The Supreme Court dismissed as improvidently granted the writ of certiorari in Emulex Corp. v. Varjabedian, No. 18-459. The question the Court agreed to hear was whether a cause of action for damages implied under Exchange Act Section 14(e) requires only proof of negligence in making a misstatement or omission in connection with a tender offer as held by the Ninth Circuit or of intentional conduct in accord with the decisions of five other circuits.
Oral argument in the action focused on the approach of the Court to its authority rather than the question accepted for review. At the outset the Justices debated whether there was a private right of action under Section 14(e), a question neither party challenged in the circuit court. Thus, Justice Ginsberg, addressing Petitioner’s counsel asked: “Mr. Garre, why should we consider that [that there is an implied cause of action for damages under Exchange Act Section 14(a)] when it wasn’t raised in this case until . . . the motion for rehearing in the court of appeals. I went through the trial court, court of appeals, not a word . . .” (Tr. 4). Petitioner tried to argue that presenting the question at the rehearing stage was sufficient but Justice Breyer was not inclined to agree, noting “You told the Ninth Circuit, I take it, quote that your client did not dispute that Section 14(e) provides for a private right of action” (Tr. 6). While Petitioner tried to stand his ground Justice Ginsberg seemed to close out the question stating: “ If you had [disputed the question of an implied cause of action] – if you had made it an explicit question, there’s no circuit split on the question is there? Mr. Garre: There’s not.”
The argument then focused on the only other question discussed – if there is in fact a private right of action. Justice Ginsburg again took the lead, noting that under Exchange Act Section 14(a) there is an implied cause of action. That was recognized by the Court in J. I. Case v. Borak, 377 U.S. 426 (1964)(holding that where a proxy statement was materially misleading – a fact that would not be apparent to the SEC until after the merger – “that under the circumstances here it is the duty of the courts to be alert to provide such remedies as are necessary to make effective the congressional purpose”).
The Borak standard, however, has been supplanted by that of Alexander v. Sandoval, 532 U.S. 275 (2001)(Opinion per Scalia, J. using a multiprong test to assess congressional intent to assess if there is an implied cause of action). While application of the Sandoval test to Section 14(e) might not yield an implied cause of action, as Justice Kagan pointed out, other factors counsel such as result: “But Sandoval accepted the Cannon [Cannon v. University of Chicago, 441 U.S. 677 (1979] principle, right, which is that if Congress specifically takes language that’ s been held to create a private right of action, and replicates that language, then that counts as a pretty strong indicator that Congress has meant for the same result to obtain” (Tr. 18). (Tr. 15).
The Assistant to the Solicitor General, arguing for the Government and the SEC, adopted another approach. The Government argued that there is no private right of action under Section 14(e), but that the agency could bring an enforcement action based on a negligence standard. While the Government acknowledged that the language of Section 14(e) was comparable to that of Section 10(b) and Rule 10b-5 she claimed that sometimes the same words can have a different meaning. That theory faded following a statement by Justice Gorsuch: “I understand that Ernst [Ernst & Ernst v Hochfelder, 425 U.S. 185 (1976] came later, but normally we do read the same language to mean the same thing . . .” (Tr. 30).
Petitioner tried to refocus the argument on the intent standard of the cause of action to no avail, it quickly reverted to Borak and the question of an implied cause of action. As the argument moved forward the Justices seemed to agree that if Section 14(e) used the same language as Section 10(b) and Rule 10b-5 then Congress would have understood that by including it in the Section it would include an implied cause of action. Under those circumstances the Court would not reject the claim. As Chief Justice Roberts stated: “But it’s not just a question of Congress’ words or even Congress’ intent. It goes to the authority of the courts to engage in the sort of fundamental law-making enterprise that inferring a private cause of action involves. In other words, the reason we do it differently [from Borak] is not because we have any different view on the tools of congressional intent. It’s because we have a different view on the appropriate limits on our authority.”
Event: On June 3, 2019, the SEC Historical Society will host a gala celebration to commemorate the 85th Anniversary of the founding of the U.S. Securities and Exchange Commission and its 20th Anniversary. The event will be held at the Building Museum, Washington, D.C. Following a brief program featuring SEC Chairman Jay Clayton, there will be cocktails and dinner. For further information regarding tables, tickets and advertisements in the program please contact the Society here (full disclosure Mr. Gorman is the President of the Society).