must be admissible under those standards. The decision will likely significantly impact the ability of plaintiffs to certify as a class under Federal Rule of Civil Procedure 23, and it may also affect underlying commercial conduct, such as the future use of territory-swapping and clustering agreements. 

Questions as Framed for the Court by the Parties: 

May a district court certify a class action under Federal Rule of Civil Procedure 23 without resolving whether the plaintiff class has introduced admissible evidence to show that they may be awarded damages on a class-wide basis?

Issue

May a district court certify a class action without resolving “merits arguments” that bear on Federal Rule of Civil Procedure 23’s prerequisites for certification, including whether purportedly common issues predominate over individual ones under Rule 23(b)(3)?

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Acknowledgments: 

The authors would like to thank former Supreme Court Reporter of Decisions Frank Wagner for his assistance in editing this preview.

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