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?

Not exactly.

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.

Insider.com recently profiled Jeffrey Housman, who is “chief people and services officer at Restaurant Brands International.”  Part of the article explains that:

One of the first DEI initiatives Housman’s team spearheaded was a change to the interview process. RBI hiring managers now ask job candidates in their first interview what diversity means to them, and how they’d champion diversity if they joined the team. And, across RBI’s corporate offices, at least 50% of all candidates in the final interview round must be “from groups that are demonstrably diverse, including race.”

Putting aside the legality of the interview quotas, this reminded me of the debate a few years ago regarding “Diversity, Equity and Inclusion” statements required of applicants for faculty positions at a number of UC campuses.  An op-ed in the Wall Street Journal argued that:

This system specifically excludes those who believe in a tenet of classical liberalism: that each person should be treated as a unique individual, not as a representative of an identity group. Rather than helping achieve inclusion, these DEI rubrics act as a filter for those with nonconforming views…. Mandatory diversity statements can too easily become a test of political ideology and conformity.

There are grounds for concluding that Democrats have become the party of racial discrimination in the name of anti-discrimination (see, e.g., here and here), while Republicans defend the colorblind ideal that: “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”  (We can assume that both parties take their respective positions in the good faith belief that they are championing the best way forward for us as a nation and, in particular, for the continued progress of historically marginalized groups.)  To the extent this partisan divide exists, do job interview questions asking about commitments to diversity violate state laws against discrimination on the basis of political viewpoint?

My efforts to persuade the Nevada legislature to allow the state’s ordinary regulatory process to handle exemptions were largely unsuccessful.  For a quick refresher, the legislation placed a NASAA model regulatory exemption which was already set to go into the next round of regulatory code updates into the statute.  I previously blogged about the issue and published an oped in the Nevada Independent, hoping to change some minds.  My main points were simple: (1) there was no need to actually do anything because it would become law when the regulations went into effect; and (2) putting it into the statute would make it much harder to update when SEC regulations change.

Still, the effort did have some impact.  The bill’s sponsor reached out to talk about the issue and asked that I produce some draft language for an amendment.  I agreed and spent much of my Easter Sunday doing that.  My proposal was to have the head of the state securities division simply report on the state’s offering rules and any needs the office saw every couple of years to improve coordination and prevent confusion.  This is the draft language I suggested:

No later than August 15 of every even-numbered year, the Administrator shall publicly release, via posting to the Secretary of State’s website or other means, his or her views on:

(a) whether any model rules, regulations, exemptions, or other provisions adopted by the North American Securities Administrators Association within the preceding five years have been implemented by the State and, if they have not been implemented, an explanation for why the State has not implemented the model rules, regulations, exemptions, or other provisions adopted by the North American Securities Administrators Association within the preceding five years;

(b) whether the Securities Division has an optimal level of resources to achieve its objectives; and

(c) whether the Administrator recommends that any legislation be enacted in the public interest and for the protection of investors.

The bill’s sponsor ultimately decided to simply expand the legislation to add an amendment based off my draft language and also persist with the effort to place the exemption into the statute.  The amendment, now law, tracked my language with a few changes and reads:

1. On or before August 15 of each even-numbered year, the Administrator shall: (a) Submit a written report to the Director of the Legislative Counsel Bureau for submission to the Legislative Commission; and (b) Publish the report described in paragraph (a) on an Internet website of the Secretary of State or by similar means.

 2. The report must include, without limitation:

(a) A summary of the states that adopted a model rule, regulation, exemption or like provision of the North American Securities Administrators Association within the 5 years immediately preceding the publication of the report described in subsection 1;

(b) A summary of the states that did not adopt a model rule, regulation, exemption or like provision of the North American Securities Administrators Association within the 5 years immediately preceding the publication of the report described in subsection 1, and the reasoning why each state did not adopt any such model rule, regulation, exemption or like provision;

(c) A determination of whether the Division has the resources necessary to achieve its objectives; and

(d) Any recommendations for legislation relating to the protection of investors in this State.

I told the bill’s sponsor that I did not support the legislation on the whole because it continued to put the exemption into the statute instead of simply letting it become law through the ordinary regulatory process.  Still, the sponsor did tell the legislature that I wrote the reporting requirement and had been “very helpful.”  You can find that at 8:31:45 here if you want to see it.  

Now we wait to see if the problem I flagged emerges.  I also predict that one of the items in the first report under this legislation will be a request that the private fund adviser exemption be removed from the statute so that it can be managed and updated in the ordinary course within the regulatory code. 

To be clear, my only objection here was that this exemption belonged in the administrative code.  I still think that’s where it will ultimately end up because keeping it in the statute will cause problems as SEC regulations change.  It’s been a real learning experience to participate in the legislative process. 

This coming Friday, June 11, at 2 PM, the Federalist Society is hosting a teleforum entitled, Free Speech and Compelled Speech: First Amendment Challenges to a Marketplace of Ideas.  You can register here (I believe registration is free).  What follows is a description of the program.

Section 230 has been understood to shield internet platforms from liability for content posted by users, and also to protect the platforms’ discretion in removing “objectionable” content. 

But policy makers have recently taken a stronger interest in attempting to influence tech companies’ moderation policies.  Some have argued the policies are too restrictive and unduly limit the scope of legitimate public debate in what has become something of a high-tech public square.  Other policy makers have argued the platforms need to more aggressively target “hate speech,” online harassment, and other forms of objectionable content.  And against that background, states are adopting and considering legislation to limit the scope of permissible content moderation to preclude viewpoint discrimination. 

Some have suggested that the §230 protection, in combination with political pressure, create First Amendment state action problems for content moderation.  Others argue that state efforts to protect the expressive interests of social media users would raise First Amendment concerns, by effectively compelling speech by social media and tech platforms.

What are the First Amendment limits on federal and state efforts to influence platform decisions on excluding or moderating content? 

Featuring:

Eugene T. Volokh, Gary T. Schwartz Distinguished Professor of Law, UCLA School of Law 

Jed Rubenfeld, formerly Assistant United States Attorney, U.S. Representative at the Council of Europe, and professor at the Yale Law School 

Mary Anne Franks, Professor of Law and Dean’s Distinguished Scholar, University of Miami School of Law 

Moderator: Hon. Gregory G. Katsas, Judge, United States Court of Appeals, District of Columbia Circuit 

Friend of the BLPB Bernie Sharfman recently alerted me to an online piece he posted on environmental, social, and governance (ESG) investing, How BlackRock Strikes Out On the Issue of Climate Change.  In his post, offering BlackRock as an example, Bernie raises concerns about the negative aspects of establishing ESG funds.   Specifically, he offers that a focus on ESG investment and reporting can reduce a sense of urgency in remedying climate change and can have other unintended undesirable effects.  He also notes that BlackRock has only limited influence in establishing efficacious ESG investments, due to the nature of its role and investment portfolio.  He concludes as follows:

BlackRock can be part of the solution by attempting to add “financial innovation” as a tool in the battle against climate change. Such financial innovation should be targeted to creating new private equity funds that help provide the billions of dollars of funding that will be needed by new and growing carbon-cutting companies. BlackRock can market these funds to the millions of retail investors who currently invest in its products.

ESG investment opportunities are a hot topic these days.   Bernie’s post offers some food for thought about the double-edged sword they may present.