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Third Circuit Holds that SLUSA Does Not Preclude Class Action Opt-Outs from Pursuing Individual Actions

In North Sound Capital, LLC v. Merck & Co, Inc., No. 18-2317, 2019 WL 4309663, 2019 U.S. App. LEXIS 27518 (3d Cir. Sept. 12, 2019), the United States Court of Appeals for the Third Circuit reversed a New Jersey district court ruling, which held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precluded state law claims in lawsuits brought by investors who opted-out of class action lawsuits. In reversing, the Third Circuit determined that the opt-out plaintiffs could indeed bring their state law fraud claims against the same defendants as the class-action lawsuits because their subsequently filed suits did not fall within the definition of a “covered class action” under SLUSA. The decision provides helpful guidance as to whether investors who choose to opt-out of class action lawsuits may be precluded under SLUSA from proceeding with individual lawsuits seeking similar relief.

Investors filed class-action suits against drug manufacturers for alleged attempts to conceal unfavorable clinical test results regarding two cholesterol drugs. The district court granted class certification after the investors’ claims survived defendants’ motions to dismiss. Ultimately, the cases settled.

Certain institutional investors opted-out of the class actions and subsequently filed their own suits alleging similar claims and an additional fraud claim under New Jersey state law. Defendants moved to dismiss on the grounds that the settled class actions and opt-out suits were “joined, consolidated or otherwise proceed[ed] as a single action for any purpose” under SLUSA. SLUSA precludes (with some exceptions) investors from litigating state-law securities fraud claims through a “covered class action.” SLUSA’s definition of a “covered class action” includes a “mass action” provision that bars lawsuits predicated on state-law claims 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 district court dismissed. It concluded that the claims were barred under SLUSA because Congress did not explicitly exempt opt-out suits under SLUSA, and because SLUSA’s legislative history required the definition of “covered class action” to be construed broadly. Plaintiffs appealed.

The Third Circuit’s decision turned on whether the class actions and subsequent opt-out suits were “joined, consolidated, or otherwise proceed[ed] as a single action for any purpose.” The Court concluded that because plaintiffs’ suits and the prior class actions did not overlap or exist at the same time, there was no “actual coordination” between them, and therefore, the suits did not “proceed as a single action for any purpose.” The majority opinion made clear that “we do not read the single action requirement to mean that cases must be coextensive with one another but rather that they be at least partially coordinated, which would seem invariably to require that they coincide for some period.”

Dissenting, Judge Patty Schwartz interpreted the “covered class action” language more broadly and concluded that the district court correctly dismissed plaintiffs’ complaints under SLUSA’s preclusion provision. Judge Schwartz observed that by filing “nearly identical complaints” to the class actions, the plaintiffs enjoyed the benefits of the class action device to obtain discovery and the “fruits of all of the pretrial activities” before opting out, and thus plaintiffs “created the foundation” for SLUSA’s bar.

The Third Circuit’s decision provides a degree of safe-harbor under SLUSA for investors who choose to opt-out of class action lawsuits, and instead proceed with individual state-law claims seeking similar relief, so long as there is no “actual coordination” between the class action and individual lawsuits. In particular, the Third Circuit found that there can be “no occasion for actual coordination if suits never overlap in time.” The majority’s opinion specifically indicated that the decision does not conflict with any circuit decision to have considered the single-action requirement, suggesting that U.S. Supreme Court review is unlikely.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume IX, Number 276


About this Author

Jonathan Moss, Lawyer, Sheppard Mullin,  Business Trial

Jonathan Moss is an associate in the Business Trial Practice Group in the firm's Los Angeles office. He is also a member of the firm's Energy and Hospitality Practice Teams.

Areas of Practice

Mr. Moss specializes in commercial and business litigation. His practice entails matters in state and federal court, including business disputes, class action defense, securities litigation, shareholder derivative cases, entertainment litigation, real estate disputes, insurance-related litigation and allegations of unfair business practice and fraud.

DAvid Berger Lawyer Sheppard Mullin Law Firm

David Berger is an associate in the Business Trial Practice Group in the firm's Los Angeles office.

During law school, David served as a judicial extern to the Honorable Manuel L. Real in the United States District Court for the Central District of California. David also served as a Note and Comment Editor for the Loyola of Los Angeles Law Review.

Angela Reid Lawyer Sheppard Mullin Law Firm

Angela Reid is an associate in the Business Trial Practice Group in the firm's Los Angeles office.

Areas of Practice

Angela represents clients with business disputes. She has litigated claims involving breach of contract, fraud, unfair competition, breach of fiduciary duty, unlawful detainer, and shareholder actions in several industries.  She has experience with all aspects of civil procedure, including filing and responding to complaints, conducting discovery, motion practice, and judgment enforcement. Angela is also actively involved in the firm’s...