Saturday, June 12, 2021
Everyone remembers Emulex Corp. v. Varjabedian, right? The Ninth Circuit held that plaintiffs could sue under Section 14(e) for negligent, as well as intentional, false statements in connection with a tender offer – breaking with circuits that had read 14(e) to require scienter – and the Supreme Court granted certiorari to resolve the split. The problem was, the defendants were sort of arguing that 14(e) only prohibits intentional conduct, and sort of arguing that there’s no private right of action under 14(e) at all. As a result, the whole thing ended with the Court dismissing the writ as improvidently granted.
Fast forward to Brown v. Papa Murphy’s Holdings Incorporated, 3:19-cv-05514-BHS-JRC, pending in the Western District of Washington. The plaintiffs there also alleged that defendants negligently made false statements in connection with a tender offer; the claims survived a motion to dismiss; but the magistrate handling the case just recommended that the district court certify for interlocutory appeal under Section 1292. What issue is being certified? Well, that depends on which page of the opinion you read. Here are some quotes from the magistrate’s order, from June 9, 2021, Dkt. 62:
the Court finds that defendants have shown that this matter should be certified for interlocutory appeal to determine whether there is a private right of action for claims under Section 14(e) of the Securities Exchange Act of 1934.
Defendants previously requested that the Court dismiss plaintiff’s second amended complaint on the ground that there is no private right of action for violations of Section 14(e) of the Exchange Act based on allegations of defendants’ negligence. In recommending denial of defendants’ motion to dismiss, this Court found, in part, that Ninth Circuit precedent establishes an implied private right of action under Section 14(e).
The District Court adopted this Court’s Report and Recommendation (Dkt. 47) over defendants’ objections (Dkt. 51) and found that “[a]bsent a directive from the Ninth Circuit or the Supreme Court [. . .], the Court will not overturn precedent in holding that no private right of action for negligence-based claims exists.”
Here, defendants assert that the existence of a private right of action under Section 14(e) is a controlling question of law. The Court agrees. If the Ninth Circuit were to rule that there is no Section 14(e) private right of action for claims premised on negligence, the outcome of the Ninth Circuit’s ruling could materially affect the outcome of this litigation.
Here, defendants argue that whether there is a private right of action under Section 14(e) for claims premised on negligence is a novel legal issue on which there is a substantial ground for difference of opinion.
You see the issue. Most of the opinion is about the uncertainty of a private right of action based on negligence, but some of the phrasing concerns whether there is a private right of action at all.
In fact, here are the crucial grafs of the magistrate’s opinion:
Defendants assert that current Ninth Circuit precedent under Plaine v. McCabe, 797 F.2d 713, 718 (9th Cir. 1986) permits only a private right of action under Section 14(e) based on “fraudulent activity” in connection with a tender offer. Dkt. 58, at 8. Therefore, defendants conclude that the Ninth Circuit’s opinion in Plaine does not control plaintiff’s Section 14(e) claim premised on negligence. See id. Indeed, the Ninth Circuit in Plaine only addressed whether there was a private right of action under Section 14(e) based on claims of fraud—not negligence. See Plaine, 797 F.2d at 717–18….
[A]lthough the Ninth Circuit later held that claims under Section 14(e) require only a showing of negligence (rather than scienter), the issue of whether there is a private right of action for Section 14(e) claims based on negligence was not before the court. See Varjabedian v. Emulex Corp., 888 F.3d 399, 403–408 (9th Cir. 2018).
But is that really an accurate characterization of Ninth Circuit precedent?
Defendants – and the magistrate – interpreted Plaine v. McCabe, 797 F.2d 713 (9th Cir. 1986) to squarely hold that there is a private right of action under 14(e). But in that case, the actual question presented was whether a nontendering shareholder could sue under 14(e), given the buyer/seller limits for 10(b) claims. No one was arguing against a private right of action; the defendants merely argued that the plaintiff was uninjured because she did not tender. In that context, the Ninth Circuit said:
Initially, we address the defendants’ argument that Plaine lacks standing to bring a section 14(e) claim. The defendants allege that because Plaine did not voluntarily tender her shares pursuant to the amended tender offer, she must not have relied on the alleged misstatements and was not injured by them.
To state a violation of section 14(e), a shareholder need not be a purchaser or seller of any securities as is required under other anti-fraud provisions of the Act... Although Plaine did not tender her shares, she alleged injury occurring as a result of fraudulent activity in connection with a tender offer. In light of the Act's goal of protecting investors and the specific harm Plaine alleges, we follow the lead of the Fifth and Second Circuits and hold that in these circumstances even a non-tendering shareholder may bring suit for violation of section 14(e).
Then along came Varjabedian v. Emulex Corp. There, private plaintiffs brought a 14(e) claim based in negligence, and the district court dismissed on the ground that a showing of scienter is required. On appeal, the Ninth Circuit held that negligence is sufficient:
[F]or the reasons discussed above, we are persuaded that intervening guidance from the Supreme Court compels the conclusion that Section 14(e) of the Exchange Act imposes a negligence standard. Accordingly, we REVERSE the district court's decision as to the Section 14(e) claim because the district court employed a scienter standard in analyzing the Section 14(e) claim. We also REMAND for the district court to reconsider Defendant's motion to dismiss under a negligence standard. On remand, the district court shall also consider whether the Premium Analysis was material, an argument that Defendants raised but that the district court did not reach. In addition, the district court shall consider Plaintiff's Section 20(a) claim since the Section 14(e) claim survives.
This, the Papa Murphy defendants and magistrate held, meant that the Ninth Circuit assumed in Emulex – but never squarely held – that the private right of action extends to negligence-based claims.
By my read, though, you could make the same argument about Plaine, i.e., that the question of a private right of action was never squarely presented, the Ninth Circuit just assumed there was a private right of action, and its legal analysis was limited to whether that right extended to nontendering shareholders. I mean, that’s at least as plausible as treating a private right of action for negligence as unsettled after Emulex, seeing as how in Emulex, the Ninth Circuit was facing a private claim and squarely told the district court to consider the motion to dismiss under a negligence standard.
Given all of this, why did the Papa Murphy defendants argue, and the magistrate accept, that it was settled law in the Ninth Circuit that there exists some private right of action, and that it was only unsettled as to the state of mind requirement?
I assume it’s because of the standards for certification under Section 1292. You can only get an interlocutory appeal if you show “substantial grounds for difference of opinion.” No court has ever questioned that there is a private right of action under 14(e); therefore, the defendants would have trouble getting an interlocutory appeal for that question, even if they argued that Plaine never squarely so held. The Ninth Circuit has, however, broken with other circuits on the issue of scienter versus negligence under 14(e), creating an avenue for argument on that score. But the Ninth Circuit was also very clear that negligence, rather than scienter, is the standard in that circuit. So, the only place where the defendants could find some uncertainty that would justify interlocutory review was by threading the needle between a negligence based standard and a private right of action – in effect, suggesting that while maybe 14(e) prohibits both negligent and intentional conduct, different levels of fault matter depending on whether an action is brought by private plaintiffs or the government.
Of course, the magistrate’s opinion here is not final. It would have to be adopted by the district court, and then the Ninth Circuit would have to grant the appeal, before it would be heard. But the muddling of issues may present the same problem in any Supreme Court petition as in the original Emulex case.