Keeping Tabs on the Ninth Circuit
March 05, 2021 - This Week at the Ninth

This Week at the Ninth: SLUSA and U.S. Waters

This Week at the Ninth:  SLUSA and U.S. Waters

This week, we take a look at two Ninth Circuit decisions wrestling with issues of statutory interpretation.  In the first, the Court considered the Securities Litigation Uniform Standards Act’s prohibition of state-law claims that might have been brought as federal securities actions, in a case in which the plaintiff actually did also bring federal securities-fraud claims.  In the second, a divided Ninth Circuit panel addressed exactly what a defendant must “know” to be convicted under the Clean Water Act for knowingly discharging a prohibited substance into the waters of the United States. 

The Court holds that a state-law claim concerning a securities broker’s improper fees does not allege a misrepresentation “in connection with the purchase or sale of a covered security,” and thus is not barred by the Securities Litigation Uniform Standards Act (SLUSA).

Panel:  Judges Boggs (CA6), M. Smith, and Bennett, with Judge M. Smith writing the opinion.

Key Highlight:  “Plaintiffs’ fiduciary duty claims cannot proceed as a class action if those claims give rise to a Rule 10b-5 claim. That is the very purpose of SLUSA. However, that Plaintiffs cannot have it both ways does not necessarily mean that they cannot have it either way.”

Background:  Plaintiffs were individual investors with Edward Jones, a financial services firm.  Although originally utilizing Edward Jones’ commission based accounts—which charged on a per-trade basis—plaintiffs subsequently switched to Edward Jones’ new fee-based accounts—which charged an annual fee based on the assets under management.  Plaintiffs later brought suit on behalf of a putative class, alleging that Edward Jones had breached its state-law fiduciary duties by inviting plaintiffs to switch to these accounts without determining whether the accounts were suitable for plaintiffs (the accounts were more expensive, given plaintiffs’ limited trading activity).  Based on the same conduct, plaintiffs also alleged that Edward Jones had violated the federal securities laws.  The district court dismissed both sets of claims—the state law claims for lack of jurisdiction, and the federal claims on the merits.  Plaintiffs appealed only the dismissal of their state-law claims.

Result:  The Ninth Circuit reversed.  SLUSA precludes plaintiffs from bringing “(1) a covered class action (2) based on state law claims (3) alleging that the defendants made a misrepresentation or omission or employed any manipulative or deceptive device (4) in connection with the purchase or sale of (5) a covered security.”  In essence, the Court explained, SLUSA prohibits plaintiffs from bringing state-law claims that they could have pursued as federal securities-fraud claims.  But that did not mean, the Court continued, that the fact that plaintiffs had pursued a federal securities-fraud action meant that SLUSA prohibited their state-law claims:  “The question of whether a plaintiff could have pursued a claim pursuant to Rule 10b-5 is distinct from the question of whether a plaintiff did pursue that claim pursuant to Rule 10b-5.”  While plaintiffs’ complaint might have pleaded inconsistent theories of liability, that did not prevent them from later pursuing only one of these theories. 

The Court then turned to the critical question of whether plaintiffs’ claims were “in connection with the purchase or sale of a covered security,” as both SLUSA’s jurisdictional bar (and plaintiffs’ since-abandoned federal securities claims) required.  This inquiry, the Court clarified, required “an inquiry into the materiality of the alleged misrepresentation or omission to the purchase or sale of a covered security.”  Applying that standard, the Court concluded that any challenged misstatements or omissions weren’t material to the plaintiffs’ investment decisions, emphasizing that the fees in question were the same regardless of whether plaintiffs engaged in any transactions.  As the Court noted, plaintiffs had never alleged that they would have purchased or sold different securities had they remained in their prior accounts.  And, the Court continued, while the plaintiffs had changed accounts based on the Edward Jones’ alleged misconduct, “[c]hoosing a broker or specific type of account is fundamentally different than choosing to buy or sell a covered security.”  The Court distinguished cases involving alleged breaches of the “duty of best execution”—which challenge brokers’ decisions to make trades that secured kickback revenue—on the ground that such claims are premised on theory that the plaintiffs would not have otherwise made those trades.  Finally, the Court rejected Edward Jones’ attempt to invoke certain allegations in plaintiffs’ complaint relating to trade-based conduct, concluding that these allegations were either “irrelevant” to plaintiffs’ state-law claims (as “complaints are often filled with more information than is necessary”) or otherwise ambiguous. 

The Court holds that the federal crime of knowingly discharging a pollutant in violation of the Clean Water Act requires the defendant to know that he discharged material “into water,” but not that he discharged material “to waters of the United States.” 

The panel: Judges Bade, Bumatay, and Márquez (D. Ariz.), with Judge Bumatay writing for the majority and Judge Bade dissenting.

Key highlight:  “But like Russian nesting dolls, the statutory definitions keep going.”

Background:  James Philip Lucero was accused of charging construction companies to dump dirt and debris near the San Francisco Bay.  33 U.S.C. § 1319(c)(2)(A) makes it a crime to “knowingly violate[] section 1311.”  Section 1311 uses a phrase defined elsewhere in the statute; in turn, phrases in that definition have their own statutory definitions.  When the definitional “Russian nesting dolls” are unpacked, § 1319(c)(2)(A) prohibits “knowingly” engaging in the “addition of any” listed substance “discharged into water” “to waters of the United States” “from any point source.”  Agency regulations define the phrase “waters of the United States.”

A jury convicted Lucero of three counts of knowingly discharging a pollutant in violation of the Clean Water Act, and he appealed.

Result:  A divided Ninth Circuit panel vacated Lucero’s conviction and remanded for a new trial.

The majority first considered what knowledge is required for a conviction under § 1319(c)(2)(A).  Did the government have to prove Lucero knew that he added a listed substance “discharged into water” and that it was “to waters of the United States” (as Lucero argued)?  Or did the government have to prove only knowledge that Lucero added a listed substance “discharged into water” (as the government argued)?  The majority sided with the government.  It acknowledged that the statute’s nested definitions were complicated.  But it held that the best way to make sense of them was to treat the phrase “to waters of the United States” as merely a jurisdictional element, not part of the substantive prohibition.  Reasoning from the text of the statute and default rules governing mens rea requirements, the majority concluded that the knowledge requirement therefore applied to all parts of the substantive prohibition but not the jurisdictional element.

That interpretation of the statute nevertheless led the Court to grant Lucero a new trial.  The jury instructions did not include knowledge that the discharge was “into water.”  And the majority held this was not harmless error because the evidence of Lucero’s knowledge on that point was “both underwhelming and contested.”

The Court went on to reject two other arguments Lucero advanced.  First, Lucero argued that “waters of the United States” is unconstitutionally vague.  The Court acknowledged that this phrase has a complex regulatory definition that sometimes—counterintuitively—counts land as “waters of the United States.”  But the Court held that the regulations applicable at the time of Lucero’s conduct “provide an ascertainable standard” sufficient to survive vagueness review.  Second, Lucero argued that when the relevant agencies amended the “waters of the United States” regulation in 2020, it changed the definition applicable to his case.  The Court held the regulatory change was prospective only, relying on a general presumption to that effect and an absence of retroactive language in the new rule.

The Court saved two interesting tidbits for the footnotes.  First, the majority disagreed with the Third Circuit’s reading of the same operative provisions of the Clean Water Act (albeit in a different context, not involving the criminal offense in § 1319(c)(2)(A)).  Unlike the majority here, the Third Circuit had viewed “to waters of the United States”—not “into water”—as the controlling phrase in defining the Act’s substantive scope.  Second, the Court flagged a difficult open question over how to interpret the splintered decision in Rapanos v. United States, 547 U.S. 715 (2006), in which the Justices divided 4-1-4.  The Ninth Circuit recently changed how it identifies the controlling opinion in splintered decisions (under what is known as the “Marks rule”) in an en banc decision, United States v. Davis, 825 F.3d 1014 (9th Cir. 2016).  But the Court has not yet applied that new approach to Rapanos—and the Court declined to settle the matter here.

Judge Bade dissented only from the majority’s interpretation of § 1319(c)(2)(A)’s knowledge requirement.  She would have adopted Lucero’s interpretation that the government must prove knowledge that the discharge was “to waters of the United States.”  That phrase, in her view, is part of the substantive prohibition, not just a jurisdictional element.  Otherwise, she argued, the substantive prohibition standing alone would be “absurdly overbroad”—covering discharges into any form of water, like “using the restroom” or “skipping a rock across a pond.”  And, in her view, the substantive prohibition under the majority’s interpretation was also “underinclusive”—covering discharges into water only, but not the dry land falling within the definition of “waters of the United States.”  Judge Bade acknowledged that her reading would create surplusage between the phrases “into water” and “to waters of the United States.”  But that surplusage, she explained, is the result of piecing together disparate statutory definitions.  Even under her reading, she explained, the provisions contain no surplusage when taken in isolation or applied in other contexts.