Business Litigation

U.S. Supreme Court Ruling Clarifies Scope of Rule 10b-5(b) Claims under Securities Exchange Act of 1934

By Leona Yazdidoust

In Macquarie Infrastructure Corp. v. Moab Partners, L. P., the U.S. Supreme Court held that a failure to disclose information required by Item 303 of SEC Regulation S-K (“Item 303”) cannot support a private action under Rule 10b-5(b), when the failure does not render any “statements made” misleading.

Rule 10b-5(b) prohibits the omission of material facts in securities transactions if such omissions would make the “statements made” misleading. It distinguishes between pure omissions, where no particular meaning is attached to silence, and half-truths, which present partial truths while omitting critical information. The Court emphasized that Rule 10b-5(b) requires disclosure to ensure clarity and completeness in statements already made, thus covering half-truths but not pure omissions.

Macquarie Infrastructure Corporation (“Macquarie”) owns various infrastructure-related businesses, including a subsidiary managing large “bulk liquid storage terminals” in the United States. One commodity stored in these terminals was No. 6 fuel oil, typically with a sulfur content nearing 3 percent. In 2016, the International Maritime Organization of the United Nations formally adopted IMO 2020, a regulation capping the sulfur content of shipping fuel oil at 0.5 percent by the start of 2020. Macquarie did not address IMO 2020 in its public offering documents.

Moab Partners, L.P. (“Moab”) contended that Macquarie had a duty to disclose the extent to which its subsidiary’s storage capacity was allocated to No. 6 fuel oil. Instead, Moab argued, Macquarie violated disclosure obligations under Item 303, thus contravening Rule 10b-5. Moab filed a lawsuit against Macquarie and other officer defendants, alleging that Macquarie’s public statements were “false and misleading” for concealing from investors that its subsidiary’s primary product was No. 6 fuel oil. The District Court dismissed Moab’s complaint, but the Second Circuit reversed the decision. The U.S. Supreme Court granted certiorari.

The U.S. Supreme Court ruled that the failure to disclose information required by Item 303 cannot sustain a private action under Rule 10b-5(b) unless the omission renders any “statements made” misleading. It clarified that Rule 10b-5(b) does not prohibit pure omissions but solely addresses half-truths. The Court vacated the judgment of the Second Circuit Court of Appeals and remanded the case, affirming that pure omissions are not actionable under Rule 10b-5(b) of the Securities Exchange Act of 1934.

Dispute Resolution

Supreme Court Clarifies When FAA’s Transportation Exemption Applies

By Leslie A. Berkoff, Partner and Chair of Dispute Resolution Practice Group, Moritt Hock & Hamroff LLP

By unanimous decision, the U.S. Supreme Court in Bissonnette v. LePage Bakeries overturned a Second Circuit decision requiring that workers must work for a company “in the transportation industry” in order to avail themselves of the Transportation Exemption from the arbitration of claims set forth in Section 1 (the “Transportation Exemption”) of the Federal Arbitration Act (“FAA”). Bissonnette v. LePage Bakeries Park St., LLC, 601 U.S. 246, 256 (2024). The Court reaffirmed through this ruling its decision in Southwest Airlines v. Saxon that the application of the Transportation Exemption turns on the nature of a worker’s duties and not the nature or type of an employer’s business. Id. at 251; Southwest Airlines Co. v. Saxon, 596 U.S. 450, 460 (2022).

While the FAA is ordinarily given broad application in the context of interstate commerce, the Transportation Exemption is understood to prohibit the FAA’s application to “seamen, railroad employees, or any other class of workers” actually engaged in interstate commerce. In this case, the companies in question produced, marketed, and delivered packaged bakery foods. In response to a suit brought by franchisees of the companies, the companies sought to compel arbitration pursuant to an arbitration clause contained in the operative agreements. In response, the workers claimed they were exempt from arbitrating their claims under the Transportation Exemption. The lower court had found the plaintiffs were in the “bakery industry,” not the transportation industry, and as such, that the Transportation Exemption was inapplicable. However, the Supreme Court disagreed. In the decision authored by Chief Justice Roberts, the Court found that the sole focus should be on the workers’ duties for the employer as opposed to the industry of the employer. For the Transportation Exemption to apply, the workers had to “play a direct and ‘necessary role in the free flow of goods’ across borders,” in order to ensure the provision remained appropriately narrow in scope. The Court noted the focus should therefore be on the performance of work, not industry of the employer, absent which a rather arcane analysis would need to be performed to sort out the percentage of revenue related to different aspects of a business operation. Here, the workers picked up goods from warehouses and distributed them to stores and restaurants. The Court remanded the case for further proceedings.

This leaves open continued challenges to the appropriate test and standard for what classes of employees qualify as “transportation workers” under the Transportation Exemption. Further, the Court did not express an opinion on “any alternative grounds in favor of arbitration” raised in the lower courts.

SCOTUS Unanimous: Order Compelling Arbitration Requires Court to Stay, not Dismiss Case

By Jim Sandy, McGlinchey Stafford PLLC

On May 16, 2024, the Supreme Court unanimously held that when a district court compels claims to arbitration and a party has requested a stay under section 3 of the Federal Arbitration Act (“FAA”), the district court is required to stay the case and lacks the discretion to dismiss the suit outright. This decision is important for parties who seek to compel arbitration, as oftentimes, parties likewise seek an outright dismissal of the case when their claims are arbitrable.

Case Background

Smith v. Spizzirri involved claims that the respondents had violated various federal and state employment laws. Specifically, the petitioners argued that they had been misclassified as independent contractors and were not paid the required minimum and overtime wages as a result. The respondents removed the lawsuit to federal court and, upon removal, sought to compel arbitration and dismiss the lawsuit. In turn, petitioners conceded their claims were arbitrable but argued that under section 3 of the FAA, the district court was required to stay the case, not dismiss it.

District Court’s Initial Ruling

The district court disagreed and issued an order compelling arbitration and dismissing the case without prejudice. While acknowledging that the text of section 3 appears to contemplate a stay, not outright dismissal, the district court found that precedent “instructed that ‘notwithstanding the language of §3, a district court may either stay the action or dismiss it outright when, . . . the court determines that all of the claims raised in the action are subject to arbitration.’” The Ninth Circuit affirmed on appeal, and subsequently, the Supreme Court granted certiorari to resolve a circuit split over whether courts can dismiss, as opposed to stay, a case pending arbitration under section 3 of the FAA.

Supreme Court’s Rationale

The Court found it to be an easy decision and unanimously reversed, noting that the

text, structure, and purpose all point to the same conclusion: When a federal court finds that a dispute is subject to arbitration, and a party has requested a stay of the court proceeding pending arbitration, the court does not have discretion to dismiss the suit on the basis that all the claims are subject to arbitration.

Justice Sotomayor, writing for the majority, first looked to the text of section 3, which states, in relevant part, that a court “shall on application of one of the parties stay the trial of the action . . . .” Focusing on the word “shall,” Justice Sotomayor concluded that it “creates an obligation impervious to judicial discretion.” Justice Sotomayor then turned to the word “stay” and likewise found it to be clear and unambiguous: “Just as ‘shall’ means ‘shall,’ ‘stay’ means ‘stay.’” In so ruling, the Court also disagreed with respondent’s interpretation of the word “stay,” noting that any “attempt to read ‘stay’ to include ‘dismiss’ cannot be squared with the surrounding statutory text.” Rather, by directing a stay of the proceeding (as opposed to outright dismissal), section 3 ensures that parties can return to court if arbitration breaks down for one reason or another.

Implications of the Ruling

The Court also rejected the respondents’ other claim that district courts have inherent authority to dismiss cases subject to arbitration. As the Court noted, “[e]ven assuming district courts have this inherent authority, ‘the inherent powers of the courts may be controlled or overridden by statute or rule’”—one such rule being section 3, which clearly contemplates a stay, as opposed to dismissal, of outright proceedings.

JAMS Announces New Mass Arbitration Rules and Procedures

By Jim Sandy, McGlinchey Stafford PLLC

Following in the footsteps of the American Arbitration Association (“AAA”), JAMS recently announced the creation of its own mass arbitration procedures and guidelines, designed, in part, “to facilitate the fair, expeditious and efficient resolution of mass arbitrations.”

The new guidelines will apply to any mass arbitration, defined as seventy-five or more similar demands for arbitration or a different amount as specified in the parties’ arbitration agreement, filed against the same or related party on behalf of individual claimants represented by the same law firm or law firms acting in coordination with each other.

JAMS’s new mass arbitration procedures also include certain filing requirements that must be met by a claimant, including a requirement that a sworn declaration from counsel avers that the information in each demand is true and correct to the best of counsel’s knowledge. This appears to be designed to address ethical considerations raised by many respondent businesses faced with a mass arbitration.

Notably, the new rules authorize and permit the use of a process administrator, designed to “determine such preliminary and administrative matters as may be necessary to ensure the orderly and efficient resolution of the claims brought in a Mass Arbitration, consistent with the terms of the controlling agreements, procedural fairness and the integrity of the Arbitration process.” This includes the power and authority to consider, among other things:

  • Whether the filing requirements have been met.
  • Whether any conditions precedent in the arbitration agreement have been met.
  • Which arbitration demands should be included.
  • Which rules apply.
  • Whether to batch, consolidate, or otherwise group demands.
  • Any other non-merits issues that impact case administration.

JAMS’s new mass arbitration procedures also include an updated fee schedule. Under the new fee schedule, there is a nonrefundable $7,500 filing fee (regardless of the number of cases), which must be paid before the process administrator will be assigned. In consumer cases, the most a consumer must pay of the initial filing fee is $2,500, with the business picking up the remainder. The updated fee schedule also calls for a case management fee in the amount of 13 percent of the professional fee and a single appointment fee of $2,000 (for a two-party matter) regardless of the number of cases or group of cases the arbitrator is appointed to. A process administrator will also bill in accordance with the rate reflected in their general fee schedule.

The updated rules and fee schedule appear designed to address common complaints with the mass arbitration process, including exorbitant up-front filing fees and the inability to quickly address procedural issues at the outset before incurring significant filing fees and costs.



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