The Seventh Circuit Widens a Split Among the Circuits on SLUSA Preemption of State Class Actions.

AuthorRoeder, Steven J.
PositionSecurities Litigation Uniform Standards Act of 1998

Mr. Roeder would like to thank Thomas Gipson, an associate at Roeder Law Offices LLC and a recent graduate of the University of Illinois College of Law, for his assistance in preparing this article.

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IN a pair of notable decisions handed down on January 23, 2017, the Seventh Circuit Court of Appeals affirmed dismissals of two separate class actions under the Securities Litigation Uniform Standards Act ("SLUSA" or the "Litigation Act"). In Goldberg v. Bank of America, (1) and Holtz v. JPMorgan Chase Bank, N.A., (2) the Seventh Circuit held that SLUSA bars state law breach of contract and breach of fiduciary duty class actions that look much different than the standard securities cases SLUSA was intended to preempt and prevent. Indeed, the reach of these decisions--and the scope of the class action claims they prevent--is likely to be very broad.

Goldberg and Holtz have widened an already significant split of authority among the circuit courts of appeal regarding SLUSA preemption. In the words of dissenting Judge David Hamilton, these decisions "effectively immunize a favored category of defendants--banks and securities businesses--from liability for their breaches of contract and fiduciary duty." (3) Arguing that they "shelter the wrongful conduct of powerful financial institutions from the only viable means to enforce contractual and fiduciary duties," (4) Judge Hamilton invited certiorari petitions by writing that "[o]nly the Supreme Court can settle this three- or four-way circuit split." (5)

While the plaintiffs in in Goldberg (6) and in Holtz (7) answered Judge Hamilton's invitation, filing petitions for writ of certiorari with the Supreme Court on June 21, 2017 and June 22, 2017, respectively, that Court denied the same on October 2, 2017. This serious circuit split therefore continues. (8)

  1. Background: The SLUSA Saga

    The SLUSA saga, and how it resulted from legislation intended to rein in federal securities class actions, is well known. In 1995, Congress passed the Private Securities Litigation Reform Act ("the PSLRA") to eliminate abusive securities litigation. The prototypical cases the PSLRA was intended to address were the meritless strike suits plaintiffs reflexively filed after unexpected stock price drops. Congress clearly heard and responded to the criticism that, to avoid expensive discovery, corporate defendants simply settled even weak and abusive cases. To separate the allegedly meritorious wheat from the meritless chaff, the PSLRA substantially increased the burdens on plaintiffs to plead securities fraud with particularity. The PSLRA also stayed discovery until plaintiffs could satisfy its higher pleading standards.

    Rather than deal with the PSLRA and its onerous requirements, securities plaintiffs and their counsel stayed in state court and avoided them. Specifically, plaintiffs often repackaged and filed in state court, under state law theories, securities claims they could no longer successfully pursue in federal court. Allowing plaintiffs to pursue weak and abusive securities cases in state court under another name obviously frustrated the purpose of the PSLRA, and this state law end around did not last long. In 1998, Congress passed SLUSA

    SLUSA bars state law class actions involving more than 50 class members that allege fraud in the purchase and sale of securities. Such claims may only be brought under federal law. SLUSA accomplishes this through the following key language:

    No covered class action [i.e., a class action involving more than 50 class members] based on 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 -

    (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security [i.e., a security traded on a national exchange, or a security of registered investment company]; or

    (B) that the defendant used or employed any manipulative or deceptive practice or contrivance in connection with the purchase or sale of a covered security. (9)

    To insure that federal courts, and not state courts, have the last say on SLUSAs reach, the statute also allows removal from state court. Federal courts of appeal, however, have differed substantially on how far SLUSA reaches to bar state law claims.

  2. SLUSA Preemption Before Goldberg and the Seventh Circuit's Decision in Brown v. Calamos

    Before the Seventh Circuit heard Goldberg, various United States courts of appeal had developed at least three lines of authority to determine whether SLUSA bars class actions that allege state law contract and fiduciary duty claims that also involve securities. The Seventh Circuit described these varying lines of authority as the Sixth Circuit's "Literalist Approach," (10) the Third Circuit's the "LaSala Approach," (11) and the Ninth Circuit's the "Intermediate Approach." (12) While the Seventh Circuit could have consulted any of these lines of authority in deciding Goldberg and Holtz, it also could have followed its earlier decision in Brown v. Calamos. (13)

    Written by Judge Richard Posner, the opinion of the Court in...

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