The last few decades have been rife with activity raising the bar for securities plaintiffs in federal court, with the plaintiffs’ bar repeatedly suffering at the hands of both Congress (the Private Securities Litigation Reform Act of 1995) and the Supreme Court (cases like Bell v. Twombly and Tellabs, Inc. v. Makor Issues and Rights). So, as one attorney frankly commented to the Court on Tuesday morning, “it’s not a surprise that a lot of securities plaintiffs want to be in state court.”

Merrill Lynch, Pierce, Fenner & Smith v. Manning brings that development front and center, calling on the Court to interpret a provision of the federal Securities Exchange Act (Section 27) that gives federal courts “exclusive” jurisdiction over cases brought to “enforce” the “duties” created under the federal statute. The case involves allegations that Merrill Lynch (the defendant) engaged in manipulative “short selling”; if the allegations are true, Merrill Lynch violated the SEC’s Regulation SHO (promulgated under the Exchange Act). Merrill Lynch argues that Section 27’s “exclusive” grant of jurisdiction to federal courts bars the New Jersey courts from hearing the action. Greg Manning (the named plaintiff) argues that the case can proceed in state court because it seeks no relief under federal law; the complaint is limited to causes of action under state law that prohibits manipulative and fraudulent market activity.

You might have thought that the Court’s persistent hostility to securities class actions would make it sympathetic to Merrill Lynch’s position: if the Justices oppose those class actions as a matter of policy, they should be no happier about allowing them to proceed in state court than in federal court. But that sentiment was not evident in the Justices’ discourse on Tuesday. Rather, two overlapping themes suggested that Merrill Lynch’s position is unlikely to persuade the Court.

The first problem is that none of the Justices seemed to believe that Section 27 compels a ruling in favor of Merrill Lynch. Some Justices, such as Justice Sonia Sotomayor and Chief Justice John Roberts (ordinarily not the pair of Justices most likely to agree in a securities case) were openly skeptical of Merrill Lynch’s position. Justice Sotomayor commented that she “just d[id]n’t understand how” Section 27 barred the New Jersey court from hearing the case. The Chief Justice found it difficult to credit the notion that the complaint involved any important element of federal law, opining that “New Jersey law certainly prohibits fraud” and asking whether the plaintiffs are “doing anything more than saying we think this constitutes fraud?”

Others were skeptical, but not quite so definitively dubious. For example, Justice Antonin Scalia worried that adopting Merrill Lynch’s view barring state courts from hearing any complaint that alleges conduct that happens to violate federal law would obligate federal trial judges “to sift through the complaint and see if any of the claimed causes of action under state law mirror a cause of action that happens to exist under federal law, without even the hint that they mention the federal statute.” The most favorable reading that Merrill Lynch got on the language probably was the wholly ambivalent view of Justice Elena Kagan, who commented to Jonathan Hacker (arguing for Merrill Lynch) that, “just looking at the language, I understand your interpretation of it, but it seems to me that there’s just as good an interpretation which says the opposite.”

The second problem is that none of the Justices seemed to think it was a particularly good idea to force Manning’s action into federal court. The problem that Merrill Lynch faced here involves the baseline understanding of the test for so-called “general” federal question jurisdiction under the “arising under” standard of 28 U.S.C. § 1331. Kagan and Justice Stephen Breyer took the view that the Court’s relatively narrow reading of Section 1331’s “arising under” test implements, in substance, a practical rule that brings cases into federal court whenever it makes sense for them to be here. Because that rule hews closely (though admittedly not always) to Justice Oliver Wendell Holmes’s view that a cause of action “arises under” the law that creates it, the parties all but concede that Manning’s case does not “arise under” federal law: all of the causes of action stated in the complaint are created by New Jersey, rather than federal, law.

So, if you take the view that the “arising under” language filters out cases that shouldn’t be in federal court, and if you start from the premise that Manning’s case doesn’t arise under federal law, it is natural to ask (as Breyer repeatedly did) “why would anyone want a case like that in federal court when the states want to adjudicate it?” As he put it bluntly to Peter Stris, representing Manning, “If [the complaint] is not sufficient to get in under ‘arising under,’ why in heaven’s name should it be [sufficient] to get in under 27?” To be sure, Hacker repeatedly emphasized the difference between the language of Section 27 and Section 1331, but Kagan for one firmly rejected the idea that the Court should give weight to the slight textual differences between statutes crafted decades apart and generations ago: “[I]t’s true they’re different words, but … the arising under test doesn’t really have a whole lot to do with the language ‘arising under’ anymore.”

Ordinarily, when the Justices don’t find the language compelling, it is not easy to persuade them to impute to Congress an intent with which they disagree. And here, any inclination there might have been to give Merrill the benefit of the doubt faced the “curious” incident of the federal government’s position. I suggested in my preview that the federal government’s absence from the case might weigh heavily in Manning’s favor, because the government routinely appears in securities cases and doubtless is well-placed to assess whether state-court litigation like Manning’s tends to support or impede federal securities enforcement. Although the topic only came up briefly in the argument, Breyer’s comment suggested that he found the absence of the Solicitor General as telling as the absence of barking that Sherlock Holmes found remarkable in Silver Blaze — but perhaps at this late date Breyer had the Broadway play more in mind than the classic short story to which the late Chief Justice William Rehnquist and Justice John Paul Stevens referred so frequently.

In sum, nothing in the argument undermines my sense from the briefs that Manning has much the better of this one. That is not to say that the Justices will find it easy to fit Section 27 into the Court’s broader jurisprudence regarding the boundaries between state and federal jurisdiction. And there is always the possibility that the silent Justices will have a view of the case quite different from the views of those who peppered Hacker and Stris with questions. Still, with those caveats, it is pretty hard after this argument to see the Justices forcing Manning’s suit into federal court.

Posted in Merrill Lynch, Pierce, Fenner & Smith v. Manning, Analysis, Featured, Merits Cases

Recommended Citation: Ronald Mann, Argument analysis: Justices spar with counsel over excluding securities litigation from state courts, SCOTUSblog (Dec. 2, 2015, 8:25 AM), http://www.scotusblog.com/2015/12/argument-analysis-justices-spar-with-counsel-over-excluding-securities-litigation-from-state-courts/