Opt-out suits brought by class members were not part of a "single action" with the settled class action and were not precluded by the SLUSA.
A Third Circuit panel has concluded that the Securities Litigation Uniform Standards Act (SLUSA) does not prohibit a plaintiff who opted out of a class action from bringing individual actions under state law. At issue here was whether the suits brought by the opt-out plaintiffs after the original class action settled functioned as a "single action" with the class action. The court concluded that the single-action requirement needs some actual coordination and that, in this case, there was no such coordination between the opt-out suits and the prior class actions. The panel accordingly reversed the dismissal of the suits and remanded for further proceedings (North Sound Capital LLC v. Merck & Co. Inc., September 12, 2019, Krause, C.).
The complaint in this action accused Merck of making false and misleading statements concerning two of the company's multi-billion dollar anti-cholesterol drugs, Vytorin and Zetia. According to the complaint, Merck (and Schering-Plough, which was acquired by Merck in 2009) delayed the release of disastrous clinical trial results for over two years while touting the products' efficacy and commercial viability. Facing critical press reports and a congressional investigation, Merck released the trial results in early 2008, and the data raised the possibility that Vytorin was essentially an "expensive placebo." Merck's subsequent stock price drop amounted to a $48 billion loss in market capitalization.
Opt-out actions. Soon after, investors filed class actions in New Jersey, and the court denied Merck's motion to dismiss in 2009. Three years later, class certification was granted, and investors were given notice of their right to opt out of the class action while not being bound by its judgment. A settlement was approved, and final judgments were entered in October 2013.
The opt-out investors then filed the individual lawsuits at issue here; there are sixteen plaintiffs in the consolidated appeals. The complaints tracked the allegations in the class complaint, but added a fraud claim under New Jersey common law. Merck eventually moved for dismissal of the state-law claims, arguing that they were precluded under the SLUSA's "mass-action provision" (15 U.S.C. § 78bb(f)(5)(B)(ii)(II)) because the class actions and opt-out suits were "joined, consolidated, or otherwise proceed[ing] as a single action for any purpose." The district court noted that no prior decisions have addressed this issue, but it agreed that the opt-out and class actions "have proceeded as a single action." Since Congress did not explicitly exempt opt-out suits, the court reasoned, opt-out suits were aggregated with class actions under the mass-action provision.
"Single action?" The question on appeal was whether the opt-out suits were precluded under the SLUSA as covered class actions. The SLUSA's definition of "covered class action" has two parts, and the part at issue was the second one, which the court dubbed the "mass-action provision." Exchange Act Section 28(f)(5)(B)(ii) covers suits that: (1) are filed in or pending in the same court; (2) involve common legal or factual questions; (3) seek damages for more than 50 persons; and (4) "are joined, consolidated, or otherwise proceed as a single action for any purpose." The appeal turned on the fourth prong and the meaning of "single action."
Merck urged a broad definition, requiring merely a "functional relationship" between the two suits. The court remarked that this reading was "strained" and concluded that the single-action requirement needs some actual coordination. Looking at the text of the provision, the court arrived at a "common-sense" interpretation: to proceed as a single action, suits must be combined, in whole or in part, for the joint management of a common stage of the proceedings (such as discovery) or the resolution of a common question of law or fact. As a general matter, the court noted, "there is no occasion for actual coordination if suits never overlap in time."
The court then concluded that the opt-out suits never proceeded as a single action with the class actions. A plaintiff that has timely opted out of a class action is not a party to that litigation, and the mere fact that he or she satisfies a class definition does not suggest coordination. While there were many parallels between the pleadings in these cases and the class-action complaints, the suits did not overlap in time, and there was never any coordination.
The court noted in conclusion that its holding does not conflict with that of any other circuit that has considered the single-action requirement. But, it warned of a "perceptible trend" in which some district courts have broadened that single-action requirement into an interpretation "increasingly unmoored from the statutory text." With this decision, the court said, "we steer this jurisprudence towards safer waters."
Dissent. A dissenting judge believed that because the opt-out plaintiffs participated in and benefitted from pretrial proceedings in the class actions, their actions "functionally proceeded as a single action with the class actions." This judge took issue with the majority's conclusion that there is a timing component, that is, that the actions at issue must be pending at the same time as the class action. The dissent defined the text of the statute more broadly and found no basis for a simultaneity requirement. The judge went on to find many "indicia of coordination" through which the opt-out plaintiffs benefitted from the class action's pretrial activities and were able to file nearly identical complaints to the class actions.
The case is No. 18-2317.
Attorneys: Daniel Hume (Kirby McInerney LLP) for North Sound Capital LLC, North Sound Legacy Institutional, United Food Commercial Workers Local 500 Pension Fund, Colonial First State Investments Ltd. and GIC Private Ltd. Daniel J. Kramer (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Merck & Co. Inc., Merck Schering Plough Pharmaceuticals, MSP Distribution Services C. LLC, MSP Singapore Co. LLC.
Companies: North Sound Capital LLC; North Sound Legacy Institutional; United Food Commercial Workers Local 500 Pension Fund; Colonial First State Investments Ltd.; GIC Private Ltd.; Merck & Co. Inc.; Merck Schering Plough Pharmaceuticals; MSP Distribution Services C LLC. MSP Singapore Co. LLC
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