SCOTUS Will Not Allow an Implied Cause of Action for Rescission

No surprises here. In FS Credit Opportunities Corp. v. Saba Capital Master Fund Ltd., the 6-3 conservative majority on the U.S. Supreme Court (SCOTUS) refused to recognize a private right of action for rescission under the Investment Company Act (ICA). SCOTUS has been hostile to implied rights of action since the Rehnquist Court, and the trend continues. In this area, I think the Court has been pretty consistent in the last three decades, and the only question is whether they will revisit some pretty well-established exceptions, such as securities fraud and Bivens actions, the latter of which have already been more or less limited to the facts of the case.

But this is about contractual rescission, so it’s worth a mention. Respondent Saba manages open-end mutual funds. Its investment strategy is activist: it purchases large stakes in more conservative close-end funds and then tries to alter those funds’ investment strategies or convert them into open-end funds. Saba sued Petitioners, referred to by the Court as the “Funds,” alleging that, by opting into the Maryland Control Share Acquisition Act, which limits shareholder voting rights, the Funds violated the ICA, which provides that each outstanding share of voting stock must have equal voting rights. The ICA’s § 47(a) provides that “a court may not deny rescission” of any contract that violates the ICA “at the instance of any party.” The District Court and the Second Circuit both found that language to create a private right of action to enforce the ICA, and that language seems pretty clearly to do so at first glance. And yet, there is a Circuit split.

Back in the day, Justice Barrett (above) explains, courts would imply private rights of action where necessary to effectuate Congress’s purpose. Beginning in the 1980s, the Court took a different approach, requiring “rights-creating language.” The Court is now especially suspicious of private rights of action where the statute creates a different remedial scheme, such as agency action. Justice Barrett finds that the statutory language at issue, “rescission at the instance of any party,” does not imply a private right of action. The key actor is a court, she says; not an individual. And because rescission is a remedy, the language assumes that there is already a party with a cause of acton before the court. In this case, the statutory scheme anticipates agency action by the Securities and Exchange Commission and thus contemplates no need for private suits.

But why is the phrase in question needed at all? Justice Barrett explains:

In addition, in 1970, Congress expressly created private rights of action for two violations of the ICA. The Court is reluctant to find an implied right of action when the same statute includes express rights of action.

The language about “any party” is troublesome, but Justice Barrett focuses on the word “party” rather than on the word “any.” The point is to expand the availability of the rescission remedy, not to create a private right of action. The dissents reliance on legislative history “backfires” according to Justice Barrett, as it models the misuse of legislative history, as “the equivalent of entering a crowded cocktail party and looking over the heads of the guests for one’s friends.” 

The three dissenting Justices read the statute differently. Justice Kagan does so without any reliance on legislative history. Justice Jackson, joined by Sotomayor, uses legislative history in Part III of her opinion, but in the parts of the opinion in which Justice Kagan joins, she argues that (in Justice Kagan’s synopsis) “the text, structure, and statutory history of Section 47(b) support recognition of a private right of action.”

By statutory history, I think Justice Kagan means the intertextual reading that Justice gives to various securities laws that use language and address issues similar to those at issue in Section 47(b) of the ICA. Courts read those other statutes as creating a private right of action, and so if follows that Congress, in using similar language in the ICA also intended a private right of action. The tough interpretive issue separating Majority and Dissent in this case turns on the TAMA case from 1979.

In TAMA, the Court found that Section 215 of the Investment Advisors Act (IAA) gives rise to a private right of action. The IAA and the ICA were enacted in the same year, and the language of Sections 215 and 47(b) were identical as of 1979. However, after TAMA, Congress amended Section 47(b), and the Majority and Dissent draw different conclusions based on the amendment. Justice Barrett finds nothing in the legislative history suggesting that Congress intended to preserve the private right of action in Section 47(b). Justice Jackson notes that Justice Barrett finds no evidence that Congress amended Section 47(b) because it intended to reject TAMA. According to Justice Jackson, Congress had other purposes in mind in amending the ICA, and the legislative history makes clear that Congress continued to see the need for private rights of action to enforce the right of rescission.

Both sides, it seems to me, make very strong cases for their interpretation of the statute. I think Justice Barrett’s characterization of Justice Jackson’s use of legislative history is highly unfair, as legislative history really only accounts for about half the opinion. Prior to that, Justice Jackson raises her own textual arguments, some of which Justice Barrett does not address. For example, the word “rescission” was added to the ICA after TAMA, suggesting that Congress wanted to signal its approval of the private right of action for rescission that TAMA recognized. Where Justice Barrett focuses on “party,” Justice Jackson focuses on the word “any,” and she provides good reasons to think that “any” party meant any party to the contract subject to rescission. Rather, I think how one feels about the outcome will turn on how one feels about implied causes of action generally.

I have never seen implied causes of action as problematic. The SEC seems to appreciate the assistance, as it lacks the resources to prosecute all violations of the statutes it is supposed to police. If we leave the enforcement of federal laws to federal agencies, a lot of wrongs are going to go unremedied, especially if an administration is not particularly zealous in the enforcement of certain laws. As yesterday’s post indicates, the Court’s conservative majority seems comfortable with allowing even egregious violations of federal rights to go unremedied. It proposes easy fixes that it ought to know will never be effectuated in the current political environment.

I note that the Solicitor General filed an amicus brief in support of the Petitioners in this case; that is, against an implied right of action. So this does not appear to be a case in which the federal agency welcomes the assistance of private attorneys general. One might expect the government’s position to carry weight here. However, a group of securities law scholars and former SEC officials lined up on the other side. All the more reason why the enforcement of securities laws ought not to be left to the whims of whomever happens to control the SEC during a particular administration.

It is worth noting in this context that the Court also last week, by the same 6-3 majority, refused to imply a cause of action under the Alien Tort Statute in Cisco Systems, Inc. v. Doe. As Justice Barrett put it, “Today, we close the door that Sosa cracked and hold that courts may not create new causes of action for violations of international norms.” The problem with this account is that Sosa did not crack a door. It mostly shut the door on implied causes of action under the ATS but left it open a crack, subject to “vigilant doorkeeping.” That door keeping was very vigilant. In Alvarez-Machain, the Court treated what had happened to Mr. Alvarez-Machain as an international kidnapping, a clear violation of international law. That same conduct was re-imagined in Sosa as “a single illegal detention of less than a day, followed by the transfer of custody to lawful authorities.” So conceived, the crack in the door was too narrow to accommodate a private right of action under the ATS. That was creative, but far too subtle for the current court.

I am more inclined with the dissent in these two cases to see each right that lacks a remedy as a blow against the principle of legality. Courts used to be comfortable exercising their equitable powers to fashion appropriate remedies so that wrongs would not go unaddressed and wrongdoers would not be unjustly enriched. I don’t know if I will live to see a return to such a view of the appropriate role for the judiciary, but it is very much to be wished for.