Reply Brief — Kircher v. Putnam Funds Trust

4 FILED

DEC 13 2005

OFFICE OF THE CLERK

No. 05-409 SUPPEME COURT, U.S.

je ________________

IN THE

Supreme Court of the United States

CARL KIRCHER, ET AL..,

Petitioners,

PUTNAM FUNDS TRUST, ET AL..,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Seventh Circuit

REPLY BRIEF FOR PETITIONERS

ROBERT L. KING DAVID C. FREDERICK

701 Market Street Counsel of Record

Suite 350 PRIYA R. AIYAR

St. Louis, Missouri 63101 KELLOGG, HUBER, HANSEN,

(314) 241-4844 TODD, EVANS & FIGEL,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

December 13, 2005 (202) 326-7900

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES. ......cccccoccccccccccccccccccccccsccccccccosce il

ARGUMENT:

I. The Circuits Are In Acknowledged Conflict

Over The Appealability Of Remand Orders

a a 1

Il. Kircher I Conflicts With This Court’s

a a 7

III. In The Alternative, The Court Should Hold.

Be I I BI ceerittecstnicsiinenediccndnneinsneniiseessas i)

eee uitsihentsnaisiccniinnasibniiidaienaiehintiansvinnipinsipioieiabminaeiiiens 10

il

TABLE OF AUTHORITIES

Page

CASES

Abada v. Charles Schwab & Co., 300 F.3d 1112

ESERIES ee. reso ON Cee N IT” 2, 3,4

Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

PEI UUE vinictasninsiiiccpinsitineteisiansithininatingianitinniieseiantion 9

Dabit v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

395 F.3d 25 (2d Cir. 2005), cert. granted, 126 S.

i ae TE ccciicsicitdibibaisistessiienininaiiailiedannbiitdinabiadaibesiiin 4, 6, 10

Disher v. Citigroup Global Markets Inc., 419 F.3d

RO GS iit iintaiesici aed iaticlinialaiel 4

Erb v. Alliance Capital Mgmt., L.P., 423 F.3d 647

I altel 4

Jefferson County v. Acker, 527 U.S. 423 (1999).................. 8

Kontrick v. Ryan, 124 S. Ct. 906 (2004) ..................e cece 4,5

McCray v. New York, 461 U.S. 961 (1983) ..............00.0.000000 7

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit,

126 S. Ct. 34 (2005) (No. 04-1371)...........ccccceeeeseeeeeeeeeees 1

Scarborough v. Principi, 124 S. Ct. 1856 (2004) ............ 4,5

Spielman v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 332 F.3d 116 (2d Cir. 2003) ..0........ cee eee eee 2, 4,6

Stevens v. Brink’s Home Sec., Inc., 378 F.3d 944

IK, I kien leatnicrehi cia niente teatime 4

United Investors Life Ins. Co. v. Waddell & Reed

Inc., 360 F.3d 960 (9th Cir. 2004)............ cee 2, 3, 4,5

Venezia v. Robinson, 16 F.3d 209 (7th Cir. 1994)............... )

il

Williams v. AFC Enters., Inc., 389 F.3d 1185 (11th

TR ae TT IT mE

Willingham v. Morgan, 395 U.S. 402 (1969) .....00000.....

WTC Disaster Site, In re, 414 F.3d 352 (2d Cir. 2005)

CONSTITUTION, STATUTES, AND

REGULATIONS

RR AEE ERE I Cem ee oO OD

Class Action Fairness Act of 2005, Pub. L. No. 109-2,

I a a

Securities Act of 1933, 15 U.S.C. §§ 77a et seq.:

a Ie A WP iniccncinitsigisiinncniniinseiaiciieiebaiieiibasebadinds

TER MR ae aeRO ION ES Ae err? :

a Se PED sasiitirictiacetirncacticiedntiadesitiinemisiinsnionis

Securities Exchange Act of 1934, 15 U.S.C. §§ 78a

et seq.:

§ 28(f)(1)(A), 15 U.S.C. § 78bb(f)(1)(A)...........000000

§ 28(f)(2), 15 U.S.C. § 78bb(f)(2)........ceccesecceceeeeeees

Securities Litigation Uniform Standards Act of 1998,

Pub. L. No. 105-353, 112 Stat. 3227.00.00... passim

RRR erty a Bee SNORE ER TS PDTC

SS SEAL TOA LASSE ONL

17 C.F.R.:

§ 240.10b-5 (Rule 106-5) .....ccssccsecseccsecseesessececssessvesereseens

Respondents “acknowledge” (Opp. 10) the existence of a

square circuit split on the first question presented in the

petition. They also concede that the Court has recently

agreed to review the second question presented on the

scope of SLUSA preemption, in Merrill Lynch, Pierce,

Fenner & Smith, Inc. v. Dabit, No. 04-1371. Respondents

nonetheless argue that the jurisdictional question is not

worthy of the Court’s attention, and that the decision be-

low did not turn on the Seventh Circuit’s resolution of the

preemption question, which, according to respondents, was

mere dictum. Respondents seem to think this Court

granted certiorari in Dabit absent a true circuit conflict.

Neither position has merit. The Court should grant the

petition to consider the appealability of remand orders fol-

lowing findings that SLUSA does not preclude a lawsuit,

which is not at issue in Dabit. At the very least, the Court

should hold the petition pending resolution of Dabit.

I. The Circuits Are In Acknowledged Conflict Over

The Appealability Of Remand Orders Under

SLUSA

In Kircher I, the Seventh Circuit held, contrary to the

prior holdings of two other circuits, that a district court’s

remand order based on a conclusion that SLUSA did not

preempt the plaintiff’s claims, and that the court therefore

lacked subject-matter jurisdiction, was immediately ap-

pealable. Respondents concede that “the decision below

conflicts with the Second Circuit’s decision in Spielman

and the Ninth Circuit’s decision in Abada (which was ad-

hered to by the same court in United Investors).” Opp. 10.

Respondents nevertheless suggest that the Court should

not grant certiorari because the Second and Ninth Circuits

might reverse themselves in light of the outcome in

Kircher J. That suggestion reflects the most baseless form

of wishful thinking. There is no reason to suppose that

litigants in the Second and Ninth Circuits will seek appel-

late review of SLUSA remand orders despite clear circuit

precedent forbidding such review; that both circuits will

decide to hear a case presenting the jurisdictional question

2

en banc; and that both circuits will reverse their own

precedent because of the result in Kircher I. Indeed, re-

spondents cite no instance in which the circuits have ever

before self-resolved a conflict in such an improbable fash-

ion. The Second and Ninth Circuits squarely, and cor-

rectly, rejected the reasoning of Kircher J. They found it

clear that SLUSA’s removal provision’ authorizes removal

only of actions that fall within the scope of subsection (b),

SLUSA’s preemption provision. See, e.g., Spielman, 332

F.3d at 123 (stating that “SLUSA’s removal provision

makes removable any class action preempted by”

§ 78bb(f)(1)(A), SLUSA’s preemption provision, and that

“Congress could not have spoken more clearly”).

The Second and Ninth Circuits concluded that a remand

based on a failure to meet the requirements of SLUSA’s

preemption provision was also a decision that SLUSA’s

removal provision had not been satisfied, and thus was

indisputably a remand for lack of subject-matter jurisdic-

tion.” As the Ninth Circuit explained in United Investors,

“the district court’s subject matter jurisdiction depended

entirely on SLUSA’s preemptive scope. As such, the dis-

trict court’s jurisdictional and merits analyses were in-

separably connected: in order to establish jurisdiction over

[the defendant’s] motion to dismiss, the district court

' That provision permits removal of “[aJny covered class action

brought in any State court involving a covered security, as set forth

in subsection (b).” 15 U.S.C. § 77p(c) (emphasis added); accord id.

§ 78bb(f)(2),

* See Spielman, 332 F.3d at 125 (SLUSA completely preempts those

claims within the scope of its preemption provision; “[iJf a district court

determines the action is not a ‘preempted class action’ and, therefore,

removal was improper, the district court lacks subject matter jurisdic-

tion to further entertain the action”); id. at 131-32 (Newman, J., concur-

ring) (preemption and the existence of subject-matter jurisdiction “are

the opposite sides of the same coin"); Abada, 300 F.3d at 1119 (“[T]o

decide whether it had subject matter jurisdiction, the district court was

required to decide whether Abada’s claims were completely preempted

by SLUSA.”).

3

would have had to decide [the defendant’s}] SLUSA pre-

emption claim in its favor.” 360 F.3d at 966.

Kircher I, on the other hand, simply ignored the crucial

language in SLUSA’s removal provision — “as set forth in

subsection (b)” — and held that, to determine whether an

action was properly removed, a federal court had to con-

sider one requirement for preemption — whether the action

was a covered class action, see Pet. App. 14a — but not the

other requirements. The Seventh Circuit offered no justifi-

cation for differentiating the various prongs of SLUSA’s

preemption test when the removal provision draws no such

distinction. Kircher I argued that whether a lawsuit is “in

connection with the purchase or sale of a covered security”

is a “substantive decision” that Congress “authorized” fed-

eral courts to make. /d. However, whether an action is a

“covered class action” is no less a “substantive decision”

that Congress “authorized” federal courts to make. Fed-

eral courts’ “authority” to decide the substantive ques-

tion stems from their jurisdiction to determine their own

subject-matter jurisdiction. See Pet. 19-20; Abada, 300

F.3d at 1118.

Kircher I is flawed in other respects as well. It asserted

that the district courts had found removal proper, despite

each of those courts’ unambiguous statements to the con-

trary. See Pet. 17-18. It also relied on the language of

SLUSA’s remand provision, see Pet. App. 13a, which ap-

plies only when the remand is based on a finding that the

action, though it meets the requirements of SLUSA’s pre-

emption provision (and therefore of SLUSA’s removal pro-

vision), falls within the specific exceptions to preemption

enumerated in subsection (d) (preserving, for example,

class actions brought by States and/or their political subdi-

visions). See 15 U.S.C. § 77p(d)(4) (“if the Federal court

determines that the action may be maintained in State

court pursuant to this subsection, the Federal court shall

remand such action to such State court”) (emphasis added).

No other court of appeals has endorsed the Seventh Cir-

cuit’s erroneous interpretation of SLUSA’s removal provi-

,

4

sion, and there is no reason to think the Second and Ninth

Circuits will both reverse course and adopt the Seventh

Circuit’s minority view. Moreover, there is no prospect

that the Seventh Circuit will reconsider Kircher I, because

not only did it follow that decision in Disher, see 419 F.3d

at 652, but it has recently held that Kircher I merely fol-

lowed settled circuit precedent. See Erb v. Alliance Capital

Megmt., L.P., 423 F.3d 647, 652 (7th Cir. 2005).

Nor is there any reason to expect a reversal in position

by the Second or Ninth Circuit because of the Supreme

Court’s decisions in Scarborough and Kontrick. Those

cases have no bearing on the analysis of Spielman or

Abada. Kontrick held that a timing rule regarding when a

complaint objecting to a debtor’s discharge had to be filed

was not “jurisdictional” in the sense of affecting the court’s

subject-matter jurisdiction (as both sides in the case con-

ceded), and that Kontrick could therefore waive his defense

based on that rule. Scarborough similarly concluded

that a timing rule for fee applications did not affect

subject-matter jurisdiction. By contrast, the requirements

of SLUSA’s preemption and removal provisions are juris-

dictional in the strict sense: if those requirements are not

met, a federal court lacks subject-matter jurisdiction, and a

remand based on a conclusion that the requirements are

not satisfied is a remand for lack of jurisdiction. See

Spielman, 332 F.3d at 123 (SLUSA completely preempts,

and thus confers federal jurisdiction over, only those

claims within the scope of its preemption provision).

For that reason, respondents’ concession that the Ninth

Circuit reaffirmed the reasoning of Abada after Scarbor-

ough and Kontrick is telling. See United Investors, 360

F.3d at 963-67. The Second Circuit similarly reaffirmed

Spielman after Scarborough and Kontrick. See Dabit, 395

F.3d at 33-34. See also Stevens v. Brink’s Home Sec., Inc.,

378 F.3d 944, 948-49 (9th Cir. 2004) (relying on Abada); In

re WTC Disaster Site, 414 F.3d 352, 366 (2d Cir. 2005)

(relying on Spielman). Respondents — like the Seventh

Circuit below — are simply attempting to deflect this

5

Court’s attention away from the clear conflict created by

Kircher I by contending (Opp. 11) that Scarborough and

Kontrick would alter other circuits’ analysis. Nothing in

the reasoning or subsequent treatment of the issues in

those circuits supports that view.

Respondents’ assertion (at 12 n.4) that Williams is

“entirely consistent” with the decision below has no merit.

Williams specifically recognized that SLUSA’s removal

provision made reference to its preemption provision, and

held that the district court’s remand order was not review-

able because it followed a conclusion that the lawsuit fell

outside the scope of the preemption clause. See 389 F.3d

at 1189. Although Williams involved a lawsuit that was

not preempted because it arose under federal law, not a

lawsuit that was not “in connection with the purchase or

sale,” Kircher I itself recognized the existence of a circuit

conflict in such circumstances, i.e., where two courts ap-

plied different interpretations of SLUSA’s removal provi-

sion to non-identical facts. See Pet. App. 15a-16a (stating

that its holding conflicted with the Ninth Circuit’s decision

in United Investors). The Seventh Circuit presumably re-

garded the decisions as conflicting because the Ninth Cir-

cuit, like the Eleventh, held that SLUSA’s preemption and

removal provisions are coextensive. The bottom line is

that, once the Williams court found the plaintiffs’ claims

not to be preempted under SLUSA, it held the case to be

not removable or reviewable on appeal — and that holding

cannot be squared with Kircher I.

Respondents’ argument that the question presented is

not important because it affects only securities class ac-

tions, not ail class actions, likewise is unpersuasive. The

circuit split over the interpretation of SLUSA’s removal

provision has a substantial impact on the docket of the

federal courts. See Pet. 21. The mere fact that the statute

concerns removability of one type of lawsuit — albeit a type

important enough for Congress to address in a separate

statute — is no reason to deny certiorari where a_ well-

recognized circuit conflict exists over construing the Act.

6

Contrary to respondents’ assertion (Opp. 13), passage of

the Class Action Fairness Act of 2005 (“CAFA”) increases,

not diminishes the importance of the question whether

SLUSA remand orders are subject to appellate review.

Respondents concede that CAFA has no effect on securities

lawsuits, and the fact that Congress left SLUSA remov-

ability in the hands of the courts by exempting securities

class actions from CAFA’s scope strongly suggests an in-

tent for the Court to resolve conflicts under SLUSA when

and if they should arise.

Respondents are also wrong that Kircher I’s misinter-

pretation of SLUSA’s removal provision is “entirely consis-

tent” with CAFA’s explicit authorization of appellate re-

view of remand orders. Opp. 13. When Congress wanted

to permit appellate review of remand orders in the class

action context, it did so explicitly, as in CAFA, but not in

SLUSA. See Spielman, 332 F.3d at 127 (“Conspicuously

absent from SLUSA is any express language suggesting

that it operates to override the appealability exclusion of

Section 1447(d). ... It is not our place as jurists to supply

that which is omitted by the legislature.”).

Finally, the pendency of Dabit in no way counsels

against deciding the jurisdictional question presented.

Dabit itself does not involve that question. Moreover,

whatever Dabit decides about preemption of claims

brought by holders of securities, the lower courts will face

outstanding issues as to whether plaintiffs’ claims are “in

connection with” purchases or sales. In Dabit itself, the

plaintiffs asserted claims regarding lost fees that Merrill

Lynch argued were “in connection with the purchase or

sale” of securities, but that the Second Circuit found were

not preempted even .under the broad definition of that

phrase endorsed by Merrill Lynch. See 395 F.3d at 47.

Merrill Lynch did not seek review of that holding. The So-

licitor General's amicus brief in Dabdit similarly observes

that the case does not call upon the Court to determine the

“outer limits” of the “in connection with” requirement.

U.S. Br. at 13 n.2, No. 04-1371. If the Court rules in

7

Dabi:’s favor, respondents here concede that defendants

will likely make many attempts to appeal remand orders

that implicate the jurisdictional question presented. See

Opp. 14. But even if the Court rules for Merrill Lynch,

there will still be many disputes regarding the coverage of

the “in connection with” language, which will lead to re-

movals, remands based on findings of no preemption, and

efforts by defendants to appeal those remand orders. Even

putting aside that Dabit will not resolve all issues relating

to the scope of “in connection with the purchase or sale,”

disputes over the proper construction of SLUSA’s other

preemption requirements — e.g., that a claim allege a mis-

representation, omission, or manipulative or deceptive de-

vice — will similarly generate attempts to appeal remand

orders. Respondents are wrong to suggest that Dabit could

somehow render the jurisdictional issue moot.

In sum, further percolation on the jurisdictional question

presented will not amplify the range of arguments avail-

able. The circuits’ opposing interpretations of SLUSA’s

removal provision are well-defined and should be ad-

dressed by this Court.*

Il. Kircher I Conflicts With This Court’s Precedent

Respondents argue that the decision below is correct be-

cause Congress may confer Article II] “arising under” ju-

risdiction even when federal question jurisdiction under 28

U.S.C. § 1331 does not exist, and because Congress may

authorize federal courts to adjudicate the merits of federal

defenses, as it did in the federal officer removal statute, 28

U.S.C. § 1442. These arguments are irrelevant. Neither

addresses the crucial point that SLUSA’s removal provi-

* This case is nothing like McCray v. New York, 461 U.S. 961 (1983),

cited by respondents (at 13), where Justice Stevens suggested further

percolation was warranted because “[tjhere is presently no conflict of

decision within the federal system” and the question presented involved

peremptory challenges. 461 U.S. at 962-63 (Stevens, J., respecting de-

nial of certiorari). Such challenges had traditionally been unreviewable,

and States had only recently begun to grapple with the procedural and

substantive problems posed by judicial review.

8

sion plainly confers jurisdiction over only those claims that

SLUSA preempts. The cases cited by respondents only

emphasize the need to make a showing that the require-

ments of a particular removal statute are satisfied before a

court may uphold removal and exercise jurisdiction.

Respondents’ cases deal with the federal officer removal

statute, which allows federal officers to remove to federal

court any state-court civil action commenced against them

“for any act under color of office.” That statute upholds

important sovereignty interests not present in SLUSA. In

Jefferson County v. Acker, 527 U.S. 423 (1999), the Court

held that, to qualify for removal, the officer must establish

that the suit is “for an act under color of office,” id. at 431 -

just as to qualify for removal under SLUSA a defendant

must establish that a lawsuit is a “covered class action .. .

as set forth in subsection (b).” The Court found it unneces-

sary for the officer to prove an “airtight case on the merits”

or a “clearly sustainable defense,” as opposed to a “color-

able defense.” Jd. at 432. The Court reasoned that such a

prerequisite would defeat the statute’s purpose, which is to

have federal courts adjudicate the validity of the defense.

Here, by contrast, there is no question of defeating the

purpose of SLUSA’s removal provision. If the Court agrees

with petitioners, federal courts will still determine

whether cases are preempted and therefore properly re-

moved. But that does not mean that remand orders are

appealable, contrary to the general rule. SLUSA contains

a textual requirement that actions must be preempted to

be removed. In the consolidated cases below, defendants

simply removed the lawsuits and none of the district courts

found that they had shown SLUSA preemption.‘

. Willingham v. Morgan, 395 U.S. 402 (1969), is similarly off-point.

That case rejected a “narrow, grudging interpretation” of the federal

officer removal statute that had no basis in the text, namely, an inter-

pretation that would not permit removal even when an officer did have

a valid defense on the merits. Id. at 405-07. The Court held that, if the

defendant demonstrated a causal connection between the charged con-

duct and the asserted official activity, this showed the lawsuit was for

an act under color of office and warranted removal. /d. at 409. See also

9

_ Respondents go farther than the Seventh Circuit in ar-

guing that, so long as defendants allege SLUSA preemp-

tion in a “colorable” fashion, removal is always proper.

The Seventh Circuit conceded that, if an action is not a

“covered class action,” removal is improper. See Pet. App.

14a. The Seventh Circuit did not hold that defendants

need only make a “colorable” assertion that an action is a

covered class action.

Ill. In The Alternative, The Court Should Hold The

Petition For Dabit

Even if the Court determines not to grant review of the

jurisdictional question presented at this time, it should

hold this petition pending resolution of Dabit. Respon-

dents offer no reason why this Court should not follow its

customary practice of holding petitions raising the same

issue as a case on which certiorari has been granted. In-

stead, they assert that Kircher Il’s holding that SLUSA

does not preempt holder claims was dictum because peti-

tioners would have lost below regardless of how the Sev-

enth Circuit decided the substantive question presented.

The Seventh Circuit, however, did not understand its opin-

ion that way. Kircher II explained that, because the com-

plaint in the Spurgeon case successfully defined a class of

holders, “we must answer the question” of whether SLUSA

preempts holder claims “rather than postpone its resolu-

tion.” Pet. App. 7a. Kircher IJ did argue that some of the

plaintiffs — those whose purchases occurred during the

limitations period — could have brought their claims under

Rule 10b-5. See id. at 9a. The court thus thought those

plaintiffs might have possessed Blue Chip Stamps stand-

ing had they defined their class and pleaded their claims

differently; because they did not, the court found it neces-

Venezia v. Robinson, 16 F.3d 209, 212 (7th Cir. 1994) (noting that re-

moving party must establish that he is a federal official and that he has

a plausible defense, but need not demonstrate that he is entitled to pre.

vail on the federal defense). None of the officer removal cases supports

reading SLUSA’s removal provision to authorize appeal of remand

orders.

10

sary to resolve the substantive question presented. See

also Cert. Reply Br. at 2-3, No. 04-1371.

Respondents essentially admit that the Seventh Circuit's

ruling was not dictum in arguing that the court’s skepti-

cism about whether the consolidated cases involved true

holder claims is “dispositive as to all of the complaints but

one.” Opp. 20 (emphasis added). The class definition in

Spurgeon mandates that the Court hold this petition for

Dabit. But the market-timing claims in all of the com-

plaints can only be brought by holders of securities; market

timing simply does not affect purchasers or sellers. The

Court’s conclusions in Dabit thus will affect the proper dis-

position of the other cases below. For example, the Sev-

enth Circuit contended that the complaints other than that

in Spurgeon should be dismissed because the plaintiff

classes were defined to include investors who held shares

between two given dates, as well as possible purchasers or

sellers. See Pet. App. 6a. The Second Circuit in Dabit

made clear that, when a class definition includes holders

as well as purchasers or sellers, the complaint should be

dismissed without prejudice, to “allow the plaintiff to plead

a claim sounding only in state law if possible.” 395 F.3d at

47. Thus, if the Supreme Court agrees with the Second

Circuit, the plaintiffs in the cases other than Spurgeon

should be permitted to amend their complaints.°

CONCLUSION

For the foregoing reasons and those stated in the peti-

tion, the petition for a writ of certiorari should be granted.

In the alternative, the Court should hold the petition pend-

ing resolution of Dabit.

° On remand from Kircher II, petitioners were not permitted to

amend their complaints ~ the courts read Kircher I/ as foreclosing that

opportunity.

ROBERT L. KING

701 Market Street

Suite 350

St. Louis, Missouri 63101

(314) 241-4844

December 13, 2005

ll

Respectfully submitted,

DAVID C. FREDERICK

Counsel of Record

PRIYA R. ATYAR

KELLOGG, HUBER, HANSEN,

TODD, EVANS & FIGEL,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900