In AT&T Mobility LLC v. Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules barring enforcement of an arbitration agreement if the agreement does not permit the parties to utilize class procedures in arbitration or in court. Before Concepcion, the law of California included that limitation on the enforceability of arbitration agreements, but Concepcion declared that rule invalid as a matter of federal law. Yesterday, in DIRECTV, Inc. v. Imburgia (pdf), the Supreme Court held that Section 2 preempts a state-law interpretation of an arbitration agreement based on a legal rule that the state’s courts had applied only in the arbitration context, concluding that the state-law ruling “does not rest ‘upon such grounds as exist . . . for the revocation of any contract.’”

(We filed an amicus brief on behalf of the U.S. Chamber of Commerce in support of DTV.)

Continue Reading Supreme Court Holds that Federal Arbitration Act Preempts California Court’s Interpretation of Arbitration Clause

What’s the difference between claiming that a food product is improperly certified as organic and claiming that the producer was properly certified but the product isn’t really organic? A unanimous California Supreme Court held in Quesada v. Herb Thyme Farms, Inc. (pdf) that state courts and juries should figure out the answer.  That ruling opens the door to state-law actions that challenge food producers’ compliance with the federal organic food product certification and labeling scheme, so long as the claims don’t take issue with the original certification decision.  The decision revived a consumer class action alleging that a food producer—though properly certified to use the “organic” label—intentionally misapplied that label to products containing conventionally produced herbs from one of its noncertified facilities.

Drawing an exquisitely fine line, the California Supreme Court held that preemption extends only to “matters related to certifying production as organic” and left “untouched enforcement against abuse of the label ‘organic.’”  The court concluded that state lawsuits alleging intentional misuse of an organic label were not preempted because (in the California court’s view) lawsuits of that kind would help rather than hinder Congress’s objective.

The federal Organic Foods Production Act of 1990 (OFPA) creates a uniform, federal definition of the term “organic” and gives the U.S. Department of Agriculture exclusive authority to elucidate the labeling standard and to certify producers as qualifying to label food as “organic.”  The USDA may approve a state agency to carry out the certification function and impose more stringent state substantive standards. The California Department of Food and Agriculture has been approved for both of these roles. The OFPA and its California counterpart both provide for administrative enforcement of the regulations, including processes for consumer complaints to the relevant agency.

In Quesada, the plaintiff sued Herb Thyme Farms under California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA), alleging that Herb Thyme applied a “Fresh Organic” label to conventionally produced herbs and to a mixture of organic and conventional herbs.  Herb Thyme has an organic farm that has been certified to use the “organic” label, but also operates conventional, nonorganic farms.

The California Supreme Court held that the federal OFPA did not preempt Quesada’s state-law claims.  First, the court held that, because the pertinent provisions of OFPA do not reference enforcement, the statute expressly preempts state law only as to the definition of “organic” and the process for certifying that a grower’s methods of production entitle it to use the “organic” label.  The California court relied on the fact that the mislabeling claims did not address the certification or compliance of Herb Thyme’s organic facility, but only challenged the use of the “organic” label for Herb Thyme products that contained (or consisted solely of) herbs that were not produced at the certified farm.  The federal certification standards also address the procedures to be followed where a producer has both organic and conventional facilities, but the California Supreme Court found that regulation insufficient to bring the case within the OFPA’s preemptive scope.

Second, the California court concluded that Quesada’s claims were not impliedly preempted because they did not pose an obstacle to the uniform federal regulatory scheme, but rather furthered the purpose of that scheme. In the court’s view, once the regulators decide whether a producer or product meets the standards in the first instance, private plaintiffs may enlist state-law theories to enforce the producer’s later compliance with the labeling requirements. According to the court, allowing plaintiffs to use state statutory and common law to enforce the OFPA would “affirmatively further the purposes of the Act”—the more enforcement, the merrier.

By allowing a private plaintiff to pursue a state-law misrepresentation theory to police compliance with OFPA labeling standards, Quesada conflicts with the Eighth Circuit’s decision in  In re Aurora Dairy Corp. Organic Milk Marketing & Sales Practices Litigation.  The Eighth Circuit held in Aurora Dairy that claims alleging that “milk [was sold] as organic when in fact it was not organic are preempted because they conflict with the OFPA.” As the court of appeals put it, “compliance and certification cannot be separate requirements.” While the plaintiffs in Aurora Dairy could not sue over the use of the “organic” label, they could challenge related assertions and omissions about the way the cows were raised and fed, including affirmative claims that the cows were antibiotic- and hormone-free.

The California Supreme Court tried to avoid the conflict by asserting that the plaintiffs in Aurora Dairy were challenging the certification process itself.  But that is not what the Aurora court said; moreover, the claims it allowed were based on representations that did not use the word “organic.”

Although the Quesada decision is limited on its face to claims involving fraudulent or intentional substitution of uncertified products for certified ones, that restriction may provide only modest comfort to defendants. Plaintiffs’ counsel can manipulate the allegations in their complaints with relative ease, particularly under the elastic standards of the UCL and CLRA.  And the California Supreme Court opinion reflects hostility to federal preemption, suggesting that state lawsuits serve the purposes of an otherwise uniform federal regulatory scheme merely by increasing the volume of litigation, and that the so-called presumption against preemption may be dispositive even in an area like food safety, where the  federal government has been heavily involved for more than 100 years. .

Plaintiffs’ lawyers love to challenge products labeled as “natural,” with hundreds of false advertising class actions filed in just the last few years. Recently, in Astiana v. Hain Celestial (pdf), the Ninth Circuit reversed the dismissal of one such class action, and in doing so, addressed some key recurring arguments made at the pleading stage in litigation over “natural” labeling.

The Hain Celestial Group makes moisturizing lotion, deodorant, shampoo, conditioner, and other cosmetics products. Hain labels these products “All Natural,” “Pure Natural,” or “Pure, Natural & Organic.” A number of named plaintiffs, including Skye Astiana, filed a putative nationwide class action, alleging that they had been duped into purchasing Hain’s cosmetics. According to plaintiffs, those cosmetics were not natural at all, but allegedly contained “synthetic and artificial ingredients ranging from benzyl alcohol to airplane anti-freeze.” Astiana claimed that she likely would not have purchased Hain’s cosmetics at market prices had she been aware of their synthetic and artificial contents. As is typical in such cases, she sought damages and injunctive relief under a variety of theories: for alleged violations of the federal Magnuson-Moss Warranty Act, California’s unfair competition and false advertising laws, and common law theories of fraud and quasi-contract.

The district court dismissed the entire case in deference to the “primary jurisdiction” of the U.S. Food and Drug Administration over natural labeling of cosmetics. On appeal, the Ninth Circuit made two important rulings to which defendants in “natural” litigation should pay special attention:

Primary Jurisdiction

Federal regulators have (with a few limited exceptions not relevant here) declined either to adopt a formal definition of the term “natural” or to regulate that term’s use on cosmetics or food labels. But both plaintiffs and defendants have pointed to informal FDA statements and letters on the subject to advance particular litigation positions. For example, in this case, Hain invoked the prudential doctrine of primary jurisdiction to argue that a case challenging labeling statements cannot go forward because the FDA, not the courts, must determine in the first instance what the challenged labeling statement means and how it should be used. (Indeed, as we have previously discussed, the primary jurisdiction doctrine has led more than a dozen courts to stay false advertising cases in which plaintiffs allege that the ingredient name “evaporated cane juice” is misleading.)

Critically for other defendants intending to invoke primary jurisdiction in the future, the Ninth Circuit concluded that the district court had not erred in concluding that the doctrine applied. Rather, the district court’s error was only in dismissing the case rather than staying it. As the Ninth Circuit explained, “[w]ithout doubt, defining what is ‘natural’ for cosmetics labeling is both an area within the FDA’s expertise and a question not yet addressed by the agency,” and “[o]btaining expert advice from that agency would help ensure uniformity in administration of the comprehensive regulatory regime established by the [Food Drug and Cosmetics Act.]” Significantly, as the Ninth Circuit noted, the FDA had shown “reticence to define ‘natural’” at the time Hain invoked the doctrine with respect to food labels, in light of competing demands on the agency, and there is no reason to believe the FDA is on the verge of rulemaking on ‘natural’ labeling. But that was not a reason to bar the doctrine’s application.

That said, when, as in Astiana, additional judicial proceedings are contemplated once the FDA completes its work, the Ninth Circuit held that the case should be stayed rather than dismissed. And on that basis, the Ninth Circuit reversed the district court’s dismissal. Whether the Astiana decision supports primary jurisdiction arguments outside the context of “natural” labeling on cosmetics—such as ‘natural’ statements on food labels—remains to be seen. But as we read it, the court’s core holding would seem to have broader application.

Express Preemption

Hain separately argued that the FDCA expressly preempted the plaintiffs’ claims challenging the use of the term “natural.” But because there are no regulations defining ‘natural’ or its use on cosmetics labels, the Ninth Circuit disagreed, concluding that neither plaintiffs’ claims nor their requested remedy would impose requirements different from the (non-existent) federal rules on “natural” labeling. The Court did not find persuasive Hain’s argument that the FDA’s conscious decision not to define or regulate the term “natural” supports express preemption. That said, in other settings, including in “natural” cases, defendants may still find it appropriate to point out that the FDA (or another agency) has made a conscious decision not to regulate, and that such a decision should be entitled to deference and respect, or should be taken into account in assessing whether plaintiff has stated a claim.

As readers of this blog know, prior to the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, the California Supreme Court (and a number of other state courts) had declared that waivers of class-wide arbitration were unenforceable as a matter of state law. But in Concepcion, the Supreme Court held that the Federal Arbitration Act (“FAA”) preempts state-law rules requiring the availability of class-wide arbitration.

How do the FAA and the Supremacy Clause of the U.S. Constitution affect the interpretation of arbitration clauses written prior to Concepcion? The Supreme Court may provide further guidance on that issue in DIRECTV, Inc. v. Imburgia, No. 14-462, in which it granted certiorari today. (We have previously blogged about Imburgia.)

At issue in Imburgia is whether an arbitration provision that specifies that it is inapplicable if its ban on class-wide procedures is unenforceable under “the law of [the customer’s] state” is (a) governed by state law without reference to FAA preemption, or (b) by state law taking into account the preemptive effect of the FAA. Stated another way, did the parties contract out of the FAA’s coverage?

Respondent Imburgia, a customer of petitioner DIRECTV, Inc. (“DTV”), filed a class action in California state court against DTV in 2007, alleging that DTV improperly charged early termination fees to its customers. DTV’s Customer Agreement contained an arbitration clause that specified that it was governed by the FAA and that arbitration would take place on an individual rather than class-wide basis. That arbitration clause also stated that “[i]f … the law of your state would find this agreement to dispense with class action procedures unenforceable, then this entire Section [i.e., the arbitration clause] … is unenforceable.”

In Discover Bank v. Superior Court, the California Supreme Court declared that consumer arbitration agreements are unconscionable under California law unless they allow for class arbitration. In light of Discover Bank, DTV did not invoke the arbitration provision when the lawsuit was filed. Shortly after the Supreme Court decided Concepcion—and held Discover Bank to be preempted by the FAA—DTV moved to compel arbitration. The trial court denied DTV’s motion.

The California Court of Appeal affirmed. The Court of Appeal held that the reference in the arbitration provision to “the law of [the customer’s] state” was ambiguous and could mean either (1) the state’s law without regard to federal law; or (2) the state’s law, as superseded by federal law (such as the FAA). The court adopted the first interpretation—i.e., that the preemptive effect of federal law does not bear on the meaning of “the law of [the customer’s] state.” Under that interpretation, the California Court of Appeal declared, the law of California is that agreements to dispense with class action procedures are unenforceable, and accordingly DTV’s arbitration clause is unenforceable. The California Supreme Court denied review. (We filed an amicus letter (pdf) in the case urging that the California Supreme Court grant review.)

Interpreting the same DTV arbitration provision, the Ninth Circuit in Murphy v. DIRECTV, Inc., 724 F.3d 1218 (9th Cir. 2013), reached the opposite conclusion. In Murphy, the Ninth Circuit held that “Section 2 of the FAA, which under Concepcion requires the enforcement of arbitration agreements that ban class procedures, is the law of California and of every other state. The Customer Agreement’s reference to state law does not signify the inapplicability of federal law,” because under the Supremacy Clause, “the Constitution [and] laws . . . of the United States are as much a part of the law of every State as its own local laws and Constitution.” Id. at 1226 (citation omitted). As a result, the Ninth Circuit concluded that the reasoning later adopted by the California court—that “the parties intended state law to govern the enforceability of the arbitration clause, even if the state law in question contravened federal law”—“is nonsensical.” Id.

The Supreme Court’s decision in Imburgia should help clarify whether a company’s good-faith effort to include in an arbitration provision language designed to comply with existing state law risks can have the unintended effect of jettisoning the protections of the FAA. The case will likely be briefed over the next several months and argued in the fall.

After the oral argument in POM Wonderful LLC v. Coca-Cola Co. (pdf), No. 12-761, the Supreme Court appeared all but certain to allow competitors to sue for false advertising under the Lanham Act over labels of FDA-regulated food products.  Food manufactures have been waiting to see just how broad the ruling would be and whether it would affect the onslaught of consumer class actions challenging food and beverage labels.  The wait is over, and the POM v. Coke decision, while effecting a dramatic change in competitor actions, should have little impact on consumer class actions.

As described by the Supreme Court, here are the facts of the case:  POM markets a juice product labeled “Pomegranate Blueberry 100% Juice,” which consists entirely of pomegranate and blueberry juices.  Coke (under its Minute Maid brand) markets “Pomegranate Blueberry Flavored Blend of 5 Juices,” a competing product that contains 99.4% apple and grape juices, with pomegranate, blueberry, and raspberry juices accounting for the remaining 0.6%.  The label on the Minute Maid product features a picture of all five fruits and the words “Pomegranate Blueberry” in a larger font than the words “Flavored Blend of 5 Juices.”  Significantly, the Minute Maid label complies with the technical labeling rules set out in the federal Food, Drug, and Cosmetic Act (FDCA) and FDA’s related regulations for naming a flavored juice blend.

POM alleged that Coke’s product name and label violate the Lanham Act’s false-advertising provision because (according to POM) consumers will be fooled into thinking there is more pomegranate and blueberry juice in the product than there really is.  The district court and Ninth Circuit rejected the Lanham Act claims, accepting Coke’s argument  that because juice labeling is pervasively regulated by FDA, applying generalized principles of false advertising under the Lanham Act would destroy the uniform, national labeling standard announced by the agency under the FDCA.  As the Ninth Circuit put it, “the FDCA and its regulations bar pursuit of both the name and labeling aspect” of the Lanham Act claim because allowing the claim would “undermine the FDA’s regulations and expert judgments” about how juices may and should be included in the product name.

The Supreme Court unanimously reversed the Ninth Circuit’s decision in an opinion by Justice Kennedy.  In analyzing whether one federal statute (the FDCA) precludes a remedy available under another (the Lanham Act), the Court ruled that the FDCA and Lanham Act can be harmonized because they are “complementary and have separate scopes and purposes” and—unlike FDCA’s express preemption of state-law claims—neither statute “discloses a purpose” by Congress to bar competitor suits like POM’s.  (A more detailed discussion of the Court’s opinion is available here.)  Notably—although the Court repeatedly tells us that the FDCA and Lanham Act can get along—the opinion never actually does the hard work of harmonizing Coke’s compliance with the FDCA’s detailed rules for naming flavored juice blends with POM’s theory of liability challenging the FDCA-compliant name under a generalized theory of false advertising.

By contrast with competitor lawsuits, the Court’s decision should have virtually no impact on food labeling consumer class actions.  While the Court expressed the view that consumers will be indirect beneficiaries of competitor Lanham Act claims over allegedly misleading labels, it made clear that its decision does not address or alter the interplay between state consumer protection laws or consumer suits and the FDCA.  In other words, the decision does not in any way undermine preemption principles that would apply to state-law claims challenging labels regulated by FDA.  That’s important not just for food companies facing consumer class actions, but also to avoid a problem the Court specifically recognized in its decision: the “disuniformity that would arise from the multitude of state laws, state regulations, state administrative agency rulings, and state-court decisions that are partially forbidden by the FDCA’s pre-emption provision.”  Though the Court correctly recognizes the resulting chaos if each state could impose non-identical labeling requirements, it characterizes the potential disuniformity from the potential tension between the FDCA and the Lanham Act a result that Congress envisioned.

Whether the Court was right or wrong about that, one thing is clear:  In creating food labels, food companies should consider not only what the FDCA and federal regulations say, but also analyze the potential risks of competitor lawsuits under the Lanham Act.  We will have more to say about these issues on a webinar tomorrow; interested clients or friends of the firm may register for the webinar here. 

 

 

The plaintiffs’ bar continues to file consumer class actions challenging food and beverage labels en masse, especially in the Northern District of California—also known as the “Food Court.” One particular line of cases—at least 52 class actions, at last count—targets companies selling products containing evaporated cane juice. The battle over evaporated cane juice has become the latest front in the war over whether federal courts should apply the primary-jurisdiction doctrine and dismiss or stay food class actions while awaiting guidance from the federal Food and Drug Administration.

In these cases, plaintiffs allege that the term “evaporated cane juice” is misleading because (in their view) it disguises the fact that the ingredient is a type of “sugar”; they contend that the ingredient  should be identified as “sugar.” Their theory rests almost entirely on a draft guidance that the FDA issued in 2009, in which the agency proposed the ingredient be called “dried cane syrup” (notably, not “sugar”), and invited public comment on the issue. That guidance suggested that the name “evaporated cane juice” not be used because it suggests the ingredient is a juice.

In response to these lawsuit, many defendants have emphasized that the FDA’s 2009 guidance not only is non-binding, but that the existence of the guidance establishes that the FDA is examining the precise issue underlying plaintiffs’ theory of liability. Accordingly, defendants argue, courts should let the agency finish its work. Or, put another way, because the federal Food, Drug, and Cosmetic Act squarely authorizes the FDA to regulate the names of ingredients as part of its power to prescribe uniform national standards for food labels, the issue is within the FDA’s “primary jurisdiction.” Thus, as we have contended in advancing the primary-jurisdiction argument, the issue should be decided by an expert agency, not via litigation brought by profit-motivated consumer class action lawyers.

How have these arguments fared? Because the FDA did not take action for over four years after issuing the 2009 draft guidance, plaintiffs had a great deal of success in convincing courts that the FDA was not actively addressing the evaporated-cane-juice issue further and therefore that applying the primary-jurisdiction doctrine was inappropriate.

All that changed in March 2014, when the FDA published a notice in the Federal Register reopening the comment period on the 2009 draft guidance and emphasizing that it has “not reached a final decision on the common or usual name for” evaporated cane juice and that it “intend[s] to revise the draft guidance, if appropriate, and issue it in final form.” [Our firm recently filed a comment with the FDA on this issue.]

As if a light had been switched on, virtually every court to consider the issue since the March notice—at least 10 class actions so far—has ruled in favor of deferring to the FDA’s primary jurisdiction in evaporated-cane-juice cases. This overwhelming trend is welcome news.

But from our perspective, the fact that the FDA recently reiterated its interest in this area should not have been necessary to trigger the primary-jurisdiction doctrine. Indeed, even before the March 2014 notice, the question of the proper labeling of evaporated cane juice was one within the primary jurisdiction of the FDA, as at least one court recognized.

To be sure, as one judge has put it, whether the FDA (or another regulatory agency) “has shown any interest in the issues presented by the litigants” appears to be an “unofficial fifth factor” that influences courts grappling with whether primary jurisdiction should be applied in a given case. Greenfield v. Yucatan Foods, L.P., — F. Supp. 2d –, 2014 WL 1891140, at *4-5 (S.D. Fla. May 7, 2014). But this “unofficial fifth factor” is neither necessary nor part of the four, well-recognized factors for applying primary jurisdiction: “(1) [a] need to resolve an issue that (2) has been placed by Congress within the jurisdiction of an administrative body having regulatory authority (3) pursuant to a statute that subjects an industry or activity to a comprehensive regulatory authority that (4) requires expertise or uniformity in administration.” Clark v. Time Warner Cable, 523 F.3d 1110, 1115 (9th Cir. 2008).

The same factors were satisfied in the evaporated-cane-juice context even before the March 2014 notice.  And—speaking more generally—uncertainty over when the FDA will act should not be treated as an invitation for different courts to apply different state laws and develop differing labeling regimes.

Here’s hoping for a few more helpings of primary jurisdiction at the Food Court—and a few more scoops of uniformity and certainty for the food and beverage industry.

The federal Food Drug and Cosmetic Act (“FDCA”)—along with the implementing regulations promulgated by the FDA—sets out a detailed national standard for much of what appears on food and beverage labeling. See 21 U.S.C. §§ 301, et seq.; 21 C.F.R. §§ 101, et seq.; Pom Wonderful LLC v. Coca-Cola Co., 679 F.3d 1170, 1175 (9th Cir. 2012). This national labeling law expressly preempts states from enacting different requirements for labels, including requirements imposed by courts under the guise of redressing a “misleading” or “fraudulent” label. 21 U.S.C. § 343-1; Turek v. Gen. Mills, Inc., 662 F.3d 423, 426 (7th Cir. 2011).

Preemption under the FDCA served as a bulwark against the first wave of false advertising consumer class actions against the food and beverage industry. Most of those complaints essentially attempted to impose state-law labeling requirements that differed from the federal requirements, and courts therefore dismissed the claims as expressly preempted. See, e.g., Turek, supra; Carrea v. Dreyer’s Grand Ice Cream, Inc. (pdf), 475 Fed. App’x 113 (9th Cir. 2012).

In response, the plaintiffs’ bar adapted by refocusing class action litigation on labeling statements that they asserted were not covered by a federal requirement. The hundreds of cases challenging “natural” labeling statements are an example. In most respects, FDA has declined to regulate the use of the term “natural” on food and beverage labels, claiming that, “[f]rom a food science perspective, it is difficult to define a food product that is ‘natural’ because the food has probably been processed and is no longer a product of the earth.”  No federal requirement, no preemption of the state-law consumer claims, plaintiffs say.

Moreover, in the last 16 months, the plaintiffs’ bar has debuted a new theory that it hopes will allow them to evade preemption. They rely on California’s wholesale incorporation of the FDCA’s labeling law into the law of California. Cal. Health & Safety Code § 110100. Alleged violations of the FDCA are thus transformed into violations of California’s Sherman Food Drug and Cosmetic Law. And violations of the Sherman law, in turn, may be alleged as predicate acts in support of claims for violation of California’s consumer protection laws, including the Unfair Competition Law (a/k/a Section 17200). Plaintiffs argue that because state law imposes identical requirements to the federal requirements (indeed, the same FDCA requirements), liability under state law is not preempted.

But is indirect enforcement of the FDCA via a “state-law delivery device” compatible with Congress’s refusal to create a private right of action for violation of the FDCA? (California’s Sherman Law also does not allow for private enforcement.) Plaintiffs tried and failed to use a similar strategy in the context of medical devices, which are also governed by the FDCA. Specifically, the Supreme Court has held that Section 337 of the FDCA (the exclusive-enforcement provision) impliedly bars suits by private litigants “for noncompliance with” federal law, and that the express-preemption provision of the Medical Device Amendments preempts any state-law claim if the result of the litigation might be to require (or forbid) any conduct not already required (or forbidden) by federal law. Buckman Co. v. Plaintiffs’ Legal Comm., 531 U.S. 341, 349 n.4 (2001); Riegel v. Medtronic, Inc., 552 U.S. 312, 330 (2008). Taken together, the exclusive-enforcement and express-preemption provisions

create a narrow gap through which a plaintiff’s state-law claim must fit if it is to escape express or implied preemption. The plaintiff must be suing for conduct that violates the FDCA (or else his claim is expressly preempted . . .), but the plaintiff must not be suing because the conduct violates the FDCA (such a claim would be impliedly preempted . . .).

Bryant v. Medtronic, Inc. (pdf), 623 F.3d 1200, 1204 (8th Cir. 2010) (emphasis in original).

On our view, Buckman and its progeny bar any state-law claim for which the existence of the federal regulatory scheme is a “critical element.” This implied preemption issue, as applied to food labeling false advertising claims, is currently joined in several pending motions in the Northern District of California. See, e.g., Kane v. Chobani, No. 12-cv-2425 (N.D. Cal), Dkt. No. 97; Trazo v. Nestlé USA, Inc., No. 12-cv-2272 (N.D. Cal.), Dkt. No. 64; Samet v. Procter & Gamble Co., No. 12-cv-1891 (N.D. Cal.), Dkt. Nos. 85, 87; Bruton v. Gerber Prods. Co., No. 12-cv-2412 (N.D. Cal.), Dkt. No. 47.

We expect decisions on these motions in the near future and will blog on the results when decisions are issued.

 

On Friday, the Supreme Court granted review in three consolidated cases: Chadbourne & Parke LLP v. Troice, No. 12-79, Willis of Colorado v. Troice, No. 12-86, and Proskauer Rose LLP v. Troice, No. 12-88. The Court’s decision will clarify when the federal Securities Litigation Uniform Standards Act (“SLUSA”) preempts state-law securities class actions.

After Congress tightened the pleading and proof requirements for class actions under the federal securities laws in 1996 in the Private Securities Litigation Reform Act, plaintiffs fled to state court and started bringing securities class actions under state law. In response to this evasion, Congress enacted SLUSA, which precludes most state-law class action claims that allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of” securities covered by the statute. 15 U.S.C. § 78bb(f)(1)(A). In the three Troice cases, the Supreme Court will determine when a misrepresentation is “in connection with” a securities transaction.

All three cases arise out of the Ponzi scheme that R. Allen Stanford allegedly operated. The plaintiffs had bought certificates of deposit from entities controlled by Stanford. CDs are not “covered securities” for SLUSA purposes. But the defendants argued that SLUSA barred the plaintiffs’ state-law claims because (1) plaintiffs had alleged that a representation that the CDs were backed by a diversified portfolio of marketable securities helped induce the CD purchases and (2) some buyers sold covered securities to fund their CD purchases.

The district court agreed with the defendants, but the Fifth Circuit reversed. Roland v. Green, 675 F.3d 503 (5th Cir. 2012). Adopting a Ninth Circuit test, the Fifth Circuit ruled that there had to be “a relationship in which the fraud and the stock sale coincide or are more than tangentially satisfied.” Id. at 520. That test was not satisfied, the Fifth Circuit concluded, because the allegation that the CD issuer’s portfolio was backed by covered securities was merely “tangentially related” to the “gravamen” of the alleged fraud that the CDs were a safe and secure investment. Several other circuits have taken different approaches, under some of which the plaintiffs’ claims would be preempted.

We intend to keep our eye on this case, which could have big implications for the wide variety of investment vehicles that may not be covered securities themselves but arguably benefit from the performance of covered securities.