On May 16, 2016, the United States Supreme Court handed down two decisions that may, in practice, limit the ability to access federal district courts. In Spokeo, Inc. v. Robins, No. 13-1339, 578 U.S. ___ (2016), the Supreme Court rejected the Ninth Circuit’s conclusion that statutory violations are per se sufficient to confer Article III standing, and, in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132, 578 U.S. ___ (2016), the Court concluded that jurisdiction under Section 27 of the Securities and Exchange Act (Exchange Act) is limited to suits brought under the Exchange Act and state law claims that turn on the plaintiff’s ability to prove the violation of a federal duty.

Spokeo, Inc. v. Robins

Spokeo concerns a representative plaintiff—Thomas Robins—whose biographical information was inaccurately reported by Spokeo Inc. At issue was whether Robins had standing to sue simply because Congress imposed upon consumer reporting agencies, which Spokeo was alleged to be, a requirement to employ procedures to assure maximum possible accuracy of consumer reports. The Ninth Circuit found that “alleged violations of Robin’s statutory rights [under the Fair Credit Reporting Act (“FCRA”) we]re sufficient to satisfy the injury-in-fact requirement of Article III” because he had been injured as a consequence of the statutory violation and the interests protected by FCRA—protection of personal information—are sufficiently individualized. Robins v. Spokeo, Inc., 742 F.3d 409, 413 (9th Cir. 2014). The Supreme Court reversed, holding that the Ninth Circuit improperly disregarded Article III’s “concreteness” requirement.

As the Supreme Court explained, to demonstrate an injury in fact, plaintiffs must show the injury was “both concrete and particularized.” Although the Ninth Circuit recognized that Robins suffered an injury on account of the statutory violation and that the handling of his personal information was individualized, the Supreme Court concluded that both of “those observations concern particularization, not concreteness,” which the Ninth Circuit was obligated to address.

The Court went on to explain what concreteness entails. A concrete injury is one that is “real,” and not “abstract.” The injury need not, however, be tangible. To determine whether an intangible injury qualifies for standing purposes, courts must look to history as well as the judgment of Congress—that is, whether the injuries were (1) ones that were traditionally sufficient to bring suit in English or American courts or (2) those traditionally deemed insufficient but that Congress has sought to elevate to qualify as concrete injuries. Notably though, simply because Congress has created a statutory right does not mean a violation confers standing. Rather, “a concrete injury” is still required “in the context of a statutory violation.”

The Court concluded that though Congress sought to deter dissemination of false information with the passage of FCRA, inaccurate reporting in of itself does not constitute an adequate injury for Article III purposes (e.g., an inaccurate zip code). Because the Ninth Circuit failed to address the concreteness inquiry, the Supreme Court remanded the case for reassessment in light of the guiding principles announced in Spokeo.

To be sure, Spokeo does not bode well for plaintiffs in a number of cases, particularly cybersecurity and data breach actions. It is often difficult in those contexts to demonstrate a tangible harm because the stolen information may not have been used in a way that directly impacts the consumer. By contrast, in most securities cases, plaintiffs have identified a tangible injury; i.e., a drop in stock price. It is possible following Spokeo’s rejection of a per se standing rule (based on a statutory violation) that defendants may use standing to force plaintiffs to articulate causation theories earlier on in the litigation or, even better, as a basis for dismissal. More realistically though, Spokeo will have minimal, if any, impact in securities cases because a concrete injury is central to the claims and/or defenses.

Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning

In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, the Supreme Court addressed the scope of Section 27 of the Exchange Act. Plaintiffs there alleged that defendants’ naked short selling of a specific stock resulted in the stock’s decline. Though plaintiffs brought only state law claims, their complaint repeatedly cited the Exchange Act’s Regulation SHO, which governs short selling activities, as a basis for the state law violation. The dispute before the Supreme Court centered on whether plaintiffs were required to bring their action in federal court.

Section 27 of the Exchange Act states that federal courts “shall have exclusive jurisdiction of violations of [the Exchange Act] . . . and of all suits . . . brought to enforce any liability or duty created by [the Exchange Act].” Merrill Lynch claimed, based on this language, that exclusive jurisdiction rests with the federal courts in any “suit that either explicitly or implicitly asserts a breach of an Exchange Act duty” because such a suit “is ‘brought to enforce’ that duty even if the plaintiff seeks relief solely under state law.” The plaintiffs, on the other hand, claimed that a suit is “brought to enforce” under Section 27 only if it is brought directly under the Exchange Act itself.

The Supreme Court rejected both parties’ proposed interpretations. The Court held that the jurisdictional test under Section 27 is the same as the test under 28 U.S.C. § 1331 for deciding if a case “arises under” a federal law. Accordingly, as the Court explained, federal jurisdiction will most often attach “when federal law creates the cause of action asserted” or “when the state-law claim ‘necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance’ of federal and state power.” Plaintiffs’ claims did not meet either test. The causes of actions they asserted were created by New Jersey law and the federal issue—whether the short selling activities in issue violated Regulation SHO—was not “necessarily raise[d]” by those claims.

Manning allows plaintiffs to invoke federal authority in support of their state law claims without risking the loss of their chosen state court forum. Though Manning precludes defendants from removing certain securities-related claims brought in state court, the practical impact of the decision is unclear. On the one hand, plaintiffs could perceive state courts as a more favorable forum for securities suits that may lead them to do their best to assert state law claims that do not permit removal under the standard articulated in Manning. That is particularly so given the heightened pleading requirements for Exchange Act claims pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In fact, plaintiffs’ efforts to avoid the PSLRA pleading requirements by filing in state court led Congress to enact the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which permits removal to federal court of class actions asserting claims involving covered securities. On the other hand, the number of situations where a state law claim necessarily raises a federal issue is not likely to be very high. And many claims arising under state law, like the common law fraud and state RICO claims brought under New Jersey law in Manning, are often more onerous to plead and prove, or provide more limited relief, than claims under the federal securities laws, such as a Section 11 claim under the Securities Act of 1933. Thus, while plaintiffs who choose to forgo federal securities law claims in favor of state law claims are now more assured of their ability to litigate in state court, Manning does not alter the substantive incentives in place that have for decades led plaintiffs asserting securities claims to bring them primarily under the federal securities laws (and thus in federal court).