In Re: Lord Abbett

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit
1-20-2009
In Re: Lord Abbett
Precedential or Non-Precedential: Precedential
Docket No. 07-1112
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 07-1112
IN RE: Lord Abbett Mutual Funds Fee litigation,
JOSEPH C. WHITE; JOSEPHINE LOGAN;
RICHARD CURTIS; BO BORTNER; JAMES A.
PINGITORE; PHILIP B. KATZ,
Appellants.
v.
LORD ABBETT & CO LLC; LORD ABBETT
DISTRIBUTOR LLC; TRACIE E. AHERN;
JOAN A. BINSTOCK; DANIEL E. CARPER;
ROBERT S. DOW; HOWARD E. HANSEN;
PAUL A. HILSTAD; LAWRENCE H. KAPLAN;
ROBERT G. MORRIS; A. EDWARD OBERHAUS, III;
EDWARD K. VON DER LINDE; MICHAEL BROOKS;
ZANE E. BROWN; PATRICK BROWNE;
JOHN J. DICHIARO; SHOLOM DINSKY;
LESLIE J. DIXON; KEVIN P. FERGUSON;
ROBERT P. FETCH; DARIA L. FOSTER;
DANIEL H. FRASCARELLI; ROBERT I. GERBER;
MICHAEL S. GOLDSTEIN; MICHAEL A. GRANT;
CHARLES HOFER; W. THOMAS HUDSON;
CINDA HUGHES; ELLEN G. ITSKOVITS;
MAREN LINDSTROM; ROBERT A. LEE;
GREGORY M. MACOSKO; THOMAS MALONE;
CHARLES MASSARE, JR.; STEPHEN J. MCGRUDER;
PAUL MCNAMARA; ROBERT J. NOELKE;
R. MARK PENNINGTON; WALTER PRAHL;
MICHAEL ROSE; ELI M. SALZMANN;
DOUGLAS B. SIEG; RICHARD SIELING;
MICHAEL T. SMITH; RICHARD SMOLA;
DIANE TORNEJAL; CHRISTOPHER J. TOWLE;
MARION ZAPOLIN
On Appeal from the United States District Court
for the District of New Jersey
(D. C. Nos. 04-cv-00559; 04-cv-00965; 04-cv-01055;
04-cv-01057; 04-cv-01209 and 04-cv-01365)
District Judge: Hon. William J. Martini
Argued on June 25, 2008
Before: SLOVITER, BARRY and ROTH, Circuit Judges
(Opinion filed: January 20, 2009 )
2
Jerome M. Congress, Esquire (Argued)
Milberg Weiss, LLP
One Pennsylvania Plaza, 49 th Floor
New York, NY 10119-0165
Patrick L. Rocco, Esquire
Shalov, Stone & Bonner
65 Madison Avenue, Suite 333
Morristown, NJ 07960
Mark Levine, Esquire
Stull Stull & Brody
6 East 45 th Street
New York, NY 10017
Counsel for Appellants
Jeffrey B. Maletta, Esquire (Argued)
Nicholas G. Terris, Esquire
Shanda N. Hastings, Esquire
Kirkpatrick & Lockhart Preston Gates Ellis, LLP
1601 K Street, N. W.
Washington, D. C. 20006
Christopher A. Barbarisi, Esquire
Kirkpatrick & Lockhart Preston Gates Ellis, LLP
One Newark Center, 10 th Floor
Newark, NJ 07102
Counsel for Appellees
3
OPINION
ROTH, Circuit Judge:
Plaintiffs appeal the December 4, 2006, order of the U.S.
District Court for the District of New Jersey, dismissing their
action with prejudice pursuant to the Securities Litigation
Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78bb(f).
This appeal presents the question whether SLUSA requires the
dismissal of the entire action when the action includes some
state law class action claims that clearly may not be maintained
under SLUSA as well as other claims that are not so prohibited.
We hold that SLUSA does not require such a dismissal.
Accordingly we will vacate the dismissal and remand this case
for further proceedings.
I. Factual and Procedural Background
Plaintiffs are a proposed class of shareholders of mutual
funds managed by Lord, Abbett & Co. LLC (Lord Abbett). On
February 9, 2004, they filed this lawsuit against Lord Abbett and
Lord Abbett Distributor LLC, the investment adviser and
distributor of the Lord Abbett mutual funds.1 Following the
consolidation of multiple related cases, plaintiffs filed a
1
A number of other defendants are no longer in the case.
4
Consolidated Amended Class Action Complaint on August 16,
2004.
In their Consolidated Amended Class Action Complaint,
plaintiffs alleged (among other misdeeds) that Lord Abbett
charged its existing investors excessive fees that were
improperly used to pay brokers to market Lord Abbett funds to
other investors. Plaintiffs claimed that Lord Abbett was
motivated to charge excessive fees because its management fees
were based on the amount of assets being managed – as the
number of investors grew so did the assets – and so did the fees.
Plaintiffs alleged violations of both federal and state law,
including violations of Sections 36(b) and 48(a) of the
Investment Company Act of 1940, brought on behalf of the
proposed class, and four state law counts, also brought on behalf
of the class.
Defendants filed a motion to dismiss, based in part on the
ground that plaintiffs’ action was pre-empted by SLUSA, 15
U.S.C. § 78bb(f). As we recently explained in LaSala v. Border
et Cie., 519 F.3d 121, 127-28 (3d Cir. 2008), SLUSA was
enacted as a supplement to the Private Securities Litigation
Reform Act of 1995, 15 U.S.C. §§ 77z-1, 78u-4 (PSLRA or
Reform Act). Congress enacted the PSLRA to prevent the filing
of “strike suits” – abusive class actions which are brought with
the hope that the expense of litigation may force defendants to
settle despite the actions’ lack of merit. In Congress’s view,
such actions “unnecessarily increase the cost of raising capital
and chill corporate disclosure . . .. ” S. Rep. 104-98 (1995),
reprinted in 1995 U.S.C.C.A.N. 679, 683. The PSLRA imposed
5
a number of requirements on federal securities litigation
plaintiffs, designed to deter such frivolous suits.2
In reaction to the rigors of the PSLRA, plaintiffs began
filing cases in state courts under less strict state securities laws.
Congress then enacted SLUSA, stating that
[I]n order to prevent certain State private
securities class action lawsuits alleging fraud
from being used to frustrate the objectives of the
Private Securities Litigation Reform Act of 1995,
it is appropriate to enact national standards for
securities class action lawsuits involving
2
In particular, the PSLRA imposed heightened pleading
requirements in fraud cases brought under Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j, and SEC Rule 10b-5. The
PSLRA requires that plaintiffs plead misleading statements
“with particularity,” 15 U.S.C. § 78u-4(b)(1), plead facts
creating a “strong inference” of scienter, 15 U.S.C. § 78u-
4(b)(2), and prove loss causation, 15 U.S.C. § 78u-4(b)(4). The
PSLRA also “limit[s] recoverable damages and attorney’s fees,
provide[s] a ‘safe harbor’ for forward-looking statements,
impose[s] new restrictions on the selection of (and
compensation awarded to) lead plaintiffs, mandate[s] imposition
of sanctions for frivolous litigation, and authorize[s] a stay of
discovery pending resolution of any motion to dismiss.” Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81
(2006) (Dabit II) (citing 15 U.S.C. § 78u-4); see also 15 U.S.C.
§ 78u-5.
6
nationally traded securities, while preserving the
appropriate enforcement powers of State
securities regulators and not changing the current
treatment of individual lawsuits.
SLUSA, S. 1260, 105th Cong. § 2(5), 112 Stat. 3227. The
SLUSA Conference Report explains that
[S]ince passage of the Reform Act, plaintiffs’
lawyers have sought to circumvent the Act’s
provisions by exploiting differences between
Federal and State laws by filing frivolous and
speculative lawsuits in State court, where
essentially none of the Reform Act’s procedural
or substantive protections against abusive suits
are available. . . . [A] single state can impose the
risks and costs of its peculiar litigation system on
all national issues. The solution to this problem is
to make Federal court the exclusive venue for
most securities fraud class action litigation
involving nationally traded securities.
H.R. Rep. No. 105-803, at 14-15 (1998) (Conf. Rep.) (internal
quotation omitted).
Accordingly, SLUSA barred certain class actions and
mass actions from state courts, providing in relevant part:
No covered class action based upon the
statutory or common law of any State
or subdivision thereof may be maintained
7
in any State or Federal court by any private
party alleging –
(A) a misrepresentation or omission
of a material fact in connection
with the purchase or sale of a
covered security; or
(B) that the defendant used or
employed any manipulative or
deceptive device or contrivance in
connection with the purchase or
sale of a covered security.
15 U.S.C. § 78bb(f)(1). Under SLUSA, a “covered class action”
brought in state court may be removed to federal court and is
subject to the above limitations. 15 U.S.C. § 78bb(f)(2).
SLUSA defines the term “covered class action” as:
(i) any single lawsuit in which –
(I) damages are sought on
behalf of more than 50
persons or prospective class
members, and questions of
law or fact common to those
persons or members of the
prospective class, without
reference to issues of
individualized reliance on
8
an alleged misstatement or
omission, predominate over
any questions affecting only
ind ividual pe rsons or
members; or
(II) one or more named
parties seek to recover
damages on a representative
basis on behalf of
them selv e s a n d othe r
unnamed parties similarly
situated, and questions of
law or fact common to those
persons or members of the
prospective class
predominate over any
questions affecting only
individua l p e r sons or
members; or
(ii) 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
9
(II) the lawsuits are joined,
consolidated, or otherwise
proceed as a single action
for any purpose.
15 U.S.C. § 78bb(f)(5)(B).
SLUSA is frequently described as “pre-empting” state-
law claims. However, as the Supreme Court has explained,
SLUSA does not actually “pre-empt” such claims; it merely
“denies plaintiffs the right to use the class-action device to
vindicate certain claims.” Merrill Lynch, Pierce, Fenner &
Smith, Inc. v. Dabit, 547 U.S. 71, 87 (2006) (Dabit II).
Plaintiffs retain the right to bring such a claim as an individual
state-law claim or federal securities fraud class action claim.
LaSala, 519 F.3d at 129.
On August 30, 2005, the District Court dismissed the four
state claims pled in plaintiffs’ Consolidated Amended Class
Action Complaint as pre-empted by SLUSA. 3 The District
Court also dismissed the remaining federal claims for failure to
state a claim. With respect to plaintiffs’ claims for violations of
Sections 36(b) and 48(a) of the Investment Company Act of
1940, the District Court determined that there is no direct cause
of action under Section 36(b), which was a predicate for the
3
The District Court issued an amended order and opinion on
December 28, 2005. In re Lord Abbett Mut. Funds Fee Litig.,
407 F. Supp. 2d 616 (D.N.J. 2005).
10
Section 48(a) claim, and dismissed those claims without
prejudice.
Plaintiffs filed a Second Amended Complaint on
September 29, 2005, asserting only two derivative claims
alleging violations of Sections 36(b) and 48(a) of the Investment
Company Act. In general, plaintiffs alleged that Lord Abbett
had received excessive management fees from its investors,
primarily because it had failed to pass along the benefits of the
economies of scale achieved as the funds grew.
Meanwhile, on September 14, 2005, defendants moved
for reconsideration of the District Court’s decision to dismiss
the claims without prejudice, in part on the grounds that SLUSA
requires dismissal of the entire action not merely dismissal of
the improper state law securities claims. Without reaching the
issue, the District Court denied the motion as lacking sufficient
grounds for reconsideration but subsequently granted the
defendants leave to brief the issue for de novo consideration.
Accordingly, on May 3, 2006, defendants filed a motion to
dismiss the Second Amended Complaint pursuant to SLUSA.4
4
On February 21, 2006, defendants filed a motion to dismiss
on the grounds that (1) plaintiffs’ claims were time barred under
the one-year look back period of Section 36(b)(3), and they
contain no relevant allegations addressing the relevant time
frame; (2) section 17 of the Investment Company Act prohibits
plaintiffs from bringing a common action on behalf of multiple
Lord Abbett funds; (3) plaintiffs failed to state a claim under
Section 36(b) of the Investment Advisers Act; and (4) section
11
The District Court granted the motion and dismissed the
Second Amended Complaint with prejudice on December 4,
2006. The District Court referred to our opinion in Rowinski v.
Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir. 2005), where,
in response to the plaintiffs’ argument that the court should
examine each count separately to determine whether it should be
pre-empted, we noted in dictum:
[W]e question whether preemption of certain
counts and remand of others is consistent with the
plain meaning of SLUSA. The statute does not
preempt particular ‘claims’ or ‘counts’ but rather
preempts ‘actions,’ 15 U.S.C. § 78bb(f)(1),
suggesting that if any claims alleged in a covered
class action are preempted, the entire action must
be dismissed.
Id. at 305. As the District Court acknowledged, we did not
reach this issue in Rowinski because in that case the plaintiff had
incorporated pre-empted state-law allegations into every count
of his complaint. Id. 5 However, the District Court found
36(b) does not apply to 12b-1 fees. This motion was briefed by
the parties, but the District Court never ruled on it.
5
Citing Rowinski and the District Court’s opinion in this case,
the Tenth Circuit recently dismissed an entire complaint as pre-
empted under SLUSA where the plaintiffs had incorporated
their general class allegations into each of their claims, each of
which was based on state law. Anderson v. Merrill Lynch,
12
Rowinski “helpful” in that it “provide[d] strong support, albeit
in dicta, for the proposition that SLUSA preempts entire class
actions rather than individual claims.” 6
The District Court then turned to the statutory language.
The District Court noted that, by its own terms, SLUSA pre-
emption applies to any “covered class action,” which is in turn
defined as “any single lawsuit” or “group of lawsuits,” and
concluded that this language reflects Congress’s intent to
regulate entire lawsuits. The District Court reasoned further that
Congress has used the word “claim” or “claims” elsewhere in
the securities laws, including in the PSLRA, and that Congress
Pierce, Fenner & Smith, Inc., 521 F.3d 1278, 1287 n.6 (10th
Cir. 2008). As such, the Tenth Circuit did not have to decide
“whether, in another action, SLUSA would permit the
preclusion of certain claims and the remand of others.” Id.
6
The District Court similarly cited the U.S. District Court for
the District of New Jersey’s holding in LaSala v. Bordier et
Cie., 452 F. Supp. 2d 575 (D.N.J. 2006), in which the district
court dismissed Swiss law claims that incorporated by reference
and were clearly tied to the allegations supporting the state law
securities claims. We reversed, noting that “by its terms
[SLUSA] only affects claims based upon the laws of a state or
territory of the United States.” LaSala v. Bordier et Cie., 519
F.3d 121, 143 (3d Cir. 2008). We did not have to reach the
question presented here, however, namely “[w]hether a single
offending claim requires dismissal of the entire action . . ..” Id.
at 129 n.6.
13
presumably would have used a narrower term than “action” if it
intended otherwise.
The District Court acknowledged that the Court of
Appeals for the Second Circuit had addressed the present issue
in Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 395
F.3d 25 (2d Cir. 2005) (Dabit I), holding that SLUSA does not
require the dismissal of an entire case where only some of the
claims are improper state law claims under SLUSA.7 In Dabit
I, the court acknowledged that SLUSA’s provisions might be
read as prohibiting maintenance of an entire action that includes
pre-empted state-law allegations. 395 F.3d at 47. The court,
however, declined to hold that SLUSA operated in this manner,
reasoning that,
On this reading, SLUSA would effectively
preempt any state law claim conjoined in a given
case with a securities fraud claim, whatever its
nature. We assume, however, that the historic
police powers of the states are not preempted
unless it was Congress’s ‘clear and manifest
purpose’ to do so.
7
The Second Circuit subsequently reiterated its holding that
SLUSA does not require dismissal of an entire action that
includes only some pre-empted claims in a non-precedential
opinion. Gray v. Seaboard Secs., Inc., 126 Fed. Appx. 14, 16
(2d Cir. Mar. 9, 2005).
14
Id. (quoting City of Milwaukee v. Illinois, 451 U.S. 304, 316
(1981)).
The Supreme Court reversed the Court of Appeal’s
holding on other grounds, ruling that SLUSA pre-empts state
law claims alleging fraud brought by investors who held
securities, as well as by those who purchased or sold securities.
Dabit II, 547 U.S. at 71. The Supreme Court explained,
In concluding that SLUSA pre-empts state-law
holder class-action claims of the kind alleged in
Dabit’s complaint, we do not lose sight of the
general ‘presum[ption] that Congress does not
cavalierly pre-empt state-law causes of action.’
Medtronic, Inc. v. Lohr, 518 U.S. 470, 485
(1996). But that presumption carries less force
here than in other contexts because SLUSA does
not actually pre-empt any state cause of action. It
simply denies plaintiffs the right to use the class-
action device to vindicate certain claims. The Act
does not deny any individual plaintiff, or indeed
any group of fewer than 50 plaintiffs, the right to
enforce any state-law cause of action that may
exist.
Moreover, the tailored exceptions to SLUSA’s
preemptive command demonstrate that Congress
did not by any means act ‘cavalierly’ here. The
statute carefully exempts from its operation
certain class actions based on the law of the State
15
in which the issuer of the covered security is
incorporated, actions brought by a state agency or
state pension plan, actions under contracts
between issuers and indenture trustees, and
derivative actions brought by shareholders on
behalf of a corporation. 15 U.S.C. §§
78bb(f)(3)(A)-(C), (f)(5)(C).
Dabit II, 547 U.S. at 87.
In dismissing plaintiffs’ entire action in the present case,
the District Court acknowledged that, in Dabit II, the Supreme
Court had not specifically addressed whether preemption of one
claim under SLUSA requires dismissal of the entire action.
However, because the presumption against pre-emption had
underpinned the Second Circuit’s analysis, the District Court
found that the Supreme Court’s decision in Dabit II had
“weakened, if not undercut entirely,” the Second Circuit’s
reasoning that SLUSA does not require dismissal of the entire
action.
The District Court also concluded that reading SLUSA as
pre-empting entire actions would not produce absurd results,
rejecting plaintiffs’ claim that applying SLUSA to require the
dismissal of an entire action would encourage the filing of
multiple lawsuits based on the same set of facts in order to
segregate state and federal claims. The District Court found that
Congress had addressed this potential problem by treating “any
group of lawsuits” as a “covered class action” for purposes of
SLUSA.
16
Plaintiffs appealed. They contend that the District Court
erred in concluding that SLUSA requires dismissal of an entire
action. Defendants urge us to affirm the District Court’s
holding or, in the alternative, to affirm the motion to dismiss on
the grounds that there is no private right of action under Section
48(a) of the Investment Company Act and that plaintiffs have
failed to state a claim under Section 36(b). Because we agree
that SLUSA does not require dismissal of an entire action that
includes some claims that are not pre-empted by SLUSA in
addition to some that are, we will vacate the District Court’s
dismissal and remand this action to the District Court for further
proceedings.
II. Discussion
The District Court had jurisdiction pursuant to the
Investment Company Act of 1940, 15 U.S.C. § 80a-43, the
Investment Advisers Act of 1940, 15 U.S.C. § 80b-14, and 28
U.S.C. § 1391(b). We have jurisdiction over this appeal from a
final judgment of the District Court pursuant to 28 U.S.C. §
1291. “SLUSA preemption is jurisdictional, and we review
dismissals for lack of subject-matter jurisdiction de novo.”
LaSala, 519 F.3d at 129 n.7 (3d Cir. 2008).
As described above, SLUSA was enacted to prevent the
flight of securities cases from federal to state courts, thereby
preventing abusive lawsuits and “mak[ing] Federal court the
exclusive venue for most securities fraud class action litigation
involving nationally traded securities.” H.R. Rep. No. 105-803,
at 15 (1998) (Conf. Rep.); see also Securities Litigation
Uniform Standards Act of 1998, S. 1260, 105th Cong. § 2(5),
17
112 Stat. 3227. Neither the Supreme Court nor this Court has
squarely addressed the issue raised in this appeal: whether the
inclusion of a SLUSA pre-empted state-law claim in a
complaint, also alleging non-SLUSA pre-empted claims,
requires dismissal of the entire action. In considering this issue
as a matter of first impression, and mindful of SLUSA’s
purpose, we conclude that neither the statutory language, the
legislative history, nor the relevant case law supports the
complete dismissal of such an action.
“The role of the courts in interpreting a statute is to give
effect to Congress’s intent.” Rosenberg v. XM Ventures, 274
F.3d 137, 141 (3d Cir. 2001). The first step in statutory
construction is to consider the plain language of the statute.
United States v. Gregg, 226 F.3d 253, 257 (3d Cir. 2000). “If
the language of the statute expresses Congress’s intent with
sufficient precision, the inquiry ends there and the statute is
enforced according to its terms.” Id. “Where the statutory
language does not express Congress’s intent unequivocally, a
court traditionally refers to the legislative history and the
atmosphere in which the statute was enacted in an attempt to
determine the congressional purpose.” Id.
The plain language of SLUSA does not clearly indicate
whether Congress intended SLUSA to pre-empt entire actions
that include an offending state-law claim. SLUSA provides,
“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 . . ..” 15 U.S.C. § 78bb(f)(1)
(emphasis added). The term “covered class action,” in turn, is
defined to include a “single lawsuit” or “group of lawsuits.” Id.
18
at § 78bb(f)(5)(B) (emphasis added). As we suggested in
Rowinski, the terms “no . . . action,” “lawsuit,” and “group of
lawsuits” indeed suggest that SLUSA intends that entire actions,
as opposed to particular claims, should fail. 398 F.3d at 305.
However, the word “action” is modified by the phrase “based
upon the statutory or common law of any State.” 15 U.S.C. §
78bb(f)(1). The plain language of SLUSA does not refer to
actions, such as this one, based in part on state law.
Nor does the legislative history compel us to conclude
that SLUSA requires dismissal of the entire action in such a
case. The legislative history is silent as to whether Congress
intended an action to be dismissed in its entirety when it
includes pre-empted claims or whether only the pre-empted
claims must be dismissed. We struggle to see how permitting
federal claims that do not specifically trigger the SLUSA
preemption to proceed would lead to either abusive litigation or
to the application of different legal standards to national
securities. Failing to dismiss the entire complaint would simply
allow class action federal claims, and state law claims that do
not trigger the SLUSA preemption, to proceed. Nothing in
SLUSA’s language or history indicates any intent to eviscerate
such claims.
Of course, requiring the dismissal of an entire action
pursuant to SLUSA might deter class action plaintiffs and their
attorneys from attempting to test the boundaries of which
individual state law claims are pre-empted by SLUSA.
However, nothing in either the plain language of the statute or
19
the legislative history suggests that Congress intended SLUSA
to have such a punitive effect.8 Even if SLUSA were interpreted
8
In In re Enron Corporation Securities, 535 F.3d 325 (5th
Cir. 2008), the Court of Appeals for the Fifth Circuit recently
suggested that plaintiffs (or, perhaps, their attorneys) faced risk
of dismissal pursuant to SLUSA where they chose to pursue pre-
empted state law claims in multiple lawsuits each involving
fewer than fifty plaintiffs. In In re Enron, the court held that,
where the lawsuits were coordinated and nearly identical, ten
cases consolidated in multi-district litigation were a “covered
class action” for purposes of SLUSA, notwithstanding that prior
to removal and consolidation each case might have escaped
SLUSA pre-emption based on the number of plaintiffs. Id. at
340.
In so doing, the court rejected the plaintiffs’ argument
that preempting their claims would lead to an absurd result in
the context of multi-district litigation, noting, “[T]he . . .
plaintiffs brush aside their own contribution to SLUSA
preemption: choosing to proceed as a single action. . . . [T]hey
must now face the consequences.” Id. at 342. “[T]he issue here
is not whether [plaintiffs] may avoid SLUSA; the question is
whether they did in fact avoid SLUSA.” Id. at 342 n.15.
While this language may suggest that SLUSA can have
a punitive effect, the Fifth Circuit was not presented with, and
therefore did not consider, the issue presented in this case. The
question presented here, whether SLUSA requires dismissal of
an entire complaint where only some of the claims are pre-
empted state law claims, is very different from the question of
20
this way, plaintiffs could simply bring two or more actions in
order to avoid having all of their claims dismissed – one action
with the potentially pre-empted state law claims and one or more
with the remaining claims.
It is entirely consistent with the purposes of SLUSA to
require the dismissal of those state law securities claims that are
clearly pre-empted by the statute. To require the dismissal of all
of the other claims in the same action, in contrast, would not
appear to serve those goals and is not supported by the plain
language or legislative history. We hold therefore that SLUSA
does not mandate dismissal of an action in its entirety where the
action includes only some pre-empted claims.
Our understanding of SLUSA’s requirements with
respect to dismissal is not inconsistent with relevant case law.
We disagree with the District Court’s conclusion that the
Supreme Court’s holding in Dabit II “implicitly rejected the
Second Circuit’s view” of the issue presented in this case. In
Dabit II, the Supreme Court was confronted with the issue of
whether a state law class action claim based on the fact that the
investors held onto overvalued securities as a result of
misrepresentations by the brokers was pre-empted by SLUSA.
Dabit II, 547 U.S. at 76-78. The Second Circuit had held that
SLUSA did not pre-empt such an action because, pursuant to
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975),
the “holder” plaintiffs had no remedy for the alleged fraud under
whether plaintiffs may avoid SLUSA pre-emption altogether by
filing multiple lawsuits.
21
federal securities laws. Dabit I, 395 F.3d at 39-44. In reversing,
the Supreme Court determined that, in light of SLUSA’s stated
purpose to prevent frustration of the PSLRA, “[i]t would be odd,
to say the least, if SLUSA exempted that particularly
troublesome subset of class actions [holder actions] from its pre-
emptive sweep.” Dabit II, 547 U.S. at 86.
With respect to the Supreme Court’s observation in Dabit
II that the presumption against pre-emption “carries less force
. . . because SLUSA does not actually pre-empt any state cause
of action,” id. at 87, the observation on which the District Court
relied, our holding today does not in any way lessen SLUSA’s
“pre-emptive sweep.” State law securities claims alleging fraud
will continue to be pre-empted under SLUSA. We hold simply
that any valid federal claims pled in the same action – claims
that, if brought independently, would clearly fall outside of
SLUSA’s pre-emptive scope – need not also be dismissed.
Nor does the Supreme Court’s decision in Kircher v.
Putnam Funds Trust, 547 U.S. 633 (2006), compel us to hold
that SLUSA requires dismissal of an action in its entirety. In
Kircher, the Supreme Court held that SLUSA does not exempt
remand orders from the general rule of nonappealability of 28
U.S.C. § 1447(d).9 547 U.S. at 648. Our conclusion today does
9
Section 1447(d) provides, “An order remanding a case to the
State court from which it was removed is not reviewable on
appeal or otherwise, except that an order remanding a case to the
State court from which it was removed pursuant to section 1443
of this title shall be reviewable by appeal or otherwise.”
22
no injury to this holding, for the Kircher opinion did not rely on
any requirement that an action, including at least some
impermissible state law claims, must be dismissed in its
entirety.10 This issue was not even presented to the Court;
indeed, the complaint in Kircher included only state-law claims.
Id. at 637.
Other case law supports our holding. While not directly
on point because it addresses another statute, the Supreme
Court’s recent holding in Jones v. Bock, 549 U.S. 199, 127 S. Ct.
910 (2007), suggests that Congress’s use of the phrase “no
action” in a statute is not necessarily determinative of whether
a preclusion provision requires dismissal of the entire action. In
Jones, the Supreme Court held that the Prison Litigation Reform
Act, which provides, “No action shall be brought with respect to
prison conditions . . . until such administrative remedies as are
available are exhausted,” 42 U.S.C. § 1997e(a), does not require
10
It is true that the Kircher opinion includes some language to
this effect. The Supreme Court stated, for example, “If the
action is precluded, neither the District Court nor the state court
may entertain it, and the proper course is to dismiss.” 547 U.S.
at 644 (emphasis added). The Court also noted, “[SLUSA]
avails a defendant of a federal forum in contemplation not of
further litigation over the merits of a claim brought in state
court, but of termination of the proceedings altogether . . ..” Id.
at 644 n.12. Given that the Supreme Court did not have to
confront the issue at hand, we do not believe that the use of the
words “action” and “proceedings” reflects a holding as to this
issue.
23
dismissal of an entire action where the plaintiff has failed to
exhaust some, but not all, of his claims. 127 S.Ct. at 923-26.
Rejecting the argument that Congress could have used
the word “claim” instead of “action” if it intended to prohibit
only the filing of particular claims, the Supreme Court
explained, “This statutory phrasing – ‘no action shall be
brought’ – is boilerplate language.” Id. at 924. The Supreme
Court continued,
As a general matter, if a complaint contains both
good and bad claims, the court proceeds with the
good and leaves the bad. [O]nly the bad claims
are dismissed; the complaint as a whole is not. If
Congress meant to depart from this norm, we
would expect some indication of that, and we find
none.
Id. (internal quotation omitted).
Although Jones did not involve SLUSA, its analysis
suggests that the fact that SLUSA provides, “No covered class
action . . . may be maintained,” does not require dismissal of an
entire action that includes only some offending claims. At least
one court, albeit non-binding on this Court, has found Jones
helpful in deciding the present issue and likewise determined
that SLUSA does not require a complete dismissal. See In re
Salomon Smith Barney Mut. Fund Fees Litig., 528 F. Supp. 2d
332, 334 n.3 (S.D.N.Y. 2007) (rejecting the argument that all
claims must be dismissed under SLUSA); LaSala v. Bank of
Cyprus Pub. Co., 510 F. Supp. 2d 246, 274-75 & 274 n.11
24
(S.D.N.Y. 2007) (holding that Dabit I remains the law of the
Second Circuit regarding whether the entire action should be
dismissed, and rejecting the District Court’s analysis of Dabit I
in this case).
Because nothing in the language, legislative history, or
relevant case law mandates the dismissal of an entire action that
includes both claims that do not offend SLUSA’s prohibition on
state law securities class actions and claims that do, the District
Court erred in dismissing this action on these grounds.
Allowing those claims that do not fall within SLUSA’s pre-
emptive scope to proceed, while dismissing those that do, is
consistent with the goals of preventing abusive securities
litigation while promoting national legal standards for nationally
traded securities.
We decline defendants’ request to affirm the dismissal of
this case on alternative grounds, in particular, that plaintiffs’
complaint fails to state a cause of action under Section 48(a)
because no private right of action exists under that provision and
that plaintiffs have failed to state a claim under Section 36(b).11
These alternate grounds, along with a number of other possible
bases for dismissal, were all briefed before the District Court in
a separate motion to dismiss, which was pending when the
District Court dismissed the case on SLUSA grounds. The
alternate grounds for dismissal would be better decided by the
District Court in the first instance.
11
At oral argument, counsel for plaintiffs indicated that they
are no longer pursuing their claims under Section 48(a).
25
IV. Conclusion
For the reasons set forth above, we will vacate the
District Court’s order dismissing the entire action on the
grounds that it is pre-empted by SLUSA and remand the case for
further proceedings consistent with this Opinion.
26