SCOTUS will be hearing at least two cases of interest next term: one case, Somers v. Digital Realty Trust, will address the split in the circuits regarding whether the Dodd-Frank whistleblower anti-retaliation provisions apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just internally at the company. The second case, Cyan Inc. v. Beaver County Employees Retirement Fund, will address whether state courts have jurisdiction over cases brought solely under the Securities Act of 1933 Act.
Cyan Inc. v. Beaver County Employees Retirement Fund
The Private Securities Litigation Reform Act of 1995 imposed a number of requirements in connection with class actions under the federal securities laws, such as heightened pleading standards and selection criteria for lead plaintiffs. However, to circumvent those requirements, a number of plaintiffs instead began to bring their class actions in the state courts. That shift to the state courts led to the adoption, in 1998, of the Securities Litigation Uniform Standards Act. SLUSA was designed to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA].”
This case was initially filed in 2014 in the California courts by Beaver County Employees Retirement Fund and others, alleging violations of provisions of the ’33 Act with regard to disclosures in an IPO registration statement. Cyan sought to dismiss the case, arguing that, under SLUSA, the state court did not have subject matter jurisdiction. The court rejected that contention, saying that its hands were tied as a result of the earlier California appellate court decision in Luther v. Countrywide Financial Corp., which held that SLUSA did not prohibit concurrent state and federal court jurisdiction. Cyan petitioned for cert. In its petition, Cyan observed that “[p]laintiffs have taken note of this revived opportunity to circumvent the [PSLRA]: since Countrywide, filings of ’33 Act class actions in California state courts have risen 1400 percent.”
SideBar: As discussed in this Cooley Alert, prior to 2011, ’33 Act “class actions were filed in California at a rate of one case every two years. In 2014, five cases were filed in California state court. The number increased to 14 in 2015, and in the first five months of 2016 (when the petition was filed), there had already been 10 cases filed. The influx of cases is due at least in part to California district courts determining that state courts have jurisdiction over [’33 Act ] Act class actions and that these cases are not removable under [SLUSA]. These decisions stand in stark contrast to the decisions by New York district courts and various other courts, which generally find that state courts lack jurisdiction over [’33 Act] class actions.”
SLUSA, Cyan contended in its cert petition, permitted defendants to remove to federal court class actions filed in state courts regarding “covered securities” that involved only ’33 Act claims and to have those state court cases dismissed. Beaver County responded that, while SLUSA precluded certain state law securities class actions outright, it did not eliminate concurrent state court jurisdiction for ’33 Act claims. In an amicus brief, the U.S. took the position that, while SLUSA did not divest the state court of jurisdiction over a ’33 Act case, it did authorize removal of ’33 Act cases, and, properly interpreted, “it provides appropriate protection against the use of state-court lawsuits to circumvent the PSLRA’s substantive and procedural safeguards.” The case, the U.S. contended, “presents a difficult interpretive issue that has generated confusion in lower courts.”
Full disclosure: Cooley represented a group of the nation’s leading securities law professors, who recommended in an amicus brief that SCOTUS grant cert. As discussed in this Cooley Alert, the brief “explained that Congress could not have intended for SLUSA to result in cases brought in some jurisdictions to be litigated in state court and for cases brought in other jurisdictions to be litigated in federal court. Further, the brief highlighted the significant implications of litigating [’33 Act] claims in state court versus federal court that can lead to varying outcomes and inconsistent administration of justice.”
Cert was granted yesterday. As stated in the SCOTUS QPReport: “The question presented—which has split federal district courts in removal cases and thus sidelined federal appeals courts—is: Whether state courts lack subject matter jurisdiction over covered class actions that allege only ’33 Act claims.”
Somers v. Digital Realty Trust
In this case, the 9th Circuit refused to dismiss a whistleblower claim brought under Dodd-Frank’s anti-retaliation provision. As you may recall, Dodd-Frank added Section 21F to the Exchange Act, establishing new incentives and protections for whistleblowers, including monetary awards for reporting information, confidentiality provisions and employment retaliation protections.
The plaintiff, formerly a vice-president of the company, was terminated by the company and claimed that his termination was a result of his reports to senior management regarding possible securities law violations. However, he did not make any disclosure of the alleged misconduct to the SEC. The plaintiff sued, claiming that the company had retaliated against him as a whistleblower in violation of the whistleblower protection provisions of Dodd-Frank. The company argued that, because he did not report to the SEC, the plaintiff was not a “whistleblower” as defined in Dodd-Frank, which expressly applies to “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” As a result, he was not entitled to the protection of the Dodd-Frank anti-retaliation provisions.
After analyzing the statute, the 9th Circuit panel concluded that the definition of “whistleblower” as an employee who reports to the SEC “should not be dispositive of the scope of [Dodd-Frank’s] later anti-retaliation provision”; the term “whistleblower,” the panel held, did not limit protections to persons who alerted the SEC regarding alleged unlawful activity, but also protected persons who were terminated after making internal disclosures.
In addition, the panel noted that Rule 21F-2, adopted by the SEC, expressly supported that interpretation. (That rule provides that “[t]he anti-retaliation protections apply whether or not you satisfy the requirements, procedures and conditions to qualify for an award.”) The panel agreed with the 2d Circuit that, “even if the use of the word ‘whistleblower’ in the anti-retaliation provision creates uncertainty because of the earlier narrow definition of the term, the agency responsible for enforcing the securities laws has resolved any ambiguity and its regulation is entitled to deference.” (See this PubCo post for a discussion of the 2d Circuit case. ) In contrast, the 5th Circuit has interpreted the statute to protect only those who report to the SEC.
SideBar: The panel is referring here to the so-called “Chevron doctrine.” That is a reference to the well-worn two-step test for determining whether deference should be accorded to federal administrative agency actions interpreting a statute, first articulated by SCOTUS in 1984 in Chevron v. Natural Resources Defense Council. Generally, the doctrine established in that case mandates that, if there is ambiguity in the language of a statute, courts must accept an agency’s interpretation of a law unless it is arbitrary or manifestly contrary to the statute. For example, in a decision released on June 14 last year, Monica Lindeen v. SEC, the D.C. Circuit applied Chevron to uphold the SEC’s rules adopted under Reg A+ against a challenge by two state securities regulators. And, as another example, the D.C. District Court applied Chevron in initially upholding the SEC’s conflict minerals rules in 2013 in Nat’l Ass’n of Mfrs. v. SEC. National Association of Manufacturers v SEC, which was subsequently reversed on other grounds. The Financial Choice Act of 2017 seeks to repeal the doctrine by statute. See this PubCo post.
The company petitioned for cert, which was granted on Monday. The question presented for review is “[w]hether the anti-retaliation provision for ‘whistleblowers’ in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extends to individuals who have not reported alleged misconduct to the Securities and Exchange Commission and thus fall outside the Act’s definition of a ‘whistleblower.’”