This Note argues that the correct approach for interpreting the scope of SLUSA's preemption language is the "literalist" approach taken by the Sixth Circuit. Part I of this Note lays out the legal framework of the Reform Act of 1995, Congress's intent in enacting the legislation, and the unintended consequences that flowed from the PSLRA's heightened pleading requirements. Part I also discusses SLUSA, what led to its passage, and its preemption language. Additionally, it looks at the Supreme Court's interpretation of preemption statutes generally, as well as the Supreme Court's broad interpretation of SLUSA in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit.
Part II examines the three distinct approaches that exist in the Third, Ninth, and Sixth Circuits for defining what is and what is not within the scope of SLUSA's preemption language. One approach is the Third Circuit approach, which tries to distinguish between essential and extraneous allegations in a complaint. If the allegation of fraud is essential to the claim, the suit is necessarily preempted and dismissed. But if the allegation of fraud is merely "an extraneous detail," the action may proceed in state court.
The Ninth Circuit takes a second approach, which preempts an action if it alleges in language or substance a misrepresentation or omission of a material fact, but subsequently allows the suit to be dismissed without prejudice. 6 This approach permits a plaintiff to file an amended complaint that removes the fraud allegation and therefore is not preempted under SLUSA.
A third approach, referred to throughout this Note as the Sixth Circuit literalist approach, reads the language of SLUSA broadly. The Fifth and Eighth Circuits have also used this approach in earlier cases. 19 Under this analysis, if a complaint can be interpreted as alleging fraud, it is preempted under SLUSA and subject to dismissal with prejudice.
Finally, Part III criticizes the Third and Ninth Circuit approaches and argues that the literalist approach is the correct standard for analyzing SLUSA's preemption language. While the distinction of whether or not the misrepresentation or omission is a necessary element of an alleged cause of action seems like a defensible bright-line rule, the Third Circuit approach is problematic. Lower courts have struggled to apply the standard consistently, and in some cases the distinction between essential and extraneous claims has proved ephemeral.