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A real estate investment trust and its former vice president, and a telecommunications company and its unhappy investors will have their day in the U.S. Supreme Court Nov. 28.
The justices will consider, in back-to-back securities disputes, whether whistleblowers are protected from retaliation if they flag possible corporate misconduct to superiors and whether state courts have jurisdiction over certain class securities-law actions.
So far, the two cases represent the only securities litigation on the high court’s docket this term. A third case brought by investors alleging that Leidos Inc. made misleading statements in an annual report settled shortly before it was to be argued Nov. 6.
In the whistleblower case, Digital Realty Trust Inc. official Paul Somers claimed he was fired for telling upper management that a supervisor was violating Sarbanes-Oxley Act internal-control requirements ( Digital Realty Trust Inc. v. Somers, U.S., No. 16-1276, oral argument 11/28/17 ). The REIT moved to dismiss, saying Somers wasn’t protected from retaliation by the Dodd-Frank Act because he didn’t “report out"—i.e., bring his concerns to the Securities and Exchange Commission. The district court disagreed and the U.S. Court of Appeals for the Ninth Circuit affirmed.
According to some lawyers, the case has “potentially enormous consequences for employers,” depending on how the justices interpret the statutory text and whether they give any weight to the SEC’s interpretation of the law. The SEC has taken the position that reporting out isn’t required, but the justices may disagree. Justice Neil Gorsuch in particular is said to take a dim view of agency deference and may not place great weight on the commission’s stance.
The second case turns on the meaning of 1998 amendments to the 1933 Securities Act intended to deter abusive class lawsuits. Cyan Inc., a high-technology concern, was sued by a pension fund for allegedly making material misstatements in securities offering documents ( Cyan Inc. v. Beaver Cty. Emp. Ret. Fund, U.S., No. 15-1439, oral argument 11/28/17 ). The suit was filed in California state court but alleged only ’33 Act violations.
Cyan moved to dismiss, saying the complaint should have been filed in federal district court. The trial court denied Cyan’s motion, an intermediate appeals court affirmed, and the California Supreme Court declined to review the decisions.
Earlier this year, New York lawyer Serena P. Hallowell of Labaton Sucharow LLP, who represents institutional investors not involved in this case, predicted that the pension fund will prevail before the high court as well. Just because the 1998 law provided for state law claims to be precluded in federal court, it doesn’t mean lawmakers intended that Securities Act claims be litigated only in federal court, she told Bloomberg Law. “If anything, an analysis of Congress’ silence says the opposite.”
That result would be good news for shareholders, who generally view state courts as friendlier venues for securities law actions.
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