In re Toyota Motor Corp. Sec. Litig., No. CV 10–922 DSF (AJWx), 2011 WL 2675395 (C.D. Cal. July 7, 2011).
In a recent decision, a District Court in California declined to exercise supplemental jurisdiction over the Japanese law claims in a case; thus, assuring the other countries of the world that they need not fear that the United States is the Shangri–La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets. While holding so, the Court maintained that foreign governments have the right to decide how to regulate their own securities markets. This respect for foreign law would be completely subverted if foreign claims are allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law.
The plaintiffs, customers, brought a class action under the Private Securities Litigation Reform Act after the defendants, Toyota Motors and others, made statements against a background of allegations of defects in Toyota vehicles.
In around 2000, Toyota received thousands of reports of unintended acceleration in several models of both the Toyota and Lexus brand vehicles. These reports continued through the last decade and were the subject of at least eight investigations by the National Highway Traffic and Safety Administration (“NHTSA”) between 2003 and 2010. Toyota identified driver error and non-standard or misaligned floor mats as the source of the problem.
In the meantime, Toyota began acquiring internal evidence that the unintended acceleration might have been due to a more serious mechanical or electrical defect in the design of the cars themselves. Toyota technicians were able to reproduce unintended acceleration not related to floor mat placement on several occasions.
In early 2010, in the face of increasing reports of accidents related to unintended acceleration, Toyota admitted that many of its vehicles were subject to several design defects. As a result, it instituted recalls at an estimated cost $4 billion. By the end of a wave of revelations, Toyota’s stock price had dropped at least 11%. The size and severity of the defects prompted both a NHTSA investigation and investigations by Congress, and in April 2010, the NHTSA fined Toyota $16.4 million for failure to comply with regulations regarding defect disclosure.
The customers filed numerous securities fraud suits under the Securities Exchange Act, and Securities and Exchange Commission Rule. Many such suits are consolidated with this action. The defendants moved to dismiss the consolidated complaint, which the District Court granted in part and denied in part.
First, the Court disagreed with the plaintiffs that the Court has original jurisdiction over the Japanese law claims under CAFA. The Court observed that because the claims related to “covered securities,” they were exempted from CAFA, 28 U.S.C. § 1332(d)(9). Under 15 U.S.C. § 77r(b)(1)(A), “Covered securities” include securities “listed, or authorized for listing, on the New York Stock Exchange (“NYSE”).” The complaint explicitly alleged that the Toyota common stock at issue was listed on the NYSE.
In an attempt to escape the obvious conclusion that the common stock is a covered security, the plaintiffs argued that the stock must actually be traded to qualify, and cited Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 83 (2006) and Proctor v. Vishay Intertechnology Inc., 584 F.3d 1208, 1217, 1221–22 (9th Cir.2009) for support. The Court observed that in both cases, however, the parties agreed that the securities were “covered,” and neither court purported to address the issue raised here. Certainly neither holds that a listed stock is not “covered” unless it is also traded on the exchange. To the contrary, in a footnote, the Supreme Court in Dabit clarified that “covered security” is defined “to include securities traded on a national exchange.” The Court declined to impose such a requirement, as to do so would ignore the plain language of the statute. Indeed, according to the statute, 15 U.S.C. § 77r(b)(1)(A), a stock need not even be listed to be “covered”; it need only be “authorized for listing,” the Court maintained.
Next, the Court found that it has supplemental jurisdiction under 28 U.S.C. § 1367(c), because the Japanese law claims form part of the same case or controversy and arise from a common nucleus of operative facts as the American securities fraud claims. Nevertheless, the Court declined to exercise its jurisdiction.
The Court observed that the Japanese law claims substantially predominated over the American law claims. The vast majority of the members of the currently pleaded class were common stock holders who purchased their stock on foreign exchanges and, therefore, had only a Japanese law claim. Thus, the damages analysis would focus overwhelmingly on these claims. In addition, even the few aspects of the claims that differ from the American law claims were extraordinarily significant in the context of this particular litigation. Under these circumstances, the Court concluded that the Japanese law claims unquestionably would dominate the litigation.
Further, the Court found that the exceptional circumstance of comity to the Japanese courts also strongly argued against the exercise of supplemental jurisdiction. Particularly, the Supreme Court held in Morrison v. Nat’l Australia Bk., Ltd., 130 S.Ct. 2869 (2010) that foreign governments have the right to decide how to regulate their own securities markets. This respect for foreign law would be completely subverted if foreign claims were allowed to be piggybacked into virtually every American securities fraud case, imposing American procedures, requirements, and interpretations likely never contemplated by the drafters of the foreign law. The Court maintained that while there may be instances where it is appropriate to exercise supplemental jurisdiction over foreign securities fraud claims, any reasonable reading of Morrison suggests that those instances will be rare.
The Court pointed out that several of the issues that the Supreme Court was concerned with in Morrison were procedural and would apply with equal force to supplemental jurisdiction over foreign claims. The Supreme Court remarked, “and the regulation of other countries often differs from ours as to what constitutes fraud, what disclosures must be made, what damages are recoverable, what discovery is available in litigation, what individuals actions may be joined in a single suit, what attorney’s fees are recoverable, and many other matters .” “Some in other countries fear that the United States has become the Shangri–La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.”
Accordingly, the Court declined to exercise supplemental jurisdiction of the Japanese law claims and directed the plaintiffs to amend their complaint as to the non-Japanese law claims.