Opinion ID: 1360978
Heading Depth: 3
Heading Rank: 1

Heading: Private Securities Litigation Reform Act Section 4(f)(7)(A)

Text: As we have previously acknowledged, Congress passed the PSLRA [in 1995] because it was distressed with the proliferation and cost of allegedly meritless federal securities class actions. The PSLRA sought to curb abusive and frivolous securities suits by imposing new procedural and substantive requirements. U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833, 841 (9th Cir.2007); see also In re Silicon Graphics Inc. Secs. Litig., 183 F.3d 970, 978 (9th Cir.1999) (noting that Congress enacted the PSLRA in part to prevent abusive securities fraud class actions designed to impose costs so burdensome that it [was] often economical for the victimized party to settle). Its provisions limit recoverable damages and attorney's fees, provide a `safe harbor' for forward-looking statements, impose new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous litigation, and authorize a stay of discovery pending resolution of any motion to dismiss. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). In its effort to reform litigation and settlement of securities fraud class actions, Congress also included the provision at issue here, which makes the entry of a bar order against future claims for contribution mandatory upon a court's approval of a settlement in such a case. [13] 15 U.S.C. § 78u-4(f)(7)(A). We are asked to determine whether the scope of a bar order under the PSLRA may also encompass independent claims, meaning claims other than those for contribution and indemnity, and we hold that it may not. In so holding, we adopt the federal common law approach taken by the Second Circuit in Gerber, 329 F.3d 297, and apply it to bar orders issued pursuant to the PSLRA. Gerber was not decided under the PSLRA. Gerber, 329 F.3d at 309-10. Prior to adoption of the PSLRA, federal courts determined the appropriate scope of bar orders issued in partial settlements of class action cases by reference to federal common law evolving from Rule 23(e)(2). See Kaypro, 884 F.2d at 1228-29 (holding that federal common law should govern the issue of contribution bars in securities class action settlements). Under the federal common law rule, once a court determined that a proposed settlement satisfied the requirements of Rule 23(e)(2), it could impose a bar order barring non-settling defendants' future claims for contribution and indemnity. Kaypro, 884 F.2d at 1231. The contribution bar provision of the PSLRA essentially codified this rule and made the imposition of a bar against future claims for contribution mandatory in securities fraud class action settlements. 15 U.S.C. § 78u-4(f)(7)(A). Because the text of the PSLRA, which is geared to orders that bar claims for contribution, id., does not speak to whether a court may issue an order that bars independent claims, we look to the reasoning of cases determining the appropriate scope of similar bar orders under federal common law. Appellees urge us to affirm the district court's application of the approach taken by the Eleventh Circuit in In re U.S. Oil & Gas Litigation, 967 F.2d 489 (11th Cir. 1992). [14] In determining the scope of the challenged bar orders, the district court relied upon the holding of In re U.S. Oil & Gas Litigation, as applied in Ruttenberg, 300 F.Supp.2d at 1219, that [t]he propriety of the settlement bar order should turn upon the interrelatedness of the claims that it precludes, not upon the labels which parties attach to those claims. If the cross-claims that the district court seeks to extinguish through the entry of a bar order arise out of the same facts as those underlying the litigation, then the district court may exercise its discretion to bar such claims in reaching a fair and equitable settlement. In re U.S. Oil & Gas Litigation, 967 F.2d at 496. However, the Eleventh Circuit called this interrelatedness test and its opinion in In re U.S. Oil & Gas Litigation into question with its decision in AAL High Yield Bond Fund v. Deloitte & Touche, LLP, 361 F.3d 1305 (11th Cir.2004). In AAL, certain non-settling defendants in a securities fraud class action suit challenged the district court's bar orders as impermissibly broad under the PSLRA contribution bar when they precluded the non-settling defendants from bringing future claims against settling co-defendants. Id. The AAL court explicitly distanced itself from In re U.S. Oil & Gas Litigation by explaining that its holding in that case had narrow applicability because it had barred the cross-claims at issue there only because they were disguised contribution and indemnity claims, not truly independent claims. AAL, 361 F.3d at 1312 (noting that In re U.S. Oil & Gas Litigation expressly declined to address the issue of `truly independent claims'). The court also declined to consider Ruttenberg as persuasive authority because of its reliance on In re U.S. Oil & Gas Litigation. Id. Because we find the reasoning of AAL persuasive, we likewise decline Appellees' invitation to adopt the federal common law rule articulated in In re U.S. Oil & Gas Litigation to determine the appropriate scope of a bar order issued pursuant to the PSLRA. [15] Instead, we hold that the correct standard for determining the appropriate scope of a bar order issued pursuant to the PSLRA is the federal common law test articulated by the Second Circuit in Gerber, 329 F.3d 297, that asks whether a non-settling defendant's claims are independent. Id. at 306. We are persuaded that limiting bar orders issued pursuant to the PSLRA to claims for contribution and indemnity accords with the purpose and plain language of the statute and strikes an appropriate balance between the judicial policies of encouraging settlements, on the one hand, and protecting the legal rights of non-settling parties in class-action lawsuits, on the other. See, e.g., Kaypro Corp., 884 F.2d at 1229-31 (identifying policy of encouraging settlements in support of allowing contribution bars in partial settlements under federal common law); New England Health Care Employees Pension Fund v. Woodruff, 512 F.3d 1283, 1289 (10th Cir.2008) (holding that non-settling defendants had standing to challenge Bar Orders that eliminate certain independent claims because they palpably interfere with [the non-settling defendants'] preexisting rights and potential legal claims). Similarly, interpreting the PSLRA to bar disguised claims for contribution and indemnity prevents non-settling defendants from engaging in an end run around a settlement agreement and an accompanying contribution and indemnity bar, while allowing them to pursue genuinely independent claims. See, e.g., In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1026 (2d Cir.1992). Like the instant case, Gerber addressed a challenge by certain non-settling defendants in a securities fraud class action to the district court's approval of a settlement bar order extinguishing any claims against [certain co-defendants] relating to or arising from the allegations of [the] litigation. Gerber, 329 F.3d at 300. The parties did not contest the authority of the district court to bar claims for contribution and indemnity and conceded that a `disguised' contribution or indemnity claim, such as a negligence claim where the injury to the non-settling defendants was their liability to the plaintiffs, could be barred. Id. at 305. Instead, the appellants argued that the district court's bar order was impermissibly broad only insofar as it barred independent claims. Id. The Gerber court determined under federal common law that if a non-settling defendant is able to prove that it sustained independent reputational damages or losses relating to the cost of defense arising out of a breached contractual or fiduciary relationship with [the settling defendant], it has not been compensated for those losses by the judgment credit, and any such claims should not be extinguished [by the bar order]. Id. at 306. In addressing which claims should not be precluded, the court explained that the only claims that could appropriately be barred by such an order, in addition to those for contribution and indemnity, were disguised claims for contribution or indemnitythose in which the injury is the non-settling defendant's liability to the plaintiff, or where damages are calculated based on the non-settling defendants' liability to the plaintiffs. Id. at 305-06. This distinction turns not on the presence of independent `claims' but on whether the injured party can assert independent `damages.' Id. at 306-07. Having determined that the bar order was impermissibly broad, the court remanded to the district court with instructions to determine whether any such claims existed and to modify the bar order to ensure that the only claims that are extinguished are claims where the injury is the non-settling defendants' liability to the plaintiffs. Id. at 307. The reasoning in Gerber is particularly apt in the context of this appeal. Like the appellants in Gerber, Talley does not question the district court's authority to issue bar orders that bar claims for contribution or indemnity, or disguised claims that seek such relief. He asserts precisely the same type of allegedly independent claims raised by the non-settling defendants in Gerber, arguing that his state law claims are not based on indemnity, contribution, or comparative fault with respect to Appellees' alleged liability. We conclude that the reasoning of Gerber is persuasive and that its holding regarding the permissible scope of bar orders issued in securities fraud class action settlements should be extended to apply to bar orders issued pursuant to the PSLRA. We therefore hold that such bar orders may only bar claims for contribution and indemnity and claims where the injury is the non-settling defendant's liability to the plaintiff. Id. at 306. When we apply this standard to the bar orders at issue in this appeal, it is clear that they are impermissibly broad insofar as they bar any genuinely independent claims. See Masters Mates, 957 F.2d at 1033 (finding similar bar order overly broad where it was impossible to predict state law claims potentially arising from litigation because nonsettling defendant should not be forced to give up potential state law claims without compensation). The district court erred in relying upon the interrelatedness test to reject Talley's challenge to the scope of the bar orders; whether the allegedly independent claims arise from the same facts as the settled ones is not determinative of whether a particular claim is a disguised claim for contribution or indemnity. See TBG, Inc. v. Bendis, 36 F.3d 916, 928-29 (10th Cir.1994). Given the broad language of the orders, a modification to the bar orders is necessary to ensure that the only claims that are extinguished are claims where the injury is the non-settling defendants' liability to the plaintiffs. Gerber, 329 F.3d at 307. The modified orders should also reflect that the Gerber standard, rather than the interrelatedness test, defines the appropriate scope of the bar orders.