# Amicus Curiae Brief — Kircher v. Putnam Funds Trust

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0221%3A08

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2006
- **Citation:** 547 U.S. 633

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0221%3A08. Public record. Not legal advice.