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North Sound Capital LLC v. Merck & Co., Inc.

United States Court of Appeals, Third Circuit

September 12, 2019

NORTH SOUND CAPITAL LLC; NORTH SOUND LEGACY INTERNATIONAL; NORTH SOUND LEGACY INSTITUTIONAL; UNITED FOOD COMMERCIAL WORKERS LOCAL 500 PENSION FUND; COLONIAL FIRST STATE INVESTMENTS LTD.; CFSIL-CFS WHOLESALE INDEXED GLOBAL SHARE FUND; CFSIL-COMMONWEALTH GLOBAL SHARES FUND 4; CFSIL-COMMONWEALTH SPECIALIST FUND 13; CFSIL WHOLESALE GEARED GLOBAL SHARED FUND; CFSIL ATF CMLA INTERNATIONAL SHARE FUND; CFSIL-COMMONWEALTH GLOBAL SHARES FUND 6; CFSIL COMMONWEALTH SHARES FUND 2; CFSIL-CFS WHOLESALE ACADIAN GLOBAL EQUITY FUND; CFSIL-CFS WHOLESALE GLOBAL HEALTH & BIOTECHNOLOGY FUND; CFSIL-CFS WHOLESALE GLOBAL SHARE FUND, Appellants
v.
MERCK & CO., INC. formerly known as SCHERING-PLOUGH CORPORATION; MERCK SCHERING-PLOUGH PHARMACEUTICALS; MSP DISTRIBUTION SERVICES (C) LLC.; MSP SINGAPORE COMPANY LLC; FRED HASSAN; CARRIE S. COX GIC PRIVATE LIMITED, Appellant
v.
MERCK & CO., INC. formerly known as SCHERINGPLOUGH CORPORATION; MERCK/SCHERING PLOUGH PHARMACEUTICALS; MSP DISTRIBUTION SERVICES (C) LLC; MSP SINGAPORE COMPANY LLC; FRED HASSAN; CARRIE S. COX GIC PRIVATE LIMITED, Appellant
v.
MERCK & CO., INC.; MERCK/SCHERING-PLOUGH PHARMACEUTICALS; MSP DISTRIBUTION SERVICES (C) LLC; MSP SINGAPORE COMPANY LLC; RICHARD T. CLARK; DEEPAK KHANNA NORTH SOUND CAPITAL LLC; NORTH SOUND LEGACY INTERNATIONAL; NORTH SOUND LEGACY INSTITUTIONAL; UNITED FOOD COMMERCIAL WORKERS LOCAL 1500 PENSION FUND, Appellants
v.
MERCK & CO., INC.; MERCK/SCHERING-PLOUGH PHARMACEUTICALS; MSP DISTRIBUTION SERVICES (C) LLC; MSP SINGAPORE COMPANY LLC; RICHARD T. CLARK; DEEPAK KHANNA

          Argued: March 20, 2019

          On Appeal from the United States District Court for the District of New Jersey (D.N.J. No. 3-13-cv-07240), (D.N.J. No. 3-13-cv-07241), (D.N.J. No. 3-14-cv-00241), (D.N.J. No. 3-14-cv-00242).

          Daniel Hume Karina Kosharskyy Ira M. Press Meghan J. Summers Kirby McInerney Counsel for Appellants.

          Daniel J. Juceam Daniel J. Kramer [ARGUED] Theodore V. Wells, Jr.

          Paul Weiss Rifkind Wharton & Garrison Counsel for Appellees.

          Before: SHWARTZ, KRAUSE, and BIBAS, Circuit Judges

          OPINION

          KRAUSE, CIRCUIT JUDGE.

         In these consolidated appeals, we consider whether the Securities Litigation Uniform Standards Act (SLUSA) prohibits investors from bringing individual actions under state law if they exercise their constitutionally protected right to opt out of a class action. Hewing to SLUSA's text, we conclude that these opt-out suits and the class actions from which these plaintiffs excluded themselves were not "joined, consolidated, or otherwise proceed[ing] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). Accordingly, we will reverse the District Court's dismissal of these suits and remand for further proceedings.

         I. Background

         This long-running dispute concerns allegations that two pharmaceutical manufacturers, Merck and Schering-Plough, stalled the release of damaging clinical trial results for their blockbuster drugs Vytorin and Zetia for years, tried to change the endpoint of the study to produce more favorable results, and then concealed their role in pushing for the change.[1] During this time, Merck and Schering-Plough allegedly made numerous statements touting the efficacy and commercial viability of Vytorin and Zetia. Plaintiffs allege that the delay allowed Schering-Plough to raise $4.08 billion through a public offering in August 2007, which the company then used to purchase another pharmaceutical company that would lessen its reliance on Vytorin and Zetia.

         Amid several critical press reports and an incipient congressional investigation, Merck and Schering-Plough finally released the clinical trial results in January and March 2008. The data showed that "[i]n no subgroup, in no segment, was there any added benefit" from taking Vytorin, raising the possibility that the active-ingredient ezetimibe amounted to an "expensive placebo." App. 165-66. Based on the results, the New England Journal of Medicine, along with several leading cardiologists, recommended that doctors prescribe Vytorin and Zetia only if other classes of drugs failed to control a patient's cholesterol.

         The devastating results for these popular anti-cholesterol drugs allegedly caused Merck's and Schering-Plough's stock price to plummet. Between December 11, 2007 and March 31, 2008, Schering-Plough's common-stock price declined 52%, eliminating $23.63 billion in market capitalization. And Merck's stock price dropped 38%, amounting to around a $48 billion loss in market capitalization.

         A. Investors File Putative Class Actions Against Merck and Schering-Plough

         Faced with enormous losses, investors soon filed separate putative class actions in the District of New Jersey against Merck and Schering-Plough, alleging each made numerous material misrepresentations about Vytorin and Zetia. Over a year later, in September 2009, the District Court denied defendants' motions to dismiss under the Private Securities Litigation Reform Act's (PSLRA) heightened pleading standard. Three years after that, the District Court denied defendants' motion for summary judgment and granted class certification.

         The District Court then directed-as Rule 23(c)(2) requires-that investors receive notice of their right to opt out of the class actions. The court-approved notices provided investors with 45 days (that is, until March 1, 2013) to exclude themselves from the class actions. If they did so, the notices assured them, "you will not be bound by any judgment in this Action" and "will retain any right you have to individually pursue any legal rights that you have against any Defendants." In re Merck & Co., Inc. Vytorin/ZETIA Sec. Litig., No. 2:08-cv-02177, ECF No. 266-1 at 11 (Dec. 19, 2012); In re Schering-Plough Corp. / ENHANCE Sec. Litig., No. 2:08-cv-00397, ECF No. 331-1 at 11 (Dec. 19, 2012).

         After the opt-out period ended, the District Court approved the settlement agreements the class-action plaintiffs reached with Merck and Schering-Plough. At the parties' request, the District Court declined to provide class members with a second opportunity to opt out, but did offer opt-out investors 45 days to join the class actions and share in the recovery. In preliminarily approving the settlement agreements, the District Court reiterated that opt-outs "shall not be bound by the terms of the Settlement, the Stipulation, or any other orders or judgments in the Action." In re Schering-Plough Corp. / ENHANCE Sec. Litig., Case No. 2:08-cv-00397, ECF No. 421 ¶ 11 (June 7, 2013); In re Merck & Co., Inc. Vytorin/ZETIA Sec. Litig., Case No. 2:08-cv-02177, ECF 330 ¶ 11 (June 7, 2013). In October 2013, the District Court gave final approval to the class-action settlements and entered separate final judgments dismissing class members' claims with prejudice.

         B. Opt-Out Investors Then File These Individual Lawsuits

         The sixteen plaintiffs in these consolidated appeals fell within the class definition alleged and eventually certified in the class actions against Merck and Schering-Plough. But they were not named plaintiffs, and neither they nor their counsel participated in the class-action proceedings. After the District Court certified the class actions, they opted out on the last day, March 1, 2013, and declined to opt in to participate in the settlement agreements.

         In November 2013 and January 2014, after the District Court entered the final judgments in the class-action suits, these opt-out investors ("Plaintiffs") brought their own actions against Merck and Schering-Plough, which had since merged. Their complaints track, sometimes verbatim, those filed in the class actions, except they added a fraud claim under New Jersey common law. Along with their complaints, Plaintiffs identified the class-action suits as "related" on the civil cover sheet and in a certification, as required by that District's Local Rules. See D.N.J. L. Civ. R. 5.1(e), 11.2, 40.1(c). In briefing papers before the District Court, Plaintiffs asserted in connection with an unrelated argument that "Defendants have already engaged in lengthy and expensive discovery in the class cases," so their suits would not burden defendants. App. 966. But nothing suggests that Plaintiffs coordinated their lawsuits with the class actions or received access to confidential materials therefrom.

         In their first motion to dismiss, Merck did not suggest that SLUSA precluded Plaintiffs' claims, even though that posed a threshold jurisdictional issue. See In re Lord Abbett Mut. Funds Fee Litig., 553 F.3d 248, 254 (3d Cir. 2009). Instead, Merck contended that their federal claims were barred by the Securities Exchange Act's statute of repose and that their state-law claims failed to plausibly allege actual reliance. The District Court rejected both arguments, but in an interlocutory appeal, we reversed the District Court's allowance of Plaintiffs' federal claims after the Supreme Court held that American Pipe tolling does not extend to statutes of repose. See N. Sound Capital LLC v. Merck & Co. Inc., 702 Fed.Appx. 75, 81 (3d Cir. 2017); see also Cal. Pub. Emps.' Ret. Sys. v. ANZ Sec., Inc., 137 S.Ct. 2042 (2017). Our decision left Plaintiffs with only their state-law fraud claims.

         On remand, Merck again moved for dismissal of Plaintiffs' state-law claims, arguing for the first time that SLUSA precluded them because the class actions and the opt-out suits were "joined, consolidated, or otherwise proceed[ing] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II).[2] In its opinion, the District Court recognized that Merck's argument "tests the limits of SLUSA's preclusive scope" and "it does not appear that any prior decision has addressed this issue." N. Sound Capital LLC v. Merck & Co., 314 F.Supp.3d 589, 601, 615 (D.N.J. 2018). Nevertheless, the District Court concluded that Plaintiffs' claims were barred under SLUSA because the "Individual Actions and the Vytorin Class Actions have proceeded as a single action." Id. at 619. Considering the statutory text, the District Court inferred that because Congress did not explicitly exempt opt-out suits from SLUSA, it necessarily "envisioned the aggregation of opt-out suits with related class actions" under SLUSA's mass-action provision. Id. at 605, 611. The District Court also concluded that SLUSA's legislative history required it to "construe the definition of a 'covered class action' broadly." Id. at 606 (citation omitted). And it relied on several district court decisions that, building upon each other, have espoused increasingly capacious interpretations of the mass-action provision. Id. at 606-19.

         These appeals followed.

         II. Discussion[3]

         In the wake of the Great Depression, Congress sought to "root out all manner of fraud" in securities by launching its "first experiment in federal regulation of the securities industry"-the Securities Act of 1933 and the Securities Exchange Act of 1934. Lorenzo v. SEC, 139 S.Ct. 1094, 1102, 1104 (2019) (quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 198 (1963)). At the same time, Congress left undisturbed private remedies under state common law and so-called "blue-sky" laws. See Edgar v. MITE Corp., 457 U.S. 624, 641 (1982); 15 U.S.C. §§ 77p(a), 78bb(a). This dual system of remedies has persisted since then, allowing aggrieved investors generally to seek redress under both state and federal law.[4]

         Sixty years later, Congress revisited this dual system of remedies in the PSLRA, primarily to curb "perceived abuses of the class-action vehicle in litigation involving nationally traded securities." Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S.Ct. 1061, 1066 (2018) (quoting Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006)). Rather than proscribing private suits under the securities laws outright, the PSLRA includes a series of mechanisms to dismiss unsubstantiated suits without discovery, see 15 U.S.C. § 78u-4(b), impose sanctions for frivolous actions, see id. § 78u-4(c), create a safe-harbor for certain forward-looking statements, see id. § 78u-5, and ensure that responsible stakeholders maintain control over class-action litigation, see id. § 78u-4(a)(3). These provisions, however, govern only securities claims brought under federal law in federal court. 15 U.S.C. §§ 77z-1(a)(1), 78u-4(a)(1).

         So, dissatisfied with the PSLRA, some entrepreneurial plaintiffs began filing putative class actions in state court to evade the Act's strictures. Merrill Lynch, 547 U.S. at 82. As class actions alleging only state-law claims, these suits generally could not be removed to federal court under the then-prevailing diversity-jurisdiction rules. See Zahn v. Int'l Paper Co., 414 U.S. 291, 301 (1973), superseded in part by 28 U.S.C. § 1332(d). To curtail this unprecedented shift of class-action securities litigation to state courts, Congress enacted SLUSA. Merrill Lynch, 547 U.S. at 82. But, yet again, Congress chose a measured approach. SLUSA "does not deny any individual plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce any state-law cause of action that may exist." Id. at 87. Instead, the SLUSA simply precludes (with some exceptions) investors from litigating their state-law claims alleging securities fraud through a "covered class action." See 15 U.S.C. § 78bb(f)(1).

         SLUSA's definition of a "covered class action" comprises two parts. The first part, which all agree does not apply here, encompasses any lawsuit that seeks to recover damages for more than 50 persons or on a representational basis. 15 U.S.C. § 78bb(f)(5)(B)(i). The second part, which we shall dub the "mass-action provision," covers lawsuits that: (1) are "filed in or pending in the same court"; (2) involve common legal or factual questions; (3) seek damages for more than 50 persons; and (4) "are joined, consolidated, or otherwise proceed as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B); accord Instituto De Prevision Militar v. Merrill Lynch, 546 F.3d 1340, 1346 (11th Cir. 2008).

         Because the total number of investors in Plaintiffs' lawsuits does not exceed fifty, SLUSA's mass-action provision does not apply unless their individual opt-out lawsuits and the settled class actions together satisfy the statutory definition. On that front, Plaintiffs do not dispute that the class actions and their individual lawsuits were both filed in the District of New Jersey and involve substantially the same facts. Thus, this appeal turns on the fourth prong of the mass-action provision: whether the class actions and these subsequent opt-out suits were "joined, consolidated, or otherwise proceed[ed] as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II).

         The opt-out plaintiffs insist that their individual actions do not satisfy this "single-action" requirement because they have never proceeded as a single action with the class actions. They argue both that their suits postdated the resolution of the class actions and that their suits were never coordinated with the class actions. By contrast, Merck interprets the single-action requirement to require a mere "functional relationship" between two suits, an amorphous standard so "broad[] and flexibl[e]" that it would seemingly embrace every suit that happens to share similar substantive allegations. Appellees' Br. 4.

         We conclude Merck's strained reading contravenes both the plain text and underlying constitutional principles. Instead, as we explain below, (A) some actual coordination is required to constitute a single action, and (B) there was no such coordination between Plaintiffs' opt-out suits and the prior class actions.

         A. The Single-Action Requirement Requires Some Actual Coordination

         a. The Phrase "Join[der], Consolidat[ion], or Otherwise Proceed[ing] as a Single Action" Plainly Demands Coordination

         We begin, as we must, with the mass-action provision's text. See Ross v. Blake, 136 S.Ct. 1850, 1856 (2016). To qualify as a mass action, the lawsuits must be "joined, consolidated, or otherwise proceed as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). We first consider the meaning of "joined" and "consolidated" before turning to the phrase "otherwise proceed as a single action."

         In law, the verbs "join" and "consolidate" share very similar meanings. See Consolidation of actions, Black's Law Dictionary 309 (1990) (cross-referencing joinder). "Join" means "to combine or unite in time, effort, action," Join, Black's Law Dictionary 836 (1990), while "consolidate" means "to unite or unify into one mass or body," Consolidate, Black's Law Dictionary 308 (1990). When used to refer to the joinder or consolidation of lawsuits, these words typically connote the "uniting [of] several actions," sometimes for all purposes, Consolidation of actions, Black's Law Dictionary 309 (1990), while other times just for pretrial purposes, see Fed. R. Civ. P. 42(a); 9A Charles Alan Wright et al., Fed. Prac. & Proc. § 2382 n.20 (3d ed. 2019). In federal court, the joinder or consolidation of separate suits is governed by Federal Rule of Civil Procedure 42, which provides that a court may "join for hearing or trial any or all matters at issue" in separate lawsuits or "consolidate the actions." Fed.R.Civ.P. 42(a) (emphasis added). In describing this rule, the Supreme Court has used "joinder" and "consolidation" interchangeably and observed that joining or consolidating cases results in the "merger" of "one or many or all of the phases of the several actions." Hall v. Hall, 138 S.Ct. 1118, 1125, 1130 (2018) (citation omitted).

         We find these authorities instructive in ascertaining what Congress meant by the phrase "otherwise proceed as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). Merck scrounges up a couple of dictionary definitions defining "proceed" as "to come forth from a source" or "to continue after pause or interruption." Appellees' Br. 32 (quoting Proceed, Merriam-Webster's Dictionary (2018)). But we are not persuaded that Congress meant the word "proceed" in either sense: The "come forth from a single source" meaning does not fit at all because the provision neither uses the preposition "from" nor does it identify any source from which the lawsuits must arise.[5] The "continue after pause or interruption" definition comes closer to the meaning here, but it too does not naturally relate to a "single action," much less joinder or consolidation. Instead, we conclude Congress intended the legal definition of "proceed," which-consistent with the meaning of joinder and consolidation in Black's Law Dictionary and Rule 42(a)-means "to carry on a legal action or process," Proceed, Webster's Third New International Dictionary 1807 (1990) [hereinafter Webster's Third Dictionary]; see also Proceed, The American Heritage Dictionary 1444 (3d ed. 1992) ("[t]o institute and conduct legal action").

         With this definition of "proceed" in mind, we consider what Congress meant by the broader phrase "otherwise proceed as a single action for any purpose." 15 U.S.C. § 78bb(f)(5)(B)(ii)(II). The adjective "single," when used in this statute to modify "action," means "consisting of one as opposed to or in contrast with many," while "action" refers to a suit. Webster's Third Dictionary 21, 2123; see also Single, American Heritage Dictionary 1684 (3d ed. 1992) ("[n]ot divided; unbroken"). By qualifying "single action" with the prepositional phrase "for any purpose," Congress clarified that the lawsuits need not proceed together for all-or even most-purposes; a group of lawsuits may satisfy the statutory requirement even if a court contemplates separate trials, judgments, or hearings. See Instituto De Prevision Militar, 546 F.3d at 1347. In this respect, SLUSA extends beyond the Class Action Fairness Act's mass-action removal provision, which exempts all pretrial coordination. 28 U.S.C. § 1332(d)(11)(B)(ii)(IV). But, at a minimum, suits do not "proceed as a single action" unless they are somehow combined for the joint management of a common stage of the proceedings (such as discovery) or the resolution of a common question of law or fact.

         A corollary of our reading is that, as a general matter, cases cannot "proceed as a single action" unless they coincide for some period. If two cases never overlap, a court cannot combine them for management of a common stage of the proceedings or for resolution of a common question. Thus, while we cannot rule out some extraordinary exception, we are hard-pressed to imagine any scenario in which two cases that never overlap could function as a single lawsuit on any dimension, as the mass-action provision requires. To be clear, we do not read the single action requirement to mean that cases must be coextensive with one another but rather that they be at least partially coordinated, which would seem invariably to require that they coincide for some period. See, e.g., In re Lehman Bros. Sec. & ERISA Litig., 131 F.Supp.3d 241, 266-68 (S.D.N.Y. 2015) (mass-action provision satisfied where two cases were combined for discovery for some time, but one case was later settled and dismissed).

         This common-sense interpretation draws further support from the time-honored canon ejusdem generis, which teaches that "where general words follow an enumeration of two or more things," those successive words refer "only to persons or things of the same general kind or class specifically mentioned." Antonin Scalia & Bryan A. Garner, Reading Law 199 (2012); see, e.g., Wash. State Dep't of Soc. & Health Servs. v. Guardianship Estate of Keffeler, 537 U.S. 371, 384 (2003). For the canon to adhere, the preceding words in the list must share a "common attribute." Ali v. Fed. Bureau of Prisons, 552 U.S. 214, 225 (2008).

         The mass-action provision presents a textbook case for applying ejusdem generis. The preceding verbs "joined" and "consolidated" are nearly synonymous when used to refer to the union of lawsuits, and "otherwise" signals a commonality between those preceding words and the phrase "proceed as a single action." See Begay v. United States, 553 U.S. 137, 143-44 (2008), abrogated on other grounds by Johnson v. United States, 135 S.Ct. 2551 (2015); id. at 151 (Scalia, J., concurring in judgment) (agreeing with the majority that "by using the word 'otherwise' the writer draws a substantive connection between two sets" based on "whatever follows 'otherwise'"); Bd. of Ed. v. Harris, 444 U.S. 130, 143 (1979) (accepting that a statute's use of "otherwise" connotes a link with a preceding clause). The meaning of join and consolidate therefore illustrates what Congress meant by the phrase "otherwise proceed as a single action."

         Confronted with these textual clues, Merck seizes on the mass-action provision's use of "any." Although a statute's use of the word "any" may favor a broader reading, see, e.g., Smith v. Berryhill, 139 S.Ct. 1765, 1774 (2019), its meaning "necessarily depends on the statutory context," Nat'l Ass'n of Mfrs. v. Dep't of Defense, 138 S.Ct. 617, 629 (2018). Or, as the Supreme Court quipped in rejecting another strange interpretation of SLUSA premised on the word "any," "we do not read statutes in little bites." Kircher v. Putnam Funds Tr., 547 U.S. 633, 643 (2006). Here, "any" modifies "purpose"; it provides no cause for reading the preceding phrase "proceed as a single action" "completely out of the statute." Nat'l Ass'n of Mfrs., 138 S.Ct. at 629. Nor does "any" preclude the application of ejusdem generis. See, e.g., Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 114 (2001) (applying the canon to the phrase "any other class of workers engaged in . . ...


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