For almost the entire time that there have even been federal securities laws, the U.S. Supreme Court only rarely and infrequently agreed to take up cases arising securities cases. Until recently, years would pass between the times that securities cases appeared on the Supreme Court’s docket. For some reason, beginning around the middle of the last decade, the Court has become increasingly willing to take up securities cases. The U.S. Supreme Court’s 2017-2018 term, which commences on Monday, is no exception to this recent trend. There are three important securities cases on the Court’s docket for the upcoming term, and these cases could have, both individually and collectively, a significant impact on many securities law cases and on securities litigation in general.
The three cases, described in greater detail below, are: Leidos Inc. v. Indiana Public Retirement System; Cyan Inc. v. Beaver County Employees’ Retirement Fund; and Digital Realty Trust, Inc. v. Somers.
Leidos, Inc. v. Indiana Public Retirement System: As discussed in greater detail here, this case, which will be argued on November 6, 2017, will address the recurring question of whether the failure to make disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5.
Item 303 of Reg. S-K states in pertinent part that in its periodic reports to the SEC, a company is to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a materially favorable or unfavorable impact” on the company. Guidance provided by the SEC on Item 303 clarifies that disclosure is necessary where a “trend, demand, commitment, event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.”
Issuers’ Item 303 disclosures appear in the Management Discussion & Analysis (MD&A) sections of their annual reports (and in interim or quarterly reports, where there have been material changes since the last annual report).
The federal circuit courts have reached contrary conclusions on the question of whether or not Section 303 creates an affirmative duty of disclosure. The Second Circuit has held that Item 303 does create an actionable duty of disclosure, while the Ninth and Third Circuits have held that it does not. The court agreed to take up the case in order to address what the petitioner described as a “deep split of authority” on the question. The existence of the split creates the possibility of a divergence of outcomes based simply on the court in which a case is filed.
The case is also important as because the question of whether or not Item 303 creates an actionable disclosure duty comes up all the time. Plaintiffs armed with the benefit of hindsight frequently attempt to allege in reliance on Item 303 that the securities suit defendant has failed to allege known risks, trends, or uncertainties.
The court’s decision in this case will not only resolve the circuit split but will also determine whether or not plaintiffs will be able to try to rely on alleged Item 303 omissions as a basis on which to try to assert securities law violations. As a commentator quoted in Evan Weinberger’s September 29, 2017 Law 360 article about the Court’s upcoming term put it, “Obviously it would mean that investors would have one less weapon in their arsenal.”
Cyan Inc. v. Beaver County Employees’ Retirement Fund: As discussed in greater detail here, in this case, the Court will address the question of whether or not state courts retain concurrent jurisdiction for ‘33 Act liability, or whether the enactment by Congress of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) eliminated state court’s jurisdiction over ’33 Act lawsuits.
In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA), which enacted a number of procedural reforms pertaining to securities class action litigation. In an effort to circumvent the PSLRA’s procedural requirements, a number of plaintiffs’ lawyers tried to file their clients’ lawsuits in state court, often under state law. In 1998, and in order to ensure that the lawsuits remained in federal court and subject to the PSLRA’s requirements, Congress passed SLUSA to preempt the state court jurisdiction and to require the lawsuits to go forward in federal court.
Even after the enactment of SLUSA, unanswered questions remained with respect to liability actions under the ’33 Act. Section 22(a) of the Securities Act of 1933 provides for concurrent state court jurisdiction for civil actions alleging violations of the ’33 Act’s liability provisions. Section 22(a) specifies further that when an action is brought in state court alleging a ’33 Act violation, the case shall not be removed to federal court.
These provisions were significantly litigated in connection with state court lawsuits filed during the financial crisis, as discussed here. One question in particular was whether the provisions of SLUSA, requiring “covered class actions” to be litigated in federal court pre-empts the concurrent state court jurisdiction provisions in the ’33 Act. The determinations of these issues have not been uniform, but in the Ninth Circuit, the state of the law is that ’33 Act cases filed in state court in reliance on Section 22’s concurrent jurisdiction provisions are not removable from state court to federal court notwithstanding the provisions of SLUSA. With the split in the circuits on this issue, different courts in different jurisdictions are reaching different conclusions on the same issue of federal law, a circumstance that Cyan described in its cert petition as “chaos.”
The question of whether or not state courts after SLUSA retain jurisdiction for ’33 Act liability lawsuits is a significant one. In recent years, a significant amount of IPO-related securities class action litigation has been filed in state court, particularly in California, as detailed in a recent guest post on this site.
As the numbers of these state court class action lawsuits under federal law has mounted in recent years, defendants (particularly those sued in California state court) have continued to try to extricate themselves from the state court forum and remove their cases to federal court. In some instances, defendants find themselves obliged to defend these state court lawsuits while also defending parallel or even identical federal court lawsuits raising essentially the same allegations.
In other words, this case raises important legal questions, and the answers to the questions potentially will address difficulties that increasingly are arising in connection with IPO-related securities litigation, difficulties that have in some instances led to duplicative litigation. More to the point, the question of whether post-SLUSA state courts retain their concurrent ’33 Act liability lawsuit jurisdiction has vexed the courts and litigants for years. This case offers the opportunity for these questions finally to be resolved.
Digital Realty Trust v. Somers: As discussed in greater detail here, in this case the Court will address the question of whether the Dodd-Frank’s anti-retaliation provisions protect only whistleblowers making their reports to the SEC, or whether or not the anti-retaliation provisions also protect whistleblowers who report internally within their companies.
The reason that there has been confusion on the question of whether or not the Dodd-Frank Act’s anti-retaliation provisions protect internal whistleblowers is that the relevant statutory provisions conflict.
The Dodd-Frank Act defines the term “whistleblower” to mean “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.” This definition seems pretty straightforward, as it seems to specifically restrict the term “whistleblower” to individuals who file reports with the SEC.
Where the issues get complicated is in the Act’s “Protection of Whistleblowers” provisions, which extend anti-retaliation protection (in section h(i)) not only to those “providing information to the Commission” but also (in section h(iii)) to those “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 … section 1513 (e) of title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”
In other words, the definition seems to restrict the term “whistleblower” to those filing whistleblower reports with the SEC, but the anti-retaliation provision seems to extend its protections to other whistleblowers, including, for example, those filing an internal whistleblower report within their own company under the Sarbanes Oxley Act.
The SEC has taken the position that the anti-retaliation provision protects not only whistleblowers who make their report to the SEC but also whistleblowers who report internally. The SEC’s position on this issue, and the extent to which court’s should defer to the agency’s interpretation, raises a latent issue that the court may or may or may not address, which has to do with the question of the extent to which courts should be deferring to agency interpretations.
This type of judicial deference, often called Chevron deference in reference to a prior U.S. Supreme Court decision that articulated the theory, has been questioned. Among its most vocal critics is the new Supreme Court justice, Neil Gorsuch. The court does not necessarily need to consider the question of whether or not Chevron deference is appropriate, but the case could provide an opportunity for the Court to reconsider the theory.
The interests of corporate defendants in the outcome of this case aren’t entirely clear. On the one hand, if the Court rules that internal whistleblowers are entitled to the anti-retaliation protections, the class of potential claimants is expanded. On the other hand, if the Court rules that internal whistleblowers are not entitled to the anti-retaliation protection, they may have incentives to take their reports straight to the SEC. To this latter point, one commentator in the Law 360 article is quoted as saying “If Digital Realty wins, corporate America loses.”
These cases may seem technical, involving as they do seemingly narrow questions of statutory interpretation. But while the issues may seem technical, the outcome of these cases has the potential to affect quite a number of other cases going forward, simply due to the frequency with which these issues arise. These cases are unlikely to produce huge changes in the law but they still are significant simply because of the numbers of cases going forward that the decision in this case might affect.
One thing about these cases that they have in common is that all three of them involve a circuit split on a narrow but important issue of legal interpretation. That clearly seems to be the key to being able to convince the Court to take up a case. The Court clearly is interested in avoiding circumstances in which different courts are reaching different conclusions on issues of statutory interpretation, particularly where the analytic difference potentially can result in different outcomes based simply on where a case has been filed.
All three of these cases will be decided by the end of the upcoming term in June 2018. It should be noted that the Court could still decide to take up yet another securities law case or two this term. A number of cert petitions remain pending and yet others could be filed.
There are a number of other important cases on the Supreme Court’s docket this term, relating to a range of important issues from worker’s rights, to gerrymandering and free speech. A comprehensive rundown on the Supreme Court’s docket can be found here.