News
October 22, 2018

Supreme Court Has Opportunity to Reexamine Implied Private Right of Action Under Section 14(e) of the Exchange Act

Advisory

After the Court of the Appeals for the Ninth Circuit "parted ways" with five other circuit courts holding that the requisite intent under Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) (Exchange Act)was mere negligence,1 defendants in Varjabedian v. Emulex Corp. filed a petition for a writ of certiorari on October 11, 2018. The petition challenges the Ninth Circuit's intent standard and also argues that an implied private cause of action does not exist under Section 14(e), which addresses fraud in connection with tender offers. Petitioners claim that the issue of the requisite intent under Section 14(e) is ripe for Supreme Court review because a circuit split exists. Given the broad venue provisions of the Exchange Act, if the split remains, plaintiffs could bring virtually every suit arising from a tender offer under the more lenient standard in the Ninth Circuit.

THE DISTRICT COURT'S DECISION

In February 2015, Emulex Corporation and Avago Technologies Wireless Manufacturing Inc. announced that they had entered into a merger agreement, with Avago offering to pay $8.00 per share for outstanding Emulex stock. A subsidiary of Avago, Emerald Merger Sub Inc., thereafter initiated a tender offer for Emulex's outstanding stock. Emulex filed a recommendation statement with the Securities and Exchange Commission in which it elected not to include a summary of a one-page premium analysis that had been performed by an outside bank showing that the transaction premium fell within the normal range, but was below average.

In April 2015, a class of plaintiffs brought a putative securities class action against Petitioners alleging that they violated various federal securities laws, including Section 14(e) of the Exchange Act,2 by failing to summarize the premium analysis in the recommendation statement. The district court dismissed the complaint with prejudice for failure to plead a strong inference of scienter in connection with the alleged violations of Section 14(e) after finding that "the similarities between Rule 10b-5 and § 14(e) require a plaintiff bringing a cause of action under § 14(e) to allege scienter."3

THE NINTH CIRCUIT'S DECISION

On appeal, a panel of the Ninth Circuit reversed the district court's dismissal of the complaint and remanded the case for reconsideration under a negligence standard splitting from five other circuit courts that found that Section 14(e) requires a showing of scienter.4

In reaching its decision that Section 14(e) requires only a showing of negligence, the Ninth Circuit relied on two decades-old Supreme Court decisions. Focusing on a 1976 decision in which the Supreme Court concluded that Rule 10b-5 required scienter "because it is a regulation promulgated under Section 10(b) of the Exchange Act, which allows the SEC to regulate only 'manipulative or deceptive device[s],'"5 the Ninth Circuit held that, "[t]his rationale regarding Rule 10b-5 does not apply to Section 14(e), which is a statute, not an SEC Rule."6 The Ninth Circuit also reasoned that the SEC is authorized under Section 14(e) to regulate a broader array of conduct than under Section 10(b) stating, "[i]f the SEC can prohibit 'acts themselves not fraudulent' under Section 14(e), then it would be somewhat inconsistent to conclude that Section 14(e) itself reaches only fraudulent conduct requiring scienter."7

In addition, the Ninth Circuit cited the Supreme Court's decision in Aaron v. SEC,8 which addressed a provision in Section 17(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77a–77aa (Securities Act), that is nearly identical to Section 14(e). Both statutes contain provisions prohibiting "any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statement made . . . not misleading."9

The Ninth Circuit concluded that because the Supreme Court in Aaron held that Section 17(a)(2) does not require a showing of scienter, Section 14(e) also does not require scienter.10

PETITIONERS' CERTIORARI PETITION

Petitioners filed a petition for a writ of certiorari with the Supreme Court on October 11, 2018 arguing that the Supreme Court has never previously recognized a private right of action under Section 14(e) and expressly declined to do so in its 1977 Piper v. Chris-Craft Industries Inc. decision.11 Such a right of action has only been inferred by lower courts, and until the Ninth Circuit's decision in Varjabedian, the lower courts had declined to create private rights of action for negligent conduct.12 Petitioners rely on the Supreme Court's decision in Alexander v. Sandoval, which provides that "restraint is always warranted when it comes to the disfavored practice of inferring a private right of action."13 Petitioners note that although this Court previously inferred rights of action relatively freely, "under the current rigorous standard that this Court applies today, there is no basis for inferring any private right of action under Section 14(e)."14

The Roberts Court, which has averaged two securities opinions per term,15 has repeatedly demonstrated a willingness to grant certiorari in securities cases and has recently entered decisions clarifying and/or limiting the scope of securities class actions. Varjabedian, in particular, is a prime candidate for Supreme Court review because it: (i) concerns whether Section 14(e) implies a private right of action, an issue that the Court has considered in past securities cases with respect to other provisions of the securities laws and (ii) has caused a significant circuit split, which threatens to invite rampant forum shopping based on the broad venue rule under the Exchange Act.

SIGNIFICANCE

Should the Supreme Court grant certiorari to review the Ninth Circuit's decision in Varjabedian, it could close a significant gap that currently exists between the Ninth Circuit and the Second, Third, Fifth, Sixth, and Eleventh Circuits on a key issue concerning federal tender offer litigation. By siding with the majority of circuits, the Court would make it far easier for defendants to dismiss Section 14(e) claims at the motion to dismiss stage by requiring plaintiffs to plead scienter. On the other hand, were the Court to affirm the Ninth Circuit's decision, it could herald a new trend of nationwide Section 14(e) tender offer litigation similar to the rise of Section 14(a) proxy statement litigation in recent years in light of the absence of a scienter pleading standard for 14(a) claims in many jurisdictions. Should the Supreme Court choose to address Petitioners' specific argument regarding the existence of an implied right of action under Section 14(e), it will have the opportunity to supersede the decisions of the lower courts thereby providing businesses with further protections against securities class actions, although tendering stockholders would generally be able to bring cases based on alleged defects in the bidder's disclosures under Rule 10b-5 if they could show scienter.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. For more information on this decision, see our previous Advisory: Departing from Five Other Circuit Courts, the Ninth Circuit Holds That Section 14(e) of the Exchange Act Requires Only a Showing of Negligence.

  2. Section 14(e) provides that: "It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. . . ." 15 USC § 78n(e).

  3. Varjabedian v. Emulex Corp., 152 F. Supp. 3d 1226, 1233 (CD Cal. 2016), aff'd in part, rev'd in part and remanded, 888 F.3d 399 (9th Cir. 2018).

  4. The Second, Third, Fifth, Sixth, and Eleventh Circuits have held that Section 14(e) claims require proof of scienter.

  5. Varjabedian, 888 F.3d at 406 (citing Ernst & Ernst v. Hochfelder, 425 US 185, 193 (1976)).

  6. Id.

  7. Id. at 407.

  8. 446 US 680 (1980).

  9. Varjabedian, 888 F.3d at 406.

  10. Id. at 408.

  11. Brief of Petitioners at 5, Emulex Corp. v. Varjabedian, No. ____ (US Oct. 11, 2018) (citing 430 US 1, 24 (1977)).

  12. Id. at 18-19.

  13. Id. (citing Alexander v. Sandoval, 532 U.S. 275, 286-87 (2001)).

  14. Id. at 20 (emphasis added).

  15. Eric. C. Chaffee, "The Supreme Court as Museum Curator: Securities Regulation and the Roberts Court," 67 Case Western Reserve L. Rev. 847 (2017).

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