Emulex Corp. v. Varjabedian

DOES SECTION 14(e) SUPPORT A PRIVATE RIGHT OF ACTION?

Emulex argues that Section 14(e) of the 1934 Act does not support a private right of action. According to Emulex, only Congress has the constitutional power to determine whether Section 14(e) allows private parties to sue. Emulex contends the Ninth Circuit’s decision that Section 14(e) implies a private right of action effectively creates a new law, and therefore oversteps the constitutional boundaries of judicial power. Emulex argues that the Supreme Court has consistently refused to infer new private causes of action or expand previously recognized private causes of action.

Moreover, Emulex asserts that Section 14(e) does not meet the Supreme Court’s established test for identifying when a law grants an implied private right of action. Emulex explains that under this test, Section 14(e) must demonstrate Congress’ intent to create a private right of action through “rights-creating language” and that it must belong to a statutory scheme allowing enforcement through a private remedy. Emulex states that Section 14(e) does not contain “rights-creating language” because it imposes a broad ban on certain conduct instead of singling out a class of plaintiffs for special protection. Furthermore, Emulex observes that Section 14(e) instructs federal agencies rather than private plaintiffs to enforce violations of its provisions.

Varjabedian and the other Emulex shareholders (“Shareholders”) counter that Emulex did not argue the issue of whether Section 14(e) supports a private right of action before the Ninth Circuit. In fact, according to the Shareholders, Emulex’s brief to the Ninth Circuit expressly conceded that Section 14(e) supports a private right of action.

Alternatively, the Shareholders argue that Section 14(e) does support a private right of action. The Shareholders contend that by adopting language from the privately enforceable Section 14(a) of the 1934 Act, Congress demonstrated its intent to create a private remedy. The Shareholders explain Section 14(e) was meant to instill a system of regulation for tender offers that would mirror Section 14(a)’s governance of proxy solicitations. According to the Shareholders, the intentional similarities between the two regimes strongly suggest that Congress wanted both to be privately enforceable.

The Shareholders also claim that both Congress and the circuit courts of appeals have affirmed that Section 14(e) supports a private right of action. More specifically, the Shareholders point to fifty years of case law inferring a private right of action under Section 14(e). Given that Congress has never rejected this jurisprudence, the Shareholders contend that the Supreme Court should not call it into question either.Finally, the Shareholders dispute Emulex’s assertion that Section 14(e) lacks “rights-creating language” by arguing that the 1934 Acts’ overriding purpose was to generate rights. In light of this broader purpose, the Shareholders maintain that Section 14(e)’s failure to explicitly address a protected class of plaintiffs is irrelevant.

DOES SECTION 14(e)’S TEXT REQUIRE SCIENTER OR NEGLIGENCE?

Emulex argues that even if Section 14(e) supports a private cause of action, the Shareholders still have to show that Emulex was not merely negligent, but rather that it intended to commit or had knowledge of wrongdoing. Emulex contends that if Congress had intended for negligence to be the standard of care in Section 14(e), it would have used different language such as “reasonableness.” Instead, Emulex points out that Section 14(e) uses terms such as “fraudulent,” “deceptive,” and “manipulative,” all of which the Supreme Court has previously associated with scienter. Although the Ninth Circuit found that the words “untrue” and “misleading” indicate a negligence standard, Emulex asserts that these terms can also denote a scienter standard because they mean “dishonest” and “deceptive.”

In addition to this lack of textual support for a negligence standard, Emulex maintains that the Ninth Circuit’s reading of Section 14(e) violates both “whole-text canon” and the “associated-words canon” of statutory construction by conceding that a scienter standard applies only to the second clause of Section 14(e)’s first sentence. Emulex explains that the “whole-text canon” asks judges to focus on the entire text of a statute, while the “associated-words canon” directs them to define words by looking at the related terms in a statute. According to Emulex, the “whole-text canon” means that the Ninth Circuit should have read the first sentence of Section 14(e) as a whole and interpreted the first clause in light of the second clause. Emulex also argues that the Ninth Circuit should have adhered to the “associated-words canon,” when interpreting the first sentence of Section 14(e). Emulex contends that neither the commas nor the word “or” in this sentence qualify as structural divisions, and that the words “untrue” and “misleading” in the first clause should be read in light of their associated words in the second clause.

The Shareholders counter that the plain text of Section 14(e) makes it clear that its two clauses cover different categories of conduct. The Shareholders contend that the first clause, as opposed to the second clause, does not expressly or implicitly require scienter. According to the Shareholders, associating the first clause with scienter runs contrary to the objective of protecting shareholders by requiring disclosure of necessary information. The Shareholders argue that Section 14(e) must apply to negligent misstatements and omissions because, regardless of scienter, these actions still withhold necessary information from shareholders. The Shareholders point out that Congress could have limited the scope of the first clause by using modifiers other than the word “any.” Moreover, the Shareholders assert that Section 14(e) becomes redundant under Emulex’s reading because if both clauses require scienter, they would cover the same type of conduct. As an example, the Shareholders note that if the first clause requires scienter, then the phrase “untrue statement” counts as a “fraudulent, deceptive, or manipulative act” in the second clause.

The Shareholders also point to the Supreme Court’s prior ruling that courts need not read separate clauses together. Here, the Shareholders posit that it would be proper to treat the two clauses as separate entities because Congress inserted the word “or” between them and used an infinitive to start each clause. The Shareholders claim that Congress selected this disjunctive structure because it viewed the two clauses as independent prohibitions on different types of conduct. The Shareholders therefore argue that it would be unreasonable for Congress to apply a scienter standard to the first clause just because the second clause requires one.

DID CONGRESS INTEND TO CREATE A SCIENTER REQUIREMENT IN SECTION 14(e)?

Emulex argues that Congress drafted Section 14(e) based on Rule 10b-5. Because the Supreme Court has interpreted the language in Rule 10b-5 to apply only to conduct with scienter, Emulex asserts that Section 14(e) should also require scienter. According to Emulex, Congress would not use similar language to cover different types of conduct. Emulex further explains that the SEC promulgated Rule 10b-5 under Section 10(b) of the 1934 Act, and Section 10(b) only allows the SEC to regulate only conduct with scienter. According to Emulex, the fact that Congress used a rule that applies only to conduct with scienter as a model for Section 14(e) demonstrates that this provision was only intended to regulate conduct with scienter.

Emulex also cites other relevant securities laws to support its argument that Section 14(e) demands a showing of scienter. Emulex contends that in these surrounding statutes, Congress explicitly stated when a private right action could proceed on negligence grounds. Moreover, Emulex notes that Congress subjected each of these negligence actions to several procedural limitations, including a requirement that prospective plaintiffs advance a bond to cover litigation costs. Because Section 14(e) does not contain either an express mention of negligence or any procedural constraints, Emulex concludes that it does not belong within the group of actions that are subject to a mere negligence standard.

The Shareholders counter by citing the Supreme Court’s decision that the same language in Section 17(a) of the 1934 Act does not require scienter. The Shareholders argue that there is no logical reason for the same language to have different meanings. According to the Shareholders, Section 14(e)’s clauses should be read separately like the Section 17(a)’s subparagraphs, despite the fact that Section 17(a) is not privately enforceable and involves injunctive relief. The Shareholders argue, however, that the issue at hand does not involve either of these differences, and that Section 17(a) should still dictate how Section 14(e) is defined.

Finally, the Shareholders also challenge Emulex’s analogy to the Supreme Court’s prior interpretation of Rule 10b-5. The Shareholders argue that in determining this rule’s scope, the Supreme Court had to consider that it was an SEC regulation rather than a statute, and that the SEC’s rulemaking authority is restricted to conduct with scienter. In contrast, the Shareholders claim that in this case the Supreme Court only needs to account for how Congress drafted Section 14(e). Moreover, the Shareholders contend that although Congress used Rule 10b-5’s language in Section 14(e), that does not necessarily mean that the scienter requirement from the former transfers to the latter. According to the Shareholders, Rule 10b-5 is actually based on Section 17(a)(2) of the 1934 Act, which requires negligence, and the Supreme Court would have applied this lower standard to the rule were it not for Section 10(b)’s narrow scope.