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Section 11 Class Actions And The Magna Carta

If you had a dispute in Medieval England, it would likely be heard in the court of the local baron.  Some disputes, however, caught the interest of the monarch and would be heard in a royal court.  In the twelfth century, King Henry II instituted royal justice throughout England.  As might be expected, controversies arose about whether disputes should be heard in royal or baronial courts.  In King John's reign, the barons objected to the removal of cases from their own courts to the royal courts through a procedural device known as the writ praecipe ("praecipe" is the singular imperative form of the Latin verb meaning to order or instruct).  The baronial objection to the writ praecipe was more venal than principled because the barons made money from the administration of justice in their courts (as did the King from his courts).  The barons won the fight with King John and the Magna Carta includes this regressive provision:

Breve quod vocatur Precipe decetero non fiat alicui de aliquo tenamento, unde liber homo perdat curiam suam (The short writ which is called "praecipe" henceforth shall not be issued to anyone with regard to any tenement (holding), from whence a free man should lose his court).

Magna Carta, Chapter 34 (my translation).

I find an historical echo of this centuries old dispute in the current debate over the Securities Litigation Uniform Standards Act (aka the SLUSA) Pub. L. No. 105-353, 112 Stat. 3227 (Nov. 3, 1998). Although the federal and state courts generally have concurrent jurisdiction over claims arising under the Securities Act of 1933, the SLUSA amended Section 22 of the Securities Act to exclude certain class actions from concurrent jurisdiction.  The statutory language is difficult and without getting into technicalities, some courts have interpreted this exclusion broadly while others have taken a narrow view.  In Luther v. Countrywide Financial Corp., 195 Cal. App. 4th 789 (2011), the Second District Court of Appeal held that state courts retain concurrent jurisdiction over Securities Act class actions involving non-nationally traded securities.

The practical consequence of the Countrywide decision has been a 1,400 percent increase in the number of class actions filed in California courts alleging violations of Section 11 of the Securities Act (Section 11 affords purchasers of securities a private cause of action against specified persons based on material misstatements or omissions in a registration statement).  Plaintiffs attorneys likely prefer California courts as a means to avoiding heightened pleading standards and the discovery stay in federal courts

The defendants  in one of these Section 11 class actions believes that Countrywide was wrongly decided.  It has filed a petition for review with the California Supreme Court, Cyan, Inc. v. Superior Court (S. Ct. Case No. S231299).  These petitioners argue that review should be granted because their petition "raises a question of law of fundamental importance to the California judicial system and the hundreds of public and would-be public companies in California and their shareholders".  The California Supreme Court has extended the time for granting or denying review to St. Patrick's Day.  Meanwhile, the federal courts have reached different conclusions.  See cases cited in Hung v. iDreamSky Tech. Ltd., 2016 U.S. Dist. LEXIS 8389 (S.D.N.Y. Jan. 25, 2016).

I do have some personal investment in this issue.  In 1997, I testified before the U.S. Senate Committee on Banking, Housing and Urban Affairs' Subcommittee on Securities.  In my remarks, I noted the problems that could be engendered by allowing states to impose their unique systems on national issuers:

Thus, a single state can impose the risks and costs of its peculiar litigation system on all national issuers.

Conference Report, p. 15.

Note to readers:  I've updated yesterday's posting about the California Revised Uniform Limited Liability Company Act to reflect the amendment of California Corporations Code Section 17701.10 by AB 506.

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