In Sanchez v. Crocs, Inc., 2016 U.S. App. LEXIS 13285 (10th Cir. 2016), the Tenth Circuit addressed whether, after Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), a plaintiff has standing, under § 10(b) of the Securities and Exchange Act (“Exchange Act”), to pursue claims in a United States federal court for its losses on investments in foreign contracts for difference (“CFDs”). (For a fuller discussion of Morrison v. National Australia Bank Ltd., see the discussion of subject matter jurisdiction in our e-book, International Practice: Topics and Trends.)
Sanchez arises from the rapid expansion of Colorado-based shoe manufacturer Crocs, Inc. (“Crocs”) in the years after its founding. According to the plaintiffs’ complaint, Crocs continued to use “archaic, error-prone Excel spreadsheets” to track inventory and forecast sales, despite the fact that the company’s massively expanding business was quickly outpacing the usefulness of its inefficient system. The plaintiffs alleged that, due to its disorganized methods for tracking inventory, Crocs not only frequently bulk-ordered unsalable shoes but also consistently failed to meet the demand for its best-selling shoes.
As a result of its inventory and distribution difficulties, Crocs sustained a four-fold increase in its inventory from August to December 2006, followed by similar increases throughout 2007 and into 2008. Nevertheless, the company valued its inventory at cost on both the 2006 and 2007 Form 10-Ks that it filed with the Securities and Exchange Commission (“SEC”). Furthermore, in both years, Crocs’ auditor, issued unqualified audit opinions approving both Crocs’ financials and its internal controls. Eventually, Crocs began disclosing its issues with its inventory and distribution, and by November 2008, the company wrote down the value of its inventory by over seventy million dollars.
In November 2007, several plaintiffs brought securities fraud class action lawsuits against Crocs. The district court consolidated the cases and named the Sanchez Group as lead plaintiff. The plaintiffs alleged, inter alia, that Crocs, its management, and Crocs’ auditor had violated § 10(b) of the Exchange Act by fraudulently representing both the value of Crocs’ inventory and the competence of its internal controls with regards to financial reporting. According to the complaint, Crocs knew well before 2008 that the “bulk” of its inventory could not be sold at cost because it “consisted of unsalable or unsuitable shoes.” Thus, the complaint alleged that Crocs violated generally accepted accounting principles (“GAAP”) by valuing its inventory at cost on the 2006 and 2007 Form 10-Ks. The plaintiffs also alleged that Crocs’ auditor was complicit in the fraud.
The defendants moved to dismiss the complaint for failure to state a claim. The district court granted their motion. Several appeals and related motions followed. The plaintiffs appealed the dismissal of their complaint, and one of the plaintiffs—the National Roofing Industry Pension Plan (“National Roofing”)—moved to dismiss the plaintiffs’ appeal for lack of jurisdiction. National Roofing also appealed the district court’s initial selection of the Sanchez Group as the lead plaintiff.
Eventually, the plaintiffs and the Crocs defendants agreed to a proposed settlement, for which the district court issued its final approval in September 2014. The court subsequently dismissed the action against the Crocs defendants, and National Roofing then voluntarily agreed to dismiss its appeal with prejudice. Thus, only National Roofing’s motion to dismiss and the claims against Crocs’ auditor appeared before the Tenth Circuit. It is the motion to dismiss that is of interest to this international practice blog.
National Roofing’s motion argued that, under Morrison, the Sanchez Group lacked standing to pursue its appeal of the district court’s decision. In Morrison, the Supreme Court held that § 10(b) of the Exchange Act reaches only the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States. See 561 U.S. at 273. According to National Roofing, because the Sanchez Group’s CFDs were not listed on a domestic exchange and were purchased abroad, the Sanchez Group lacked standing under Morrison to pursue § 10(b) claims in a United States Court.
The Tenth Circuit ultimately found that, even under Morrison, the court had proper subject matter jurisdiction. To reach that conclusion, however, the Court of Appeals first had to navigate the sometimes less-than-clear waters of federal and international civil procedure. Although the Tenth Circuit ultimately addressed National Roofing’s Morrison-based argument as part of National Roofing’s motion to dismiss, the appellate court found the motion was moot because National Roofing had included the motion’s Morrison-based argument within its appeal that it subsequently voluntarily dismissed with prejudice.
National Roofing initially intended for the Court to address its Morrison-based argument as part of its appeal of the district court’s selection of the Sanchez Group as the lead plaintiff. After the other parties opposed its suggestion for the Court to hear and decide that appeal first, however, National Roofing brought its motion to dismiss, as a way of ensuring that the Court would address the Morrison issue before the Sanchez Group could settle its claims with the defendants.
Eventually, the plaintiffs did in fact settle with most of the defendants, and National Roofing voluntarily agreed to dismiss its own appeal with prejudice. Thus, according to the Tenth Circuit, because “a stipulation of dismissal with prejudice…normally constitutes a final judgment on the merits” (quoting Astron Indus. Assocs., Inc. v. Chrysler Motors Corp., 405 F.2d 958, 960 (5th Cir. 1968), by voluntarily agreeing to dismiss its appeal (which raised the same Morrison-based argument as the motion to dismiss) with prejudice, National Roofing obtained “a complete adjudication on the merits” of its claim and removed itself from the litigation of the Morrison issue. Harrison v. Edison Bros. Apparel Stores, Inc., 924 F.2d 530, 534 (4th Cir. 1991). Thus, the Tenth Circuit’s only course of action was to deny National Roofing’s motion to dismiss the appeal as it no longer had any “personal stake” in the dispute because its claim had already been fully adjudicated. Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523, 1530 (2013).
Despite its holding that National Roofing’s motion to dismiss was moot, the Tenth Circuit acknowledged that, even in a filing not properly before the Court, the Court has an independent obligation to determine whether subject-matter jurisdiction exists where a party raises a jurisdictional challenge. See United States v. Rubio, 231 F.3d, 709, 711 n.1 (10th Cir. 2000). Thus, although the Tenth Circuit was not resolving the motion itself, it was required to assess whether Morrison did actually impact its jurisdiction over the case.
The Tenth Circuit held that Morrison did not impact its jurisdiction over the case. The appellate court explained that, contrary to National Roofing’s argument, Morrison explicitly held that the territorial reach of § 10(b) is a merits issue—not a jurisdictional one. In addition, the Tenth Circuit referred to its own reaffirmation of Morrison in CGC Holding Co. v. Broad & Cassel, 773 F.3d 1076, 1096 (10th Cir. 2014), where it held that “the extent to which a statute applies extraterritorially proceeds exclusively as a merits issue, not a question of jurisdiction.”
In the end, the court denied as moot National Roofing’s motion to dismiss and, after addressing the merits of the plaintiffs’ appeal, affirmed the district court’s dismissal of the plaintiffs’ complaint.