Earlier this year the Ninth Circuit held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not preclude state class actions alleging breach of contract and insurance bad faith .  Freeman Investments, LP v. Pacific Life Insurance Co., No. 09-55513, 2013 WL 11884 (9th Cir. Jan 2, 2013).

In Freeman the Plaintiffs purchased variable universal life insurance policies from Pacific Life Insurance. The policies allowed the policy holders to share in gains as well as losses from the insurer’s investment of the premiums generated from the policies. However, Plaintiffs argued that Pacific Life levied excessive charges in the administration of the insurance policies which decreased the amount available for investment.

The lawsuit was filed as a class action on behalf of the life insurance policy holders. The original complaint alleged violation of SLUSA, and various state law claims including breach of contract, breach of duty of good faith and fair dealing, and unfair competition. Plaintiffs argued that Pacific life deviated from industry standards in calculating the cost of insurance. They claimed that Pacific Life debited an amount in “excess of true mortality of charges.”

Because SLUSA precludes state law class actions that allege misrepresentations or fraudulent ommissions in connection with the purchase or sale of covered securities, Pacific Life filed a motion to dismiss and argued that a SLUSA precluded all the other claims.

SLUSA is part of the series of reforms which Congress first passed in 1995 as the Private Securities Litigation Reform Act (PSLRA) that imposed procedural hurdles and heightened pleading requirements on federal securities class actions. Plaintiffs were still allowed to file state law class actions. In 1998 (SLUSA), Congress persisted in its attempt to limit 7th Amendment rights with respect to securities litigation and barred state class actions in connection with the purchase or sale of covered securities. SLUSA failed to address and protect genuinely defrauded investors, and arguably compounded the 2008 financial collapse of America.

The district court granted Pacific Life’s motion, but only after twice giving the plaintiffs leave to amend to remove all references to systematic concealment and deceitful conduct. On review the Ninth Circuit agreed that the state law claim for unfair competition was precluded by SLUSA because it was dependent on allegations of misrepresentations and omissions in connection with the sale of the life insurance policies. However, the court ruled that the claims for breach of contract and violation of good faith and fair dealing involved issues relating to insurance industry accepted standards, did not rest on misrepresentation or fraudulent omission, and were not preempted by SLUSA. The 9th Circuit reversed the district court’s dismissal of the contract claims provided that the plaintiffs amended their complaint to remove any reference to deliberate concealment or fraudulent omission.