Opinion ID: 782278
Heading Depth: 2
Heading Rank: 1

Heading: SLUSA's Enactment and the Scope of Federal Question Jurisdiction

Text: 10 SLUSA was enacted in 1998 in response to a demonstrably unavailing attempt by Congress, through the Private Securities Litigation Reform Act of 1995 (PSLRA), Pub.L. 104-67, 109 Stat. 737 (1995) (codified in part at 15 U.S.C. §§ 77z-1, 78u), to prevent strike suits, described as meritless class actions that allege fraud in the sale of securities. Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 107 (2d Cir.2001). Congress had enacted the PSLRA to filter out potential strike suits. Instrumental to achieving this objective was imposition of more stringent pleading requirements 4 and mandatory discovery stays for securities fraud class actions filed in federal court. The PSLRA afforded district courts the opportunity in the early stages of litigation to make an initial assessment of the legal sufficiency of any claims before defendants were forced to incur considerable legal fees or, worse, settle claims regardless of their merit in order to avoid the risk of expensive, protracted securities litigation. Id. (citing H.R. Conf. Rep. No. 104-369 (1995)). Although theoretically capable of paralyzing the efforts of potential strike suit plaintiffs, the PSLRA proved ineffective in actual practice to prevent litigation of meritless suits. 11 Driving enactment of SLUSA was Congress' finding that litigants eluded PSLRA's reach with relative ease. Confronted with more onerous procedural requirements and dimmed prospects of success under the PSLRA, litigants simply abandoned use of federal court and filed suit in state court under state securities laws. Lander, 251 F.3d at 107-08 and n. 4 (citing Pub.L. No. 105-353 § 2(2)). PSLRA's objectives went largely unrealized due to this federal flight loophole. SLUSA was enacted to close the loophole by mandating federal court as the exclusive venue for class actions alleging fraud in the sale of certain covered securities and by mandating that such class actions be governed exclusively by federal law. Id. at 108 (citing 15 U.S.C. §§ 77p(b)-(c)); see also 15 U.S.C. §§ 78bb(f)(1)(A) and (f)(2). SLUSA's preemption and removal provisions, read together, accomplish this task. However, examination of SLUSA's statutory language, a necessary predicate step in this analysis, clarifies SLUSA's broad, but not unlimited, scope. 12 SLUSA's preemption provision provides, in pertinent part: 13 No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging ... a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security.... 14 15 U.S.C. § 78bb(f)(1)(A). SLUSA's removal provision makes removable any class action preempted by 15 U.S.C. § 78bb(f)(1)(A). See 15 U.S.C. § 78bb(f)(2). Congress could not have spoken more clearly. The clear and unambiguous language convinces us that SLUSA was intended to completely preempt the field of certain types of securities class actions by essentially converting a state law claim into a federal claim and creating federal jurisdiction and venue for specified types of state securities fraud claims. 5 See Beneficial Nat'l Bank v. Anderson, ___ U.S. ___, ___, 123 S.Ct. 2058, 2063, 156 L.Ed.2d 1 (2003) (When the federal statute completely pre-empts the state-law cause of action, a claim which comes within the scope of that cause of action, even if pleaded in terms of state law, is in reality based on federal law.). SLUSA does not, however, preclude all state enforcement or private causes of action in securities fraud cases. 15 SLUSA only converts into federal claims those state claims that fall within its clear preemptive scope, thereby confining federal question jurisdiction under this statutory regime to a subset of securities fraud cases. Congress was mindful to preserve the balance between establishing and maintaining national standards for securities class action lawsuits involving nationally traded securities and preserving the appropriate enforcement powers of State securities regulators.... Pub.L. No. 105-353 § 2(5). This balance was achieved by expressly confining SLUSA preemption and removal to lawsuits in which the plaintiff alleges a state law violation stemming from (for purposes of this suit) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security [`preempted class action'].... 15 U.S.C. § 78bb(f)(1)(A); see Abada v. Charles Schwab & Co., Inc., 300 F.3d 1112, 1116 (9th Cir.2002) (SLUSA prohibits a private party from bringing a `covered class action' in federal or state court based on the statutory or common law of a state alleging a `misrepresentation or omission of a material fact' ... `in connection with the purchase or sale of a covered security.') (quoting 15 U.S.C. § 78bb(f)(1)). In essence, SLUSA's enactment marked a Congressional attempt to close the federal flight loophole and route facially preempted class action lawsuits to federal court for scrutiny and possible summary disposal. 16 Under SLUSA, then, state securities fraud class actions are removable. See 15 U.S.C. § 78bb(f)(2). Removal under SLUSA does not necessarily sound the death knell of the removed action, however. SLUSA's removal provision ensures that the district court to which the case has been removed can do what exploitation by litigants of PSLRA's federal flight loophole effectively precluded: determine that the removed action is, in fact, a preempted class action. Quite simply, a district court must examine the complaint to determine whether the substantive requirements necessary to sustain removal under SLUSA's preemption provision, see 15 U.S.C. § 78bb(f)(1), have been satisfied, as these requirements determine whether a district court has subject matter jurisdiction to entertain the action. See Caterpillar, Inc., 482 U.S. at 392-93, 107 S.Ct. 2425 (affirming appellate court's remand to state court finding removal of state claim for breach of employment contract improper because requirement for complete preemption under Section 301 of the Labor Management Relations Act of 1947, 29 U.S.C. § 185, not satisfied and federal question jurisdiction not otherwise apparent on the face of complaint). 17 If a district court determines the action is not a preempted class action and, therefore, removal was improper, the district court lacks subject matter jurisdiction to further entertain the action. Rather than dismiss for want of jurisdiction, both the general remand statute, 28 U.S.C. § 1447(c), and SLUSA's remand provision, 15 U.S.C. § 78bb(f)(3)(D), require the district court to remand the removed action back to the originating state court. The question then presented — which is the threshold issue raised in Merrill Lynch's appeal — is whether a remand order such as the one issued in this case is reviewable on appeal. It is this question, which turns on the interplay between Section 1447(c) and SLUSA's remand provision, that we now examine. 18