In several recent high-profile cases, courts have been asked to decide whether state law claims removed to federal court are subject to dismissal as preempted under the Securities Litigation Uniform Standards Act (“SLUSA”). See, e.g., In re Enron Corp. Securities, Derivative & ERISA Litig., No. H-01-3624, 2006 WL 3716669 (S.D. Tex. Dec. 12, 2006); In re WorldCom, Inc. Sec. Litig., 308 F. Supp. 2d 236 (S.D.N.Y. 2004). In each of these cases, the plaintiffs chose to file suit originally in state court and asserted only state law claims. Defendants then removed the cases to federal court (typically based on the existence of bankruptcy proceedings involving the company at issue) and the cases were then transferred by the Multi-District Litigation Panel to another federal court to be managed in conjunction with other related cases.
Plaintiffs have argued in such cases that post-removal events cannot be used to establish the criteria for preemption under SLUSA and that a court may only assess whether the statute applies to the case as it existed in state court or, at the latest, at the time of its removal. The Fifth Circuit Court of Appeals recently held in one such case that preemption can be considered by a court at any time and, thus, this analysis may take into consideration any relevant post-removal events. In re Enron Corp. Securities, Derivative & ERISA Litig., No. 07-20051, 2008 WL 2690119 (5th Cir. July 10, 2008). As a result, the Fifth Circuit affirmed the dismissal with prejudice of several cases asserting state law claims against former Enron personnel and outside professionals who had provided services to Enron prior to its collapse.
The issue in Enron was whether a group of similar cases asserting purely state law claims qualified as a “covered class action” under SLUSA, which is a necessary prerequisite for application of the statute’s preemption provision. In particular, the parties disputed whether one aspect of the definition of a covered class action could apply – namely, whether the actions at issue constituted a group of lawsuits pending in the same court that raised common questions of law or fact, sought damages on behalf of more than fifty persons, and were joined or consolidated, or were otherwise proceeding as a single action for any purpose. See U.S.C. § 78bb(f)(5)(B)(ii). The District Court in Enron had relied on that portion of the definition to dismiss as preempted various state law claims. Enron, 2006 WL 3716669, at *7; Enron, 2008 WL 2690119, at *3.
On appeal, the plaintiffs argued that the definition of a covered class action should be assessed only at the time the state court action is removed to federal court and not after the action has been consolidated with other similar cases pending in federal court in conjunction with MDL proceedings. Enron, 2008 WL 2690119, at *6. The plaintiffs asserted that any other interpretation of SLUSA would allow “federal courts . . . to manufacture SLUSA preemption by issuing consolidation orders” and would “place the MDL on a collision course with SLUSA.” Id.
The Fifth Circuit rejected all of these arguments, holding that a court may look to events that occur after removal of the case to federal court in order to determine whether the case qualifies as a covered class action for purposes of a subsequently filed motion to dismiss. Id. at *11. In so ruling, the Court recognized that SLUSA functions both as a preemption and as a removal statute, although both aspects of the statute share a common definition of what constitutes a covered class action. Id. SLUSA does not, however, require that the test for whether a case is a covered class action may be applied only at the time of the filing of the lawsuit or upon removal. Id. Rather, the statute evidences Congress’s intent that preemption be considered at any time. Id. Indeed, the Fifth Circuit explained that, to hold that preemption could only be tested at removal, “would . . . impermissibly limit the reach of SLUSA’s preemption provision and . . . would run contrary to Congressional intent that SLUSA be interpreted broadly.” Id.
At the time the motions to dismiss on preemption grounds were filed, the Fifth Circuit determined that this group of cases (1) involved more than fifty plaintiffs; (2) presented common questions of law or fact; (3) were all pending in the same court; and (4) were all proceeding as a single action. Id. at *11-*12. Accordingly, these cases met the definition of a covered class action under SLUSA and were properly subject to the statute’s preemption provision. Id.