On April 5, 2005, a unanimous panel of the United States Court of Appeals for the Seventh Circuit ordered complaints in 10 cases to be dismissed, including one against a variable annuity company.
This represents a significant setback for plaintiffs’ attorneys that try to drag VA companies and mutual funds into “plaintiff-friendly” state courts. The 10 cases were consolidated as Kircher v. Putnam Funds Trust (Nos. 041495, et al.).
The relevant legal history goes back 10 years, when Congress enacted legislation to curb the rash of abusive securities class actions that it found were extorting settlements by threatening expensive litigation and generally were interfering with the efficient operation of the U.S. capital markets.
That legislation, the Private Securities Litigation Reform Act of 1995 (PSLRA), added a series of requirements and safeguards to screen out frivolous suits.
Plaintiffs’ attorneys responded by bringing equivalent suits that stated their complaints in terms of state law claims, often choosing to file in state courts that had developed the reputation for being particularly receptive to plaintiffs and for awarding generous damages.
Congress responded to this end run around its earlier legislation with new legislation, the Securities Litigation Uniform Standards Act of 1998 (SLUSA). Under SLUSA, such state lawsuits had to be dismissed at the outset, saving securities defendants–including insurance companies–much of the cost of litigation as well as the risk.
Plaintiffs’ attorneys have been poking and prodding at potential loopholes in SLUSA since it was enacted. One of their more successful efforts has been to bring claims on behalf of “holders” of securities, such as VA contract holders. Some courts have encouraged this approach by finding that SLUSA does not block these suits, or at least does not block them under some circumstances.
In response, class actions of “holders” have mushroomed. These cases complain about market-timed trades, market research, sales loads and more.
Most of the major insurance companies in the VA market have been slapped with class action suits by holders in the last couple of years. This will not be alleviated under the new Class-Action Fairness Act of 2005, because it does not apply to suits about securities. But the Seventh Circuit’s decision does strike a strong blow against the latest tactic for avoiding the standards Congress has imposed to protect against frivolous securities suits.
The court flatly rejected the technique of bringing lawsuits solely in the name of “holders,” ruling that this is no get-out-of-SLUSA-free card.
Thus far, the Seventh Circuit’s view is law only in Illinois, Indiana and Wisconsin. But that three-state area includes one of the most notorious plaintiff-friendly state courts in the country–Madison County, Illinois. Madison County has been derided by business groups and legislators, and most recently became the poster county for the new Class-Action Fairness Act when President Bush highlighted its class-action claim to fame during the signing ceremony.
All 10 of the lawsuits the Seventh Circuit just ordered dismissed had been filed in Madison County.
Though challenges to the appeals court decision may be brought, the decision is a major step forward for VA providers and the industry as a whole.
Nory Miller is counsel and Jeffrey Puretz is a partner with Dechert LLP. Miller, based in Philadelphia, can be reached at Nory.Miller@Dechert.com. Puretz, based in Washington, D.C., can be reached at Jeffrey.Puretz@Dechert.com.
This strikes a strong blow against the latest tactic for avoiding the standards Congress has imposed to protect against frivolous securities suits