Courts over the years have struggled with determining when a particular group of individuals is a “class” in all but name and, thus, should be subject to the restrictions associated with bringing class claims under the Securities Litigation Uniform Standards Act (“SLUSA”). Courts of the Eleventh Circuit have issued rulings that call for a broad interpretation of what may constitute a “covered class action” and will, therefore, trigger the preemption (and removal) provisions of SLUSA. Indeed, district courts within the Eleventh Circuit have even held that state law claims will constitute a “covered class action” and be preempted under SLUSA, even though the putative group of investors is comprised of fewer than fifty prospective members. Drooker v. Morgan Stanley & Co., Inc., No. 07-61772-CIV-JORDAN, slip op. (S.D. Fla. Mar. 26, 2008).
In Drooker, the plaintiff filed suit in Florida state court on behalf of himself and all other individuals who purchased unlisted securities from Morgan Stanley. See id. at 1. The complaint asserted claims for breach of fiduciary duty and breach of contract under Florida law. See id. Morgan Stanley subsequently removed the case to the United States District Court for the Southern District of Florida, arguing that the plaintiff’s state law claims were removable and preempted by SLUSA. See id. SLUSA mandates removal and ultimately dismissal “of any (1) ‘covered class action,’ (2) based on state law, (3) alleging the purchase and sale of one or more ‘covered securities,’ and (4) a misrepresentation or omission of material fact in connection with the purchase or sale of such security.” Id. at 2.
While conceding that the action asserted state law-based claims for fraud in connection with the purchase or sale of covered securities, the Drooker plaintiff nevertheless argued that the suit did not qualify as a “covered class action” under SLUSA. See id. SLUSA defines a “covered class action” as:
(i) any single lawsuit in which –
(I) damages are sought on behalf of more than 50 persons or prospective class members, and questions of law or fact common to those persons or members of the prospective class, without reference to issues of individualized reliance on an alleged misstatement or omission, predominate over any questions affecting only individual persons or members; or
(II) one or more named parties seek to recover damages on a representative basis on behalf of themselves and other unnamed parties similarly situated, and questions of law or fact common to those persons or members of the prospective class predominate over any questions affecting only individual persons or members ….
Id. (quoting 15 U.S.C. § 77p(f)(2)(A)). The plaintiff argued that the action was not a “covered class action” because the putative class had less than fifty members. The court, however, found that “[t]his argument ignores that [subsection (II)], a different sub-section of the SLUSA, applies to any class action irrespective of the number of members” and concluded that “[t]here is simply no textual support to extend the 50 person requirement to the definition of a covered class action under [subsection (II)], particularly where subsections (I) and (II) are separated by the disjunctive ‘or’.” Id. at 3-4. To the extent other courts’ opinions have suggested that putative class actions having fewer than fifty members did not constitute covered class actions under SLUSA, the scope of those decisions was found to be limited to subsection (I). See id.
The court did, however, also note in passing that commonality is easier to prove under subsection (I) than under subsection (II). Specifically, the court found that,
[T]o be a “covered action” [under SLUSA,] issues common to the class must predominate over individual issues. If the action is on behalf of more than 50 members, the court can determine that common issues predominate, without considering issues of individual reliance. On the other hand, evidence of individual reliance needs to be considered to establish commonality if the suit is on behalf of less than 50 members. In other words, the SLUSA establishes a scheme under which commonality is easier to prove (and sometimes can only be proved) if the class has more than 50 members.
Id. at 4. Because the plaintiff’s own allegations established a commonality of issues, the court found this distinction irrelevant in the context of the Drooker case. See id.
After finding that the plaintiff’s putative class action was preempted by SLUSA, the court dismissed the complaint.