Amicus Curiae Brief — Kircher v. Putnam Funds Trust

a beset tr: us a |

MAR 28 2006

| CFFICE OF THE CLERK |

No. 05-409

Jn the Supreme Court of the Anited States

CARL KIRCHER. ET AL.

Petitioner.

\.

PUTNAM TRUST FUNDS. ET AL..

Respondents.

On Writ of Certiorari to the

United States Court of Appeals for the Seventh Circuit

BRIEF OF THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA AS AMICUS CURIAE

IN SUPPORT OF RESPONDENTS

ROBIN S. CONRAD CHARLES A. ROTHFELD

AMAR D. SARWAL Counsel of Record

National Chamber Litiga- DARREN LISITZA

tion Center, Inc. Mayer, Brown, Rawe &

1615 H Street, NW Maw LLP

Washington, DC 20062 1909 K Street, NW

(202) 463-5337 Wasluneton, DC 20006

(202) 263-30KK)

QUESTION PRESENTED

Whether the court of appeals had jurisdiction to review

the district court’s holding that petitioners’ state-law claims

are not precluded by the Secunties Litigation Uniform Stan-

dards Act of 1998.

(1)

TABLE OF CONTENTS

Page

Re Bee RIE DEED onc cncacevscoseccsncncossesnascsessnosesvesssosonsess i

TABLE OF AUTHORITIES...........0..sccccsossorsssrressscsressesseenes ll

INTEREST OF THE AMICUS CURIAE.......0.............:::000 I

SUMMARY OF ARGUMENT................::cccceeeeesseeeeessreeeeeeees 2

ITE iissscewiisstapiintiihsiseibiaeancepniainiiacbaiienapiatiunianieianuendemipets 4

I. SLUSA AUTHORIZES APPEALS FROM DIS-

TRICT COURT ORDERS REJECTING SLUSA

SE EINIIIG stcicccninintinienassnentdbiipciuinhiieidéatimninieasindnimnestceinn 4

A. The Language Of SLUSA Distinguishes Be-

tween Removability And Preemption ..................0008+. 5

B. The Unambiguous Policy Of SLUSA Con-

firms That Secunties Class Actions Belong In

PUG CT ss iissccicccnnsnvininepinstnisietomsactinnivieneteuniniaien 8

1. SLUSA Was Intended To Establish

Uniform Standards To Govern Se-

curities Class Action Litigation,

Thus Discouraging Abusive Law-

2. Petitioners’ Cramped Reading Of

SLUSA’s Removal Proviston

Would Frustrate The Statutory

ll. THE BAR ON APPELLATE REVIEW OF RE-

MANDS DOES NOT EXTEND TO CIRCUM-

STANCES IN WHICH THE MERITS AND JU-

RISDICTIONAL INQUIRIES ARE IDENTICAL........ 23

SITET sviicksontcntureniviinetndicinseartrinuieteniesenialiiniiieiipiie 27

TABLE OF AUTHORITIES

Page(s)

CASES

Abela v. General Motors Corp.,

EF Us PRA PD CEN, BOD veccssevcnsssescvstccencnssscreisesatetue 17

Adams v. Pacific Bell Directory,

Be ee FR Ge We CD vcticnecevecsnnctsccnsescsetosessconsees 14

Adkins v. Ill. Cent. R.R. Co.,

ee I I ssecndersecscnioersrvrenssoosericentens 24

Baldridge v. Kentucky-Ohio Transp., Inc.,

Pe ee O08 COU CR, FDTD) cccccrecccvncscesccsessenevesescnsonnssts 16

Blue Chip Stamps v. Manor Drug Stores,

ee ne HIPPIE ciccndssh sacl dindihapdiencenincsceoceenidclinnenstied 8. 20

BT Secs. Corp. v. W.R. Huff Asset Mgmt. Co.,

Fe ee ee Ny i cckahsnicescctcaseticosedeseuncbeiostenines 16

Cimarron Foothills Community Ass'n v. Kip-

pen, 79 P.3d 1214 (Ariz. App. Div. 2003).............cc ee 17

Cohen v. Beneficial Indus. Loan Corp.,

eR

Coopers & Lybrand v. Livesay,

Se Te IE isinesinspinidipishicnisconeiipteionshagcensndetniinin 26

Cordova v. Larsen,

94 P.3d 830 (N.M. Ct. App. 2004) 200.0... cece eeee eres 15

Dirks v. SEC,

aN NII TEI sh cscs ad scepecduinecinpiaieearinddonmndetnataci 1}

Dukes v. U.S. Healthcare, Inc.,

Be ee OIE incttcctnvsasinvnptisianntiscnsinnsesonciients 17

Etcheverry v. Tri-Ag Serv., Inc.,

Ee ee I EE Be etic erintebinvibininaioninntagdccencinnsnite 17

iV

TABLE OF AUTHORITIES — (Cont'd)

Page(s)

FBI v. Abramson,

A Us Re Cees rerivininrecnsesiesinecbindsnteitaniaiaiatnmnaia 8

Gravitt v. Southwestern Bell Tel. Co.,

396 F. Supp. 948 (W.D. Tex. 1975) oo... cccccceceeteeeeeeeeeeees 24

Gravitt v. Southwestern Bell Tel. Co.,

SP RFs. FE COT Tito iisiieivinshiniienlccmuisitahiceaaaammmeadinna 24

Harris v. Ladner,

ee Fee ee ss, AEIIR cevivinccsanciviiidsintesdnavammndaiiabialla 15

Hinterlong v. Baldwin,

720 N.E.2d 315 (IM. Ct. App. 1999) ooo. eeeeeeeeeeeees 15

Jefferson County v. Acker,

FEE Was Eee CHIR hectcicithonietunivesinsibaiammbienieaiiiiesaaminn 7

In re Loudermitch,

Sw Fe COGS CER Cie, BOIID ccsnsvssssceovssccnteticinctvcenneiin 16

Magyery v. Transamerica Fin. Advisors, Inc.,

315 F. Supp. 2d 954 (N.D. Ind. 2004)... eee 18

Mclntosh v. Atchison, Topeka & Santa Fe Ry.,

877 P.2d IL (Kan. Ct. App. 1994) ooo... eeeseeeeneeeeens 16

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

ey See Ey... Mic csiccisdzinsicudecadiiciansionas passim

Metro. Life Ins. Co. v. Taylor,

GS DAs Fe GT Pied cinensincansitnssisedscnaiandineiaicicabhcnmeiiens 17

Moses H. Cone Mem’! Hosp. v. Mercury

Consty. Corp. S60 U.S. & (IDES) cssvsoscessccorssictscessessacessse 26

Nebraska Press Ass'n v. Stuart,

SEU Gi FE a PP caksissenbsspsoecisnleinicséiiendiisidentdaaanaaiialn 26

Nutter v. Monongahela Power Co.,

SFIS FES CRG BOOP hsttiiersceivievtoscescininieadeangdlinaa 16

V

TABLE OF AUTHORITIES — (Cont'd)

Page(s)

Oglala Sioux Tribe of Pine Ridge Indian Reser-

vation v. Homestead Mining Co.,

Pe I EI, IID ecccccsesesccececcscoceccesescnssscesecs 15

Pelleport Investors, Inc. v. Budco Quality Thea-

tres, Inc., 741 F.2d 273 (9th Cir. 1984) ............... 24, 25, 26

Provience v. Valley Clerks Trust Fund,

Te 16

Roth v. McAllister Bros., Inc.,

i cctasbontcl 15

Rowland v. California Men's Colony,

ee sdsscipndecinie 26

Ruhrgas AG v. Marathon Oil Co.,

EE ee eR 14

SEC v. Texas Gulf Sulphur Co..

ee Ns II, II ooo cn cisnccnccesedossnsssscsensecosees 20

Segal v. AT&T Co.,

606 F.2d 842 (9th Cir. 1979) oo... ccccccccccecceeceeseceeeeeeseeeeee: 15

Shaw v. Charles Schwab & Co., 2003 WL

1463842 (Cal. Super. Ct. Mar. 7, 2003) .0.....00....0.0c00 16

TSC Indus. v. Northway, Inc.,

REA EES 11

Thermtron Prods., Inc. v. Hermansdorfer, °

Rs SI dc ccctaccsantnsacvcsonconsesessesocces 7, 23, 24, 26

Things Remembered, Inc. v. Petrarca,

a. scsatipdenonasotenens 24

Underwriters Nat'l Assurance Co. v. North

Carolina Life & Accident & Health Ins.

Guar. Ass'n, 455 U.S. 691 (1982) ..0...... oc cccccccccccceeeeeceees 15

vi

TABLE OF AUTHORITIES — (Cont'd)

Page(s)

United States v. Rice,

ee ey Pe i icicicheisichicciininsitdeiinsbieceioatitadaiiintianeitiddetaiiie 24

Volvo of Am. Corp. v. Shwarzer,

a il Se Ce cktcncterioreccatccccnienmtstibatincesuaisiuititntmisien 24

Waco v. United States Fid. & Guar. Co.,

ae: Se cicrnnscinniasundiibancendissdebiiessedtiiinimaniasaaei 25

In re Wage Payments Litig,,

Ge a TC irik ieittcctesinsitaitnintesiecnienaiiniiiahinins 15

Willingham v. Morgan,

es er i itcersscciacetbictionsisinitheitcinitahecilasitcmaeinahia aa?

STATUTES AND REGULATIONS

Be ies Oe i incesicensscciseentaccesnccssitbiebenatibdupescniminiiin 6,7

as Oe ee iiceaiiatetetcindiniahsictsipeieistingshaiiialainipeoseiiaiiat 4, 23

|e ERASE Ree ease nn ean Cue des passim

le Be Ie tictnpasiserencitcetnntaciticebatsiilindaeitetiqnmmeiitcnnitiieesinies 17

Class Action Fairness Act of 2005,

. 1S SB Senne 22

Private Securities Litigation Reform Act of

1995, Pub. L. No. 104-67, 109 Stat. 737.200.0000... 3

Be ae UW ceiioctinsesipsiciesniaiaiibtindasiinsnieniendiiectpdiidinpmaienaim 3

Securities Litigation Uniform Standards Act of

1998, Pub. L. No. 105-353, 112 Stat. 3227............. 1,5, 18

ee ee Oe Fe teciineteecsicstciilictndstnbaintenplnnsccantenniis 6, 14

ens FE cosiintiinncinccaniaacicenionsinisctitinialistonsiale 5

Fe an Oe Pee cvtccsctitinetinacetitincsanintviantnniaetinns 5

vil

TABLE OF AUTHORITIES — (Cont'd)

Page(s)

SEC, Release No. 33-7881, 65 Fed. Reg. 51716

MISCELLANEOUS

Administrative Office of the U.S. Courts, Fed-

eral Judicial Caseload Statistics, March 31,

2005, at http://www. uscourts.gov/

caseload2005/tables/BOSmar05.pdf ...................00065 18, 19

Alexander, Do the Merits Matter? A Study of

Settlements in Securities Class Actions,

a es Ces Ss GP I ccrvicesestnnnsictnecocsenentnceneinetetitiinen 9

Alexander, Rethinking Damages in Securities

Class Actions, 48 STAN. L. REV. 1487 (1996) ................. 10

Beisner & Miller, Class Action Magnet Courts:

The Allure Intensifies, 4 BNA CLASS ACTION

FS 8 8 een 22

Beisner & Miller, They’re Making A Federal

Case Out Of It... In State Court, 25 HARV.

ae U8 a) 22

Bohn & Choi, Fraud in the New-lssues Market:

Empirical Evidence on Securities Class Ac-

tions, 144 U. PA. L. REV. 903 (1996)............... cece i)

Buckberg et al., NERA, Recent Trends in Secu-

rities Class Action Litigation: Are WorldCom

and Enron the New Standard? (July 2005) ...........-..00.+2++ |

Class Action Lawsuits: Hearing Before the S.

Comm. on the Judiciary, 108th Cong. (2003),

available at 2003 WL 21130259... ccecececeeceseeeeeeees 21

vill

TABLE OF AUTHORITIES — (Cont’d)

. Page(s)

Coffee, Causation by Presumption? Why the

Supreme Court Should Reject Phantom

Losses and Reverse Broudo, 60 Bus. LAw.

PE iiscanecteaneccnseiiodpetintebislicongionnsuntcdnasinebeinintiasinitiniginiie 10

Coffee, Understanding the Plaintiff's Attorney:

The Implications of Economic Theory for

Private Enforcement of Law Through Class

and Derivative Actions, 86 COLUM. L. REV.

SETA ciosalesoctecicipnspcldcke hiiliada speclaipeabeipceciniagelbcibaapptinmaibesianenibicn 9

a Un I i ucemenanieemineian 19

Common Sense Legal Reform Act: Hearings on

H.R. 10 Before the Subcomm. on Telecom-

munications and Finance of the H. Comm. on

Commerce, 104th Cong., Ist Sess. (1995) ...........:ccceeees 1]

144 Cong. Rec. (daily ed. Oct. 13, 1998)... ccececeeete eens 13

Easterbrook & Fischel, Optimal Damages in

Securities Cases, 52 U. CHI. L. REV. 611

SET ERIPTER EE Set AS OR Seren anon eee rar ee NN 10

Easterbrook & Fischel, THE ECONOMIC STRUC-

TURE OF CORPORATE LAW (1991) ..000000.0....000...00cceeeeee 10, 11

Edney, Comment, Preclusive Abstention: Issue

Preclusion and Jurisdictional Dismissals Af-

ter Ruhrgas, 68 U. Cui. L. REV. 193 (2001) ................... 16

Federalist Society, Analysis: Class Action Liti-

gation—A Federalist Society Survey,

1 Class Action Watch, at http://www .fed-

ie cicsiteicnnstincvencicinicinidecbiniicaniaiinganammnsevenneibiaees 21

Garry et al., The Irrationality of Shareholder

Class Action Lawsuits: A Proposal for

Reform, 49 $.D. L. REV. 275 (2005) .................cccccceeeesenenees 9)

1X

TABLE OF AUTHORITIES — (Cont'd)

Page(s)

Haire, Lindquist & Songer, Appellate Court

Supervision in the Federal Judiciary:

A Hierarchical Perspective,

37 LAW & Soc’y REV. 143 (2003) ..............cccccceeeeeeeeeeees 19

H.R. Conf. Rep. No. 104-369 (1995) o0........cccccecceceeeeee eens 9

H.R. Conf. Rep. No. 105-803 (1998) ..........:ccccccceeeceseeeeeeees 13

H.R. Rep. No. 105-640 (1998) ooo... ccc ccceseeeeeeeeeeeeeeeeneeees 12

Howard, Class Actions Set Record Last Year In

Madison County; Possible Change In Law

Prompted Rush In Filing, St. Louis Post Dis-

ED, BA: BE, SERIO certcimtnsacinanintenevsniinimenennintesnmvininuctvinia 22

Kassis, The Private Securities Litigation Reform

Act of 1995: A Review of Its Key Provisions

and an Assessment of Its Effects at the Close

of 2001, 26 SETON HALL LEais. J. 119 (2001) .................. i]

Neuborne, The Myth of Parity,

90 HARV. L. REV. L105 (1977) ...............cccceeee cece eeeeeeeeeees 21

Newman, A Study of Appellate Reversals,

58 BROOK. L. REV. 629 (1992) 0000.0... eee cceeetereeeeeeeeeeeees 19

Perino, Did the Private Securities Litigation Re-

form Act Work ?, 2003 U. ILL. L. REV. 913 «0.0.0.0... 10

Perino, Fraud and Federalism: Preempting Pri-

vate State Securities Fraud Causes of Action,

SO STAN. L.. REV. JTS (EGGS) ........ccressercsssrsvsessoveseessvorsess 12

Posner, Judicial Behavior and Performance: An

Economic Approach, 32 FLA. ST. U. L. REV. 1259

a ccinsernccsavtinsvtingniiiniitineginicaniiniindessiapagsutiniaieaiinninnsasanmninnceiane 19

PricewaterhouseCoopers LLP. 2004 Securities

Litigation Study (Mar. 2005), available at

http://www. 1lObS.com/2004_study.pdf ................-.:eee 1]

X

TABLE OF AUTHORITIES — (Cont’d)

Page(s)

Pritchard, Markets as Monitors: A Proposal to

Replace Class Actions with Exchanges as Se-

curities Fraud Enforcers, 85 VA. L. REV. 925

Rosen, The Statutory Safe Harbor for Forward-

Looking Statements After Two and a Half

Years: Has It Changed the Law? Has It

Achieved What Congress Intended? , 76

WAGE. Ui. BG, GES CRIB ei cecvvcccccsecscoveccccescoccescosscccsesscees 12

SEC, Office of General Counsel, Report to the

President and the Congress on the First Year

of Practice Under the Private Securities Liti-

gation Reform Act of 1995, Apt. 1997 .......cccccceeceeees Raades On

Securities Litigation Reform Proposals: Hear-

ings on S. 240, S. 667, and H.R. 1058 Before

the Subcomm. on Securities of the S. Comm.

on Banking, Housing, and Urban Affairs,

104th Cong., Ist Sess. (1995) oo... cccccccceeceeeesseeseeeeneneennes 10

S. Rep. No. 104-98 (1995) 00... cecceseeereeseseeeeeeeeeeees 9, 10, 11

S. Rep. No. 109-14 (2005) 0.0... cceccceececeseeeseeeeeeeeeeeeeees 21, 22

18A Wright, Miller & Cooper, FEDERAL PRAC-

TICE AND PROCEDURE (3d ed. 1998) .............00ccccceeeceeeeees 15

INTEREST OF THE AMICUS CURIAE

The Chamber of Commerce of the United States of

America is the world’s largest business federation, represent-

ing a membership of more than three million businesses and

organizations of every size, in every industry sector and geo-

graphical region of the country.' A central function of the

Chamber is to represent the interests of its members in im-

portant matters before the courts, Congress, and the Execu-

tive Branch. To that end, the Chamber has filed amicus

briefs in numerous cases addressing issues of vital concern to

the Nation’s business community. The Chamber filed a brief

in Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547

U.S. ___ (2005), which, like this case, involved the meaning

of the Securities Litigation Uniform Standards Act of 1998

(“SLUSA”), Pub. L. No. 105-353, 112 Stat. 3227 (codified

as amended in various sections of 15 U.S.C.). |

The Chamber has a substantial interest in the issue pre-

sented in this case: the appealability of a federal district

court’s determination that a securities class action arising un-

der state law is not preempted by SLUSA. Secunties class

action litigation imposes an enormous tol] on the national

economy, affecting virtually every public corporation in

America and costing American businesses billions of dollars

in settlements every year. Indeed, a recent study concluded

that, over a five-year period, the average public corporation

has a 10% probability of facing at least one securities class-

action lawsuit. Buckberg et al., NERA, Recent Trends in

' Pursuant to Rule 37.6 of the Rules of this Court, amicus states

that this brief was not authored in whole or in part by counsel for a

party and that no person or entity, other than the amicus curiae, its

members, and its counsel made a monetary contribution to its

preparation and submission. The written consents of the parties to

the filing of this brief have been filed with the Clerk of the Court.

th

Securities Class Action Litigation: Are WorldCom and Enron

the New Standard? 2 (July 2005).

Congress has enacted legislation to rein in some of the

worst abuses of securities class-action litigation, assuring that

class actions involving nationally traded securities are gov-

ered by federal standards and may be heard in federal court.

Petitioners’ argument in this case — which contends that ap-

pellate review is unavailable when a federal district court re-

mands a removed securities class action to state court — de-

parts from the language of the SLUSA and would frustrate

the realization of Congress's goal to reform securities litiga-

tion. The Chamber believes that the experience of its mem-

bers with abusive class action litigation makes it well situated

to address the issues presented here.

SUMMARY OF ARGUMENT

1. Petitioners’ argument rests on a misreading of

SLUSA’s removal provision. Petitioners contend that, where

removal to federal court of a state-law claim asserted to be

preempted by SLUSA is concerned, the merits and jurisdic-

tional inquiries are identical. On this reading of the removal

provision, a district court has jurisdiction to entertain the re-

moved action only if it first resolves the merits of the suit by

determining that plaintiffs’ claims are in fact preempted, at

which point the case must promptly be dismissed —- an ap-

proach to removal that the Court, in a related setting, has la-

beled “anomalous.” Willingham v. Morean, 395 U.S. 402,

407 (1969).

That approach is not a plausible construction of the

SLUSA removal provision. Instead, SLUSA 1s most natu-

rally read as providing that removal is proper when the de-

fendant asserts a colorable argument that the requirements

for preemption are satisfied. That understanding follows

from the statutory language, which separately treats remov-

ability and preemption. Indeed, the Court seemed to read the

‘a

removal provision just that way in Dabit, where it noted that

the statute “makes all ‘covered class actions’ filed in state

court removable.” Slip op. 10 n.7. Under this reading of

SLUSA, removal here plainly was proper; appellate review

of the district court’s rejection of respondents’ preemption

defense therefore follows as a matter of course.

2. The statutory background and policy confirm that dis-

trict court decisions rejecting a SLUSA preemption defense

are not insulated from appellate review. SLUSA is a part of

Congress’s comprehensive effort, begun with enactment of

the Private Securities Litigation Reform Act of 1995

(“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (codified as

amended at 15 U.S.C. § 77a et seq.), to curb abusive secur-

ties litigation. The PSLRA broadly reformed the process of

federal securities litigation, establishing various safeguards

against meritless strike suits. When plaintiffs sought to cir-

cumvent the PSLRA by bringing securities-fraud class ac-

tions under state law in state court, Congress responded by

enacting SLUSA, which assures that securitics class action

litigation is governed by uniform national standards.

SLUSA’s removal provision, which makes it possible for

federal courts to determine whether state-law securities class

actions are precluded by SLUSA’s substantive provisions, is

a “key” element of the statute. Dabit, slip op. 10 n.7.

Against this background, petitioners’ approach — which

precludes appellate review of a district court’s decision re-

jecting a SLUSA preemption defense in any case that has

becn removed from state to federal court — would substan-

tially undermine the congressional goals. Under petrtioners’

reading, it is likely that defendants will never be able to test

on appeal in any court their contention that particular state-

law securities claims are preempted by federal law. This

would make it rmpossible to achieve uniformity in the law.

That, in turn, would encourage forum shopping by plaintiffs,

inevitably would lead to the survival of abusive lawsuits, and

therefore would foment the very harms that Congress sought

to prevent when it enacted the PSLRA and SLUSA.

3. Even if petitioners’ reading of SLUSA is correct, their

understanding of 28 U.S.C. § 1447(d) is not. That provision

must be construed together with Section 1447(c) and in light

of its purposes. Those purposes are undisputed: by barring

appeal of a district court’s decision to remand a case to state

court, Section 1447(d) seeks to prevent interruption of litiga-

tion regarding the merits of a lawsuit by protracted disputes

about peripheral jurisdictional or procedural matters. That

policy, however, has no application in this case. Here, the

jurisdictional issue (on petitioners’ view of the case) 1s not

distinct from the merits; to the contrary, petitioners submit

that determination of jurisdiction requires resolution of the

merits of the principal defense to liability. In such circum-

stances, the rationale for precluding appeal of remand orders

— avoiding delay in adjudication of the ments — ts wholly

inapplicable.

ARGUMENT

I. SLUSA AUTHORIZES APPEALS FROM DIS-

TRICT COURT ORDERS REJECTING SLUSA

PREEMPTION

There 1s no doubt about the goal of SLUSA: Congress

sought to implement uniform national standards governing

securities class action litigation, while preventing the use of

State-law securities claims to circumvent the federal-law re-

forms enacted by the PSLRA. See Dabit, slip op. at 9-10. It

is manifest, however, that petitioners’ contention in this case

- which would preclude appellate review of distnct court

decisions rejecting the preemption defense created by

SLUSA -— would frustrate those goals. In this case. as in

Dabiut, a “broad construction” of the relevant provision of

SLUSA “follows not only from ordinary principles of statu-

tory construction but also from the particular concerms that

culminated in SLUSA’s enactment. A narrow reading of the

Statute would undercut the effectiveness of the 1995 Reform

Act and thus run contrary to SLUSA’s stated purpose, viz.,

‘to prevent certain State private securities class action law-

suits alleging fraud from being used to frustrate the objcc-

tives’ of the 1995 Act.” Slip op. 13-14 (quoting SLUSA §

2(5), 112 Stat. 3227). Petitioners’ approach accordingly

should be rejected and the decision below affirmed.

A. The Language Of SLUSA Distinguishes Between

Removability And Preemption

At the outset, petitioners’ argument rests on a misreading

of SLUSA’s removal provision. Petitioners’ central argu-

ment is that, where SLUSA preemption is concerned, the

merits and jurisdictional inquiries in a removed case are iden-

tical, on this reading of the removal provision, the district

court has jurisdiction to entertain the removed action only if

it first resolves the merits of the suit by determining that the

plaintiffs’ claim is in fact preempted by federal law. Peti-

tioners thus understand SLUSA to dictate, as the Court put it

when addressing a very similar argument regarding another

removal provision, “the anomalous result of allowing re-

moval only when the [defendants} had a sustainable de-

fense.” Willingham v. Morgan, 395 U.S. 402, 407 (1969).

But this peculiar and counter-intuitive approach does not fo!-

low from the statutory text.

SLUSA’s removal provision states that

[a]ny covered class action brought in any State

court involving a covered security, as set forth in

subsection (b) of this section, shall be removable to

the Federal district court for the distnct in which the

action is pending. and shall be subject to subsection

(b).

15 U.S.C. §§ 77p(c), 78bb(f)(2) (emphasis added). Respon-

dents persuasively show that this language does not require

satisfaction of all of the requirements for preemption before

removal is appropriate, and we will not repeat that argument

in detail. It bears emphasis, though, that the statute is most

naturally read as providing that removal is proper whenever

the defendant asserts a colorable argument that the require-

ments for preemption are satisfied. That understanding fol-

lows from the removal provision’s broad directive that fed-

eral courts may entertain “any” class action “involving” a

covered security, as well as its separate treatment of remov-

ability (a class action “shall be removable”) and preemption

(removed case “shall be subject to subsection (b)"). Indeed,

the Court recently seemed to read the provision in just that

way in Dabit. There, the Court described SLUSA’s removal

language as a “key provision of the statute [that] makes all

‘covered class actions’ filed in state court removable to fed-

eral court” (slip op. 10 n.7); the Court did not suggest that a

class action is removable only if the district court first deter-

mines that preemption is required by [5 U.S.C. § 77p(b), the

SLUSA preclusion provision.

This reading of SLUSA also accords with the Court's ap-

proach to analogous removal provisions. The statute permit-

ting federal officer removal, for example, authorizes removal

to federal court of a suit against a federal officer if the action

is for “any act unde» color of such office.” 28 U.S.C. §

1442(a)(1). The Court has not read that statute to provide for

removal only if the district court first determines definitively

that the defendant in fact was acting under color of federal

office, as petitioners’ approach here would seem to dictate.

Instead, the Court has held the language to be

[b]road enough to cover all cases where federal offi-

cers can raise a colorable defense arising out of

their duty to enforce federal law. One of the pn-

mary purposes of the removal statute — as its his-

tory clearly demo» strates was to have such de-

fenses litigated in te federal courts. [Petitioners’ |

position * * * would have the anomalous result of

allowing removal only when the officers had a

Clearly sustainable defense. The suit would be re-

moved only to be dismissed. Congress clearly

meant more than this * * * . The officer need not

win his case before he can have it removed. In

cases like this one, Congress has decided that fed-

eral officers * * * require the protection of a federal

forum. This policy should not be frustrated by a

narrow, grudging interpretation of § 1442(a)(1).

Willingham, 395 U.S. at 407 (emphasis added). See also Jef-

ferson County v. Acker, 527 U.S. 423, 431-432 (1999).

The same considerations apply here. The language of

Section 1447(d) likewise is “[bjroad enough to cover all

cases where [class action defendants] can raise a colorable

defense” of SLUSA preemption. By the same token, enact-

ment of the SLUSA removal provision itself shows that, “[iJ]n

cases like this one, Congress has decided that [class action

defendants] * * * require the protection of a federal forum.”

Because the preemption defense here surely is more than

colorable —- as the holding in Dabit establishes beyond dis-

pute — removal accordingly was proper. That being so, the

district court’s reyection of the preemption defense cannot be

thought to have retroactively divested that court of jurisdic-

tion to entertain the suit. Appellate review of the distnct

court’s preemption decision therefore is warranted as a mat-

ter of course.”

~ For reasons explained by respondents (at Br. 12-16), an other-

wise appealable decision cannot be insulated from review simply

because the district court purports to base its remand on lack of

jurisdiction. In Thermtron Prods., Inc. v. Hermansdorfer, 423

U.S. 336 (1976), for example, mandamus surely would not have

become unavailable had the district court asserted that it lacked

jurisdiction to decide the case because its docket was crowded.

B. The Unambiguous Policy Of SLUSA Confirms

That Securities Class Actions Belong In Federal

Court

Petitioners’ reading of SLUSA accordingly misunder-

stands the statutory language. But to the extent that there is

any doubt on that score, the statutory background and policy

confirm that SLUSA should not be read to insulate district

court decisions that reject a preemption defense from appel-

jate review. The SLUSA was designed to establish uniform

national standards governing securities litigation, while dis-

couraging abusive securities class actions. Petitioners’ read-

ing of the SLUSA removal provision would undermine both

of those goals, and thus would frustrate the paramount “fed-

eral interest in protecting the integrity and efficiency of the

market for nationally traded securities.” Dabit, slip op. 5.

As a consequence, respondents’ reading of SLUSA is the one

that “more accurately reflects the intention of Congress, is

more consistent with the structure of the Act, and more fully

serves the purposes of the statute.” FBI v. Abramson, 456

U.S. 615, 624-625 (1982).

I. SLUSA Was Intended To Establish Uniform

Federal Standards To Govern Securities Class

Action Litigation, Thus Discouraging Abusive

Lawsuits

a. To appreciate the extent to which petitioners would

depart from the congressional intent, it is useful to begin with

a consideration of the underlying problem that Congress

sought to address when it enacted SLUSA: Congress was

concerned that securities class action litigation fostered abu-

sive lawsuits, with destructive consequences for the national

economy. As this Court has recognized, securities-fraud liti-

gation presents “a danger of vexatiousness different in degree

and in kind from that which accompanies litigation in gen-

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

723, 739 (1975)) because such suits contain unique elements

that encourage defendants to settle even insubstantial claims

— and that, as a consequence, encourage plaintiffs to file

them. See generally Coffee, Understanding the Plaintiff's

Attorney: The Implications of Economic Theory for Private

Enforcement of Law Through Class and Derivative Actions,

86 COLUM. L. REV. 669 (1986).

The direct costs of securities litigation impose enormous

burdens on defendants,’ while the sheer size of the damages

demanded in national class actions makes it attractive for de-

fendants to forgo the adversarial process and settle even

meritless suits to avoid the prospect of ruinous liability. See

H.R. Conf. Rep. No. 104-369, at 37-38 (1995); S. Rep. No.

104-98, at 5, 9 (1995). That is so regardless of the strength

of the plaintiffs’ claims; the costs and nsks of litigation make

the merits of securities suits largely irrelevant to the decision

to settle. Alexander, Do the Merits Matter? A Study of Set-

tlements in Securities Class Actions, 43 STAN. L. REV. 497,

516-517 (1991).

These insubstantial strike suits are of little benefit to

shareholders. In addition to the significant transaction costs

* See, e. g.. Kassis, The Private Securities Litigation Reform Act of

1995. A Review of Its Key Provisions and an Assessment of Its Ef-

fects at the Close of 2001, 26 SETON HALL LEGIS. J. 119, 124

(2001) (describing the discovery process as “financial blood let-

ting’); see also Pritchard, Markets as Monitors: A Proposal to Re-

place Class Actions with Exchanges as Securities Fraud Enfore-

ers, 8S VA. L. REV. 925, 953 (1999) (lost productivity may

“dwarf the expense of attorneys’ fees”); S. Rep. No. 104-98, at I4

(1995).

* See also Garry et al., The Irrationality of Shareholder Class Ac-

tion Lawsuits: A Proposal for Reform, 49 $.D. L. Rev. 275, 287

n.98 (2005). Bohn & Choi, Fraud in the New-/ssues Market: Em-

pirical Evidence on Securities Class Actions, 144 U. Pa. L. REV.

903, 979-980 (1996).

10

such suits entail, to the extent that class members still own

shares in the issuer, “payments by the corporation to settle a

class action amount to transferring money from one pocket to

the other, with about half of it dropping on the floor for law-

yers to pick up.” Alexander, Rethinking Damages in Securi-

ties Class Actions, 48 STAN. L. REV. 1487, 1503 (1996); see

also Coffee, Causation by Presumption? Why the Supreme

Court Should Reject Phantom Losses and Reverse Broudo,

60 Bus. LAW. 533, 542-543 (2005); Perino, Did the Private

Securities Litigation Reform Act Work?, 2003 U. ILL. L. REV.

913, 921-922: Easterbrook & Fischel, Optimal Damages in

Securities Cases, 52 U. Cui. L. REV. 611, 638-639 (1985).

At the same time, the costs of abusive litigation are felt

throughout the national economy. These costs are borne dis-

proportionately by the most innovative and entrepreneunial

companies, which are targeted because the volatility of their

share price attracts the attention of the plaintiffs’ var’; the

risk of liability deters competent individuals from serving as

independent directors on corporate boards (see S. Rep. No.

104-98, at 21); accounting firms, often named as deep-

pocket defendants, become less willing to perform auditing

services (see id. at 21-22); and D&O insurers must increase

premiums or stop underwriting policies altogether. See id. at

21.

Furthermore, because any statement by an issuer that

later is proven inaccurate or any prediction that fails to come

true could form the predicate for an allegation of fraud, the

prospect of liability chills corporate disclosures of informa-

* See Securities Litigation Reform Proposals: Hearings on S. 240,

S. 667, and H.R. 1058 Before the Subcomm. on Securities of the S.

Comm. on Banking, Housing, and Urban Affairs, 104th Cong., Ist

Sess. 109 (1995) (testimony of George Sollman on behalf of the

American Electronics Association) (estimating that about half of

the top 100 companies in Silicon Valley have been subjected to a

securities Class action lawsuit at least once).

tion that could be useful to investors, thus directly frustrating

the disclosure objectives of the federal secunties laws. See

id. at 1S—16; Easterbrook & Fischel, THE ECONOMIC STRUC-

TURE OF CORPORATE LAW 339 (1991) (noting that because a

firm that discloses information “inevitably takes the risk of

excessive optimism and excessive pessimism,” a “rule penal-

izing excesses in either direction would lead to silence” about

a company’s prospects). The risk of liability also muzzles

corporate managers’ communications with analysts, which

are “necessary to the preservation of a healthy market.”

Dirks v. SEC, 463 U.S. 646, 658-659 (1983); see also SEC,

Release No. 33-7881, 65 Fed. Reg. 51716, 51718 n.19

(2000) (“fear of legal liability” “chill[s]” communications

with analysts). And when SEC disclosure requirements do

not make silence an option, issuers may respond to the threat

of* unconstrained liability with defensive disclosures that

“bury the shareholders in an avalanche of trivial informa-

tion.” TSC Indus. v. Northway, Inc., 426 U.S. 438, 448-449

(1976).°

* In addition to detracting from the quantity and quality of informa-

tion received by investors. securities class-action abuse reduces the

overall competitiveness of United States securities markets, as fear

of potential liability deters foreign companies from listing on do-

mestic stock exchanges. Common Sense Legal Reform Act: Hear-

ings on H.R. 10 Before the Subcomm. on Telecommunications and

Finance of the H. Comm. on Commerce, 104th Cong.. Ist Sess.

221, 224 (1995) (statement of former SEC Chairman Richard C.

Breeden) (“Based on conversations with potential issuers of securt-

ties all over the world, the fear of litigation inhibits foreign firms

from participating in the U.S. market|s].”), see also Pricewater-

houseCoopers LLP. 2004 Securities Litigation Study 2 (Mar.

2005), available at http://www. lObS.conV/2004_ study .pdf (report-

ing that a record 29 foreign issuers were sued in domestic securt-

ties Class actions in the 2004 fiscal year).

12

b. In the face of these abuses, Congress acted to broadly

reform the process of securities litigation. This movement

began with enactment of the PSLRA in 1995. That statute

took far-ranging steps to rein in meritless litigation and in-

crease issuers’ incentives to disclose information to investors.

The PSLRA’s reforms included creation of a “safe harbor”

for certain “forward-looking statements” by issuers, restric-

tions on the selection of lead class action plaintiffs in securi-

ties-fraud suits, sanctions for frivolous litigation, a stay of

discovery pending resolution of motions to dismiss, and

heightened pleading standards. See Dabit, slip op. 9.

As the Court recognized in Dabit, however, plaintiffs re-

sponded to enactment of the PSLRA by bringing secunties-

fraud class actions in state court under state law. See Dabit,

slip op. 9-10. Prior to the enactment of the PSLRA, state

securities laws — the subject of SLUSA — played virtually

no role in class-action litigation involving securities traded

on national exchanges. But that changed as plaintiffs and

their attorneys attempted to circumvent the PSLRA’s re-

forms. The plaintiffs’ bar had brought “essentially no sig-

nificant securities class action litigation” in state courts be-

fore the effective date of the PSLRA. H.R. Rep. No. 105-

640, at 10 (1998). In the two years after the enactment of the

PSLRA, however, at least 104 state-law securities class ac-

tions were filed. Rosen, The Statutory Safe Harbor for For-

ward-Looking Statements After Two and a Half Years: Has It

Changed the Law? Has It Achieved What Congress In-

tended?, 76 WASH. U. L.Q. 645, 670 (1998). Predictably, the

weaker cases, which would not have survived in federal court

after enactment of the PSLRA, were the ones filed tn state

court. See Penno, Fraud and Federalism: Preempting Pri-

vate State Securities Fraud Causes of Action, SO STAN. L.

REV. 273, 307-318 (1998). SEC. Office of General Counsel.

Report to the President and the Congress on the First Year of

Practice Under the Private Securities Litigation Reform Act

of 1995, Apr. 1997, at 84 (noting that increase in filings of

13

state securities class actions “may reflect a migration of

weaker cases to state court’). The obvious effect of the

movement of securities class actions to state court was to

frustrate the PSLRA’s purposes and to resurrect the abusive

practices that Congress had sought to discourage.

In this context, there is no mystery about Congress's goal

in enacting SLUSA: that Act's preemption of state law and

attendant removal provision were intended to “stem this

‘shif[t] from Federal to State courts’ and ‘prevent certain

State private securities class action lawsuits alleging fraud

from being used to frustrate the objectives of’ the Reform

Act.” Dabit, slip op. 10 (citation omitted). Representative

Bliley, the House Manager of SLUSA, remarked that “[t}he

premise of this legislation is simple: /awsuits alleging viola-

tions that involve securities that are offered nationally be-

long in Federal court.” 144 Cong. Rec. H10771 (daily ed.

Oct. 13, 1998) (emphasis added); see also H.R. Conf. Rep.

No. 105-803, at 13 (1998) (“{The SLUSA] makes Federal

court the exclusive venue for most securities class action

lawsuits.”’).

2. Petitioners’ Cramped Reading Of SLUSA’s

Removal Provision Would Frustrate The

Statutory Goals

Against this background, it 1s manifest that petitioners’

approach — which reads the SLUSA removal provision to

require an immediate remand to state court when the distnct

court finds that the plainuffs’ claims are not preempted —

would substantially undermine the congressional goals. That

approach would make 1t difficult (and sometimes impossible)

to achieve uniformity in the rules governing nationally traded

securities. It would encourage forum-shopping by secunties

fraud class-action plaintiffs, who typically have their chovce

of venue. It would foster continuation of the abusive prac-

tices that Congress sought to prevent. And it would, as a

consequence. have the pernicious effects on the securities

14

markets and the broader national economy that prompted en-

actment of the PSLRA and the SLUSA. Petitioners’ ap-

proach accordingly should be rejected.

a. To begin with, if remand orders under SLUSA may

not be appealed, there is a substantial prospect that defen-

dants never wil] be able to test on appeal in any court their

contention that particular state-law securities claims are pre-

empted by federal law. Petitioners assert that a remand under

SLUSA necessarily must be premised on the district court's

determination that the plaintiff's claim is not preempted. If

that is so, state courts likely will conclude on remand that

preclusion doctrines such as the law of the case or collateral

estoppel bar defendants from relitigating the question

whether the state-law claims at issue fall within the preemp-

tive scope of 15 U.S.C. § 77p(b).

Indeed, this Court has suggested that state courts may ac-

cord collateral estoppel effect to federal district court deter-

minations made in the course of remands for lack of subject-

matter jurisdiction. In Ruhrgas AG v. Marathon Oil Co., 526

U.S. 574, 586 (1999), the Court hypothesized a federal dis-

trict court remanding a breach-of-contract action for lack of

the requisite amount in controversy to support diversity ju-

risdiction on the ground that the district court believed state

law to bar punitive damages in such cases. The Court re-

marked that the holding as to the unavailability of punitive

damages “will travel back with the case. Assuming a fair

airing of the issue in federal court, that court’s ruling on per-

muissible state-law damages may bind the parties in state _

court, although it will set no precedent otherwise governing

state-court adjudications.” hid.

Unsurprisingly, many state courts have accepted this

Court's suggestion, ruling that law-of-the-case or estoppel

doctnnes foreclose relitigation of defenses necessarily re-

jected by the federal district court in the course of determin-

ing that removal was improper. For cxample. in Adams vy.

15

Pacific Bell Directory, 111 Cal. App. 4th 93 (2003), the de-

fendant removed the case. persuading the district court that

the state-law claims against it were preempted and that the

preemption defense involved a federal question that sup-

ported federal question jurisdiction. After the court of ap-

peals reversed that ruling and ordered the case remanded for

lack of a federal question, the state court held that the defen-

dant was barred under “the principles of the law of the case”

from renewing its preemption defense in state court. /d. at

97-99,’

” See also Harris v. Ladner, 828 A.2d 203, 205 (D.C. 2003)

(“Whether or not the [federal] disirict court’s rulings were ‘law of

the case,’ not an abuse of discretion to refuse to reconsider them

following remand because “upon remand of a removed case, * * *

the receiving court treats the pretrial orders of the [district] court as

if they were its own.”); In re Wage Payments Litig,, 759 A.2d 217,

225 (Me. 2000) (holding that state court bound by decision of fed-

eral district court prior to remand), Cordova v. Larsen, 94 P.3d

830, 835 (N.M. Ct. App. 2004) (declining to adopt a “per se rule

affording no preclusive effect to a remanding federal court's or-

ders”), Hinierlong v. Baldwin, 720 N.E.2d 315, 323 (ill. Ct. App.

1999) (“|DJecisions of the lower federal courts are not binding on

State courts. except insofar as the decision may become the law of

the case * * *."’) (citations omitted); accord Underwriters Nat'l

Assurance Co. ¥. North Carolina Life & Accident & Health Ins.

Guar. Ass'n, 455 U.S. 691, 706-707 & n.13 (1982) (principles of

res judicata apply to questions of jurisdiction”); Oglala Sioux

Tribe of Pine Ridge Indian Reservation v. Homestead Mining Co..,

722 F.2d 1407, 1412 (8th Cir. 1983) Gurisdictional dismissal pre-

cludes relitigation of statute's constitutionality), Segal v. AT&T

Co., 606 F.2d 842, 844-845 (9th Cir. 1979) (jurisdictional dis-

missal forecloses revisiting issues decided), Roth v. McAllister

Bros., Inc., 316 F.2d 143. 145 (2d Cir. 1963) (estopping defendant

from denying that plaintiff was a seaman, the basis for a prior ju-

risdictional dismissal); see generally 18A Wright, Miller & Coo-

per, FEDERAL PRACTICE AND PROCEDURE § 4436, at 340 (3d ed.

1998) (Although a dismissal for lack of jurisdiction does not bar a

16

To be sure, some federal courts of appeals addressing

preemption under ERISA have indicated that a district

court's rejection of the argument that state-law claims are

“completely preempted” — and thus its holding that the com-

plete preemption doctrine does not raise a federal question

authorizing removal — does not preclude defendants from

renewing their preemption defenses in state court. See, e.g.,

In re Loudermilch, 158 F.3d 1143, 1146 (11th Cir. 1998);

Nutter v. Monongahela Power Co., 4 F.3d 319, 321-322 (4th

Cir. 1993); Baldridge v. Kentucky-Ohio Transp., Inc., 983

F.2d 1341, 1347-1350 (6th Cir. 1993). Two state court deci-

sions have embraced this view specifically with respect to

SLUSA. See BT Secs. Corp. v. W.R. Huff Asset Mgmt. Co.,

891 So. 2d 310, 316 & n.1t (Ala. 2004) (citing Loudermilch,

supra, for proposition that state court not “bound” by re-

manding court’s resolution of preemption under the SLUSA);

Shaw v. Charles Schwab & Co., 2003 WL 1463842, at *2

(Cal. Super. Ct. Mar. 7, 2003) (concluding that district

court's rejection of preemption under the SLUSA was not

“res judicata” on relitigation of defense in state court).

second action as a matter of claim preclusion, it does preclude re-

litigation of those issues determined in ruling on the jurisdiction

question.”), Edney, Comment, Preclusive Abstention: Issue Pre-

clusion and Jurisdictional Dismissals After Ruhrgas, 68 U. CHI. L.

REV. 193, 197 (2001) (“[A] jurisdictional dismissal can be the ba-

sis for issue preclusion in that other court. In general, a jurisdic-

tional dismissal precludes relitigation of the ‘precise issue of the

jurisdiction’ of the dismissing court.”). But see, ¢.g., McIntosh v.

Atchison, Topeka & Santa Fe Ry., 877 P.2d 11, 16 (Kan. Ct. App.

1994) (“The federal district court's decision that the RLA did not

preempt MclIntosh’s claims was not binding on the state district

court [following remand]."); Provience v. Valley Clerks Trust

Fund, 163 Cal. App. 3d 249, 256-257 (1984) (refusing to accord

law of the case status to remanding district court's rejection of fed-

eral preemption defense).

17

But other state courts asked to accord preclusive effect to

remands under SLUSA likely will decline to follow the ER-

ISA decisions. A state court might well distinguish the ER-

ISA cases by relying on the difference in standards under

ERISA for determining whether a state-law action is “com-

pletely preempted” (thus authorizing removal under Mero.

Life Ins. Co. v. Taylor, 481 U.S. 58, 63-64 (1987)), and

whether a state-law action is merely “substantively pre-

empted” on the merits. Such a court could reason that an

ERISA defendant may not remove a state-law claim to fed-

eral court because the claim falls outside of the ambit of

“complete preemption,” but nevertheless enjoys a substantive

preemption defense under 29 U.S.C. § 1144. See, e.g.,

Dukes v. U.S. Healthcare, Inc., 57 F.3d 350, 355 (3d Cir.

1995). On petitioners’ reading of SLUSA, though, there is

no such distinction between the standard governing remand

and the one determining the outcome of the merits of the pre-

emption defense.

Moreover, even if a state court does not accord full pre-

clusive effect to the remanding judge’s rejection of SLUSA

preemption, a second obstacle to revisiting that rejection re-

mains: as a practical matter, state courts are likely to defer to

the federal court’s judgment that federal law does not pre-

empt a state rule. See, e.g., Abela v. General Motors Corp.,

677 N.W.2d 325, 327 (Mich. 2004) (lower federal court deci-

sions on federal law persuasive if not binding); Etcheverry v.

Tri-Ag Serv., Inc., 993 P.2d 366, 368 (Cal. 2000) (“decisions

of the lower federal courts * * * on federal questions * * *

are persuasive and entitled to great weight’); Cimarron

Foothills Community Ass'n v. Kippen, 79 P3d 1214, 1217

(Anz. App. Div. 2003) (“We generally defer to federal

courts’ interpretation of federal law.”).

The consequence of petitioners’ approach accordingly

would be that the district court’s decision to remand would

effectively resolve the SLUSA preemption claim. This would

18

make for an asymmetrical rule: although a defendant whose

preemption claim was rejected could not obtain appellate re-

view (or an appellate determination in state court) regarding

preemption, plaintiffs whose claims were held preempted

could test that decision on appeal. It is difficult to believe

that Congress, which enacted SLUSA specifically to keep

combat abusive securities claims, meant to establish such a

regime.

b. That is particularly so because petitioner's approach

would have effects that are directly contrary to SLUSA’s

goals. Most obviously, perhaps, a bar on appellate review

would make it virtually impossible to achieve uniformity in

the law. That prospect already is apparent: “the district court

cases appear to be all over the map on the issue of what state

law claims are preempted by SLUSA.” Magyery v. Trans-

america Fin. Advisors, Inc., 315 F. Supp. 2d 954, 959 (N.D.

Ind. 2004). Needless to say, that outcome “squarely conflicts

with the congressional preference for ‘national standards for

securities class action lawsuits involving nationally traded

secunities.’” Dabit, slip op. 14 (quoting SLUSA § 2(5), 112

Stat. 3227).

The certainty of disparate results, moreover, necessarily

means that district courts will, not infrequently, err when re-

jecting claims of preemption. Though the error rate of dis-

trict courts is difficult to estimate, figures for the twelve-

month period ending March 31, 2005, indicate that the courts

of appeals reversed district court decisions in private civil

actions in almost twelve per cent of appeals, with the reversal

rate approaching twenty per cent in the Seventh Circuit.

Administrative Office of the U.S. Courts, Federal Judicial

Caseload Statistics, March 31, 2005 tab. B-S, at http://www.

uscourts.gov/caseload2005/tables/BOSmar05.pdf. These fig-

ures doubtless significantly understate the likelihood of error

where SLUSA claims are involved. The reversal rate for

complex cases was higher, for example, courts of appeals

19

reversed 17.5 per cent of bankruptcy appeals, with that rate

exceeding forty per cent in the Third Circuit. /bid. And

Judge Newman's study of reversals in the Second Circuit re-

ported that the most frequently reversed category of decisions

in the two-year sample, not counting “miscellaneous,” were

those interpreting federal statutes. Newman, A Study of Ap-

pellate Reversals, 58 BROOK. L. REV. 629, 633 (1992).

Although these reversal rates provide only a rough proxy

for the rate of judicial error, they do suggest that a substantial

number of decisions to remand under SLUSA will be wrong.

And the risk of error would be compounded yet again if, as

petitioners contend, review of decisions to remand is un-

available. As Judge Posner has observed, it is the “reversal

threat” that keeps district judges “working carefully.” Pos-

ner, Judicial Behavior and Performance: An Economic Ap-

proach, 32 FLA. St. U. L. REV. 1259, 1271 (2005); see also

Haire, Lindquist & Songer, Appellate Court Supervision in

the Federal Judiciary: A Hierarchical Perspective, 37 LAW

& Soc’y REV. 143, 147 (2003) (attributing efficacy of circuit

court review of district judges’ decision-making to esteem in

which low reversal rate held, internalized professional norms

of stare decisis, and desire to avoid the additional work a re-

versed or vacated decision entails). Or, to quote Judge Cof-

fin: “one reversal is worth a hundred lectures.” Coffin, ON

APPEAL 163 (1994).

c. This lack of uniformity would be problematic in itself.

But it also would undermine SLUSA’s most fundamental

goals in another way: disparate approaches to the question of

preemption would allow class action plaintiffs to strategically

file in jurisdictions where district courts are likcliest to reject

removal and where, after remand, the state courts are known

to apply a rule that precludes relitigation of a SLUSA pre-

emption defense. Because issuers cannot control where their

securities are traded, they will not be able to avoid junsdic-

tions presenting unreasonable litigation nsk profiles — an

20

important component of which is the opportunity to appeal

erroneous SLUSA remand orders.

The consequences of erroneously permitting state-law

class actions to proceed would be significant. Such suits, of

course, would not be governed by the PSLRA’s rules and

thus would present all of the dangers that prompted the

PSLRA’s enactment: they could premise liability on forward-

looking statements, would not make use of the discovery stay

and pleading standards that have curbed abusive discovery,

and would not apply the Jead plaintiff rules that discourage

the “race to the courthouse door.” Indeed, some types of

state-law actions present especially tempting vehicles for

strike suits. The claim in this case, for example — one on

behalf of hoiders of securities rather than purchasers or sell-

ers — 1S not recognized under federal law precisely because

it is of the sort that is likely to “lead to large judgments, pay-

able in the last analysis by innocent investors, for the benefit

of speculators and lawyers.” Blue Chip Stamps, 421 U.S. at

739 (quoting SEC v. Texas Gulf Sulphur, 401 U.S. 833, 867

(2d Cir. 1968) (Friendly, J., concurring)).

The danger that some abusive suits will improperly es-

cape preemption could have an effect that transcends the im-

pact of individual judgments or settlements. The prospect of

even episodic liability inevitably will chill use of the PSLRA

safe harbor, deter individuals from serving as independent

directors, and discourage accounting firms from providing

audit services for newer and smaller companies — that is, the

very harms that Congress sought to prevent when it enacted

the PSLRA and SLUSA.

d. The risk that petitioners’ rule would encourage plain-

tffs to file suit in jurisdictions where they hope to achieve a

remand if the case is removed to federal court — and the

likelihood that success with this tactic would lead plaintiffs

to file abusive suits that could not have survived in federal

court — 1s not at all fanciful. Empirical data on class-action

21

filings confirm that the plaintiffs’ bar believes that its

chances of prevailing in dubious class actions are best in state

courts. A study of class actions filed against Fortune 500

companies from 1988 to 1998, for example, revealed that the

number of filings in state court during that period skyrock-

eted by 1,042 per cent; the relevant number for filings in fed-

eral court increased only 338 per cent over the same period.*

The perception that some state courts provide a fnendly

forum for class action litigation is, unfortunately, rooted in

reality. Testimony by the U.S. Department of Justice on the

need for class-action reform noted that “certain local court-

houses have become known for the ease with which they cer-

tify class actions,” and that the “threat of large awards arising

out of class actions filed in these jurisdictions coerces defen-

dants to agree to disproportionately high settlement

amounts.” Class Action Lawsuits: Hearing Before the S.

Comm. on the Judiciary, 108th Cong. (2003) (testimony cf

Viet Dinh), available at 2003 WL 21130259. And Congress

has recently found that a common characteristic of cases ex-

hibiting the worst abuses of the class-action device is “adju-

dicat(1on] in state courts, where the governing rules are ap-

plied inconsistently (frequently in a manner that contravenes

basic fairness and due process considerations) and where

there is often madequate supervision over litigation proce-

dures and proposed settlements.” S. Rep. No. 109-14, at 5

(2005).

This is not to suggest, of course, that state courts gener-

ally will be hostile to preemption rules such as those enacted

by SLUSA. Cf. Neuborne, The Myth of Parity, 90 HARV. L.

REV. 1105, 1115-1130 (1977). But plaintiffs have proved

able to engage in forum shopping by filing nationwide class

* See Federalist Society, Analysis: Class Action Litigation—A Fed-

eralist Society Survey, 1 Class Action Watch, at http://www. fed-

soc.org/Publications/classactionwatch/volume tissue | .htm.

22

actions in those few jurisdictions with reputations for disre-

garding class-action certification requirements and the due

process nights of both out-of-state defendants and class mem-

bers. A study conducted in three such venues revealed expo-

nential increases in the numbers of class actions filed in re-

cent years; for example, the Circuit Court of rural Madison

County, Illinois — the venue where petitioners brought this

action — saw an increase in the number of filings of 1,850

per cent from 1998 to 2000. See Beisner & Miller, They're

Making A Federal Case Out Of It...In State Court, 25 HARV.

J.L. & PuB. POL’y 143, 161 (2001). See also Howard, Class

Actions Set Record Last Year In Madison County; Possible

Change In Law Prompted Rush In Filing, ST. LOUIS POST

DISPATCH, Jan. 11, 2004, at E4; Beisner & Miller, Class Ac-

tion Magnet Courts: The Allure Intensifies, 4 BNA CLASS

ACTION LITIG. REP. 58 (Jan. 24, 2003).

Congress has expressed alarm at the tendency of these

class-action magnet state courts to “issue[] nationwide rul-

ings that actually contradict the laws of other states.” S. Rep.

No. 109-14, at 24; see also id. at 24-26 (providing exam-

ples). In fact, some state courts have demonstrated a willing-

ness to certify almost any class action, even classes that other

courts applying the same procedural rules have found uncer-

tifiable. See id. at 22-23. Occasionally, these certifications

have come even before the out-of-state defendant had a

chance to respond to the complaint. /d. at 21-22.”

It was, of course, this very sort of manipulation that

prompted enactment of SLUSA — and that made the re-

* These concerns led to enactment of the Class Action Fairness Act

of 2005 (“CAFA”), Pub. L. No. 109-2, 119 Stat. 4, which broadly

provides for the removal of national class actions from state to fed-

eral court. As petitioners recognize (Pet. Br. 30 & n.38), however,

the existence of the comprehensive PSLRA and SLUSA regime

led Congress to exempt securities class actions from the CAPA.

23

moval provision a “key” element of the statute. Dabit, slip

op. 10 n.7. Petitioners’ reading would significantly reduce

the efficacy of the removal guarantee and invite continued

efforts to circumvent Congress’s attempt to work a compre-

hensive reform of securities class-action litigation. As in

Dabit, then, “[t}he background, the text, and the purpose” of

SLUSA “all support the broader interpretation adopted by the

Seventh Circuit.” /d. at 1.

Il. THE BAR ON APPELLATE REVIEW OF RE-

MANDS DOES NOT EXTEND TO CIRCUM-

STANCES IN WHICH THE MERITS AND JURIS-

DICTIONAL INQUIRIES ARE IDENTICAL

For the reasons discussed above, petitioners misunder-

stand SLUSA’s removal provision; under that statute, the

questions of removability and preemption are discrete ones

that are governed by distinct standards —- meaning that a dis-

trict court's decision rejecting a SLUSA preemption defense

is reviewable on appeal as a matter of course. But if we are

wrong in that submission, the decision below still should be

affirmed. If the merits and removability inquines are identi-

cal under SLUSA, petitioners’ assertion that 28 U.S.C. §

~---14447(d) precludes appeal of the district court’s decision to

remand cannot be squared with principles governing removal

that have been articulated by this Court.

It is settled that “Section 1447(d) is not dispositive of the

reviewability of remand orders in and of itself.” Thermtron

Prods., Inc. v. Hermansdorfer, 423 U.S. 336, 345 (1976).

Instead, the limits on appealability stated in that provision

“must be construed together” with the standards for removal

set out in Section 1447(c) and in light of the purposes ani-

mating both provisions. /hid. And there can be no dispute as

to the goal of Section 1447(d): it effectuates “the policy of

not permitting interruption of the litigation of the merits of a

removed cause by prolonging litigation of questions of juns-

24

diction of the district court to which the case is removed.”

United States v. Rice, 327 U.S. 742, 751 (1946). See Therm-

tron, 423 U.S. at 351 (Section 1447(d) intended “to prevent

delay in the tral of remanded cases by protracted litigation of

jurisdictional issues”). Thus, “Congress’ concern that parties

might use the appeal process to protract litigation over juris-

dictional issues and thereby further delay litigation over the

merits of the case reflects a balancing of competing interests

resolved in favor of judicial economy.” Pelleport Investors,

Inc. v. Budco Quality’Theatres, Inc., 741 F.2d 273, 277 (9th

Cir. 1984).

As suggested by this policy, the Court has recognized

that Section 1447(d) bars appeal of a district court's decision

to remand on the basis of jurisdictional or procedural flaws

that were peripheral to the merits of the litigation — for ex-

ample, where there was a dispute about the existence of di-

versity or the amount in controversy. See, e.g., Volvo of Am.

Corp. v. Shwarzer, 429 U.S. 1331 (1976) (case remanded for

failure to satisfy amount-in-controversy requirement);

Gravitt v. Southwestern Bell Tel. Co., 430 U.S. 723 (1977)

(case remanded for lack of diversity; see Gravitt v. South-

western Bell Tel. Co., 396 F. Supp. 948 (W.D. Tex. 1975));

Things Remembered, Inc. v. Petrarca, 516 U.S. 124, 125-26

(1995) (remand based on untimely removal). In such cases,

the bar on appeal furthers the congressional goal because

“[t}]he only thing that is at stake is the forum that will hear a

claim. This is certainly not an unimportant matter, but it 1s

not so fundamental that a second or third layer of judges

must test its correctness.” Adkins v. lll. Cent. R.R. Co., 326

F.3d 828, 832 (7th Cir. 2003).

This case, however, involves considerations that are deci-

sively different. Here, the jurisdictional issue (on petitioners’

own view of the case) is not distinct from the merits, to the

contrary, petitioners submit that determination of jurisdiction

requires resolution of the merits of one of the principal de-

NN

A)

fenses to liability. Moreover, for the reasons addressed

above, that resolution is likely to be final and not subject to

renewed litigation upon the case’s return to state court. In

such circumstances, an appeal of the distnct court’s decision

would not “delay litigation over the merits of the case”

(Pelleport Investors, 741 F.2d at 277); it would constitute

litigation of the merits.

The Court has never suggested that Section 1447(d) pre-

cludes appellate review in such a case, where the decision to

remand resolves a significant portion of the merits of the liti-

gation. Indeed, in closely analogous circumstances, the

Court has held that appeal is permissible. In Waco v. United

States Fid. & Guar. Co., 293 U.S. 140 (1934), the district

court dismissed the one diverse party from the suit and then,

finding that it lacked jurisdiction, remanded the case to state

court. See id. at 141-142. This Court recognized that “no

appeal lies from the order of remand.” /d. at 143. But the

Court nevertheless held that appeal of the dismissal was

proper, emphasizing that dismissal of the diverse party, “if

not reversed or set aside, is conclusive upon the petitioner.”

Id. at 143-144.

The same outcome is appropriate here.'” The rationale

for precluding appeal of remand orders — avoiding delay in

adjudication of the merits — is wholly inapplicable to cases

like this one. Indeed, applying the reviewability bar of Sec-

tion 1447(d) in this case would turn the statutory purpose on

its head; it would convert a shield against the use of litigation

over peripheral jurisdictional matters for purposes of delay

’ In Waco, the Court anticipated that the case would be returned to

state court following the federal appeal contesting dismissal of the

diverse party. See 293 U.S. at 193-194. Such a course could be

followed here, although. if the federal court of appeals holds the

plainuffs’ claims preempted, the only proper disposition on re-

mand to state court would be dismissal of their claims.

26

into a sword that prevents defendants from fully contesting

liability. As the Ninth Circuit put it in similar circumstances,

such an approach “would leave matters of substantive * * *

law unreviewable” and “would deprive [the defendant] of its

right to appeal a substantive determination of [preemption]

law. We cannot believe that Congress intended to immunize

such decisions from review.” Pelleport Investors, 741 F.2d

at 277.'' Section 1447(d) should not be construed “so

woodenly” (Thermtron, 423 U.S. at 352) as to insulate a rul-

ing on the merits from all review so as to advance a policy of

avoiding delay in resolving the merits. See, e.g., Rowland v.

California Men's Colony, 506 U.S. 194, 200 (1993) (noting

“the common mandate of statutory construction to avoid ab-

surd results’).

'' This Court has recognized in related settings that statutory re-

strictions on appeal must yield when, in particular circumstances,

effective review otherwise would be precluded altogether. The

collateral order doctrine reflects this norm; federal appellate re-

view is permitted when awaiting final judgment might make im-

portant rulings effectively unreviewable. See Coopers & Lybrand

v. Livesay, 437 U.S. 463, 468 (1978); Cohen v. Beneficial Indus.

Loan Corp., 337 U.S. 541 (1949); see also Moses H. Cone Mem'l

Hosp. v. Mercury Constr. Corp., 460 U.S. 1, LL (1983) (This or-

der would be entirely unreviewable if not appealed now. Once the

State court decided the issue of arbitrability, the federal court

would be bound to honor that determination as res judicata.”’); cf.

Nebraska Press Ass'n v. Stuart, 427 U.S. 539, 546 (1976) (“capa-

ble of repetition, yet evading review” exception to mootness limi-

tation on standing).

27

CONCLUSION

The judgment of the court of appeals should be affirmed.

Respectfully submitted.

ROBIN S. CONRAD CHARLES A. ROTHFELD

AMAR D. SARWAL Counsel of Record

National Chamber Litiga- DARREN LISITZA

tion Center, Inc. Mayer, Brown, Rowe &

1615 H Street, NW Maw LLP

Washington, DC 20062 1909 K Street, NW

(202) 463-5337 Washington, DC 20006

(202) 263-3000

MARCH 2006