The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) is a federal law that bars state law securities class actions alleging misrepresentations or omissions related to the purchase or sale of certain covered securities. In an opinion filed on January 2, 2013, the Ninth Circuit held that SLUSA does not preclude certain state law securities class action breach of contract claims.

In Freeman Investments, LP v. Pacific Life Insurance Co., No. 09-55513 (9^th Cir., Jan 2, 2013), plaintiffs purchased variable universal life insurance policies from defendant Pacific Life Insurance Company. Under a variable universal life insurance policy, the insurer invests the premiums paid by the policyholders. The policyholders are able to share in the gains or losses which result from the investments. Plaintiffs alleged that Pacific Life overcharged for certain “costs of insurance” related to the insurance policies, thereby reducing the amount of money available for investments.

Because of the significant investment risk borne by policyholders of universal life insurance, there is a general consensus among the Circuits that the policies meet the definition of “covered securities” and, therefore, fall within the purview of SLUSA. When an action falls within the purview of SLUSA, state law securities class actions alleging misrepresentation or omissions are precluded. The specific issue in Freeman was whether the state law claims related to the insurance contracts (covered securities) alleged (a) a misrepresentation or omission in connection with the purchase or sale of covered securities (and, therefore would be precluded by SLUSA) or (b) were straightforward contract claims that would not be precluded by SLUSA.

In discussing the plaintiffs’ complaint, the court pointed out the plaintiffs’ claim that “‘cost of insurance’ is a term of art that refers to ‘the portion of premiums from each policyholder set aside to pay claims.’” The court further noted that the plaintiffs “raise a dispute about the key meaning of a contract term, and the success of their claim will turn on whether they can convince the court or jury that theirs is the accepted meaning in the industry.” Thus, the Ninth Circuit framed the dispute, or at least the central part of the dispute, as one sounding mainly in straightforward contract law, rather than omission or misrepresentation.

The district court had dismissed the case, finding that the crux of the plaintiffs’ complaint related to the omission of facts and possible misrepresentations in connection with the purchase or sale of securities, and therefore that the class action could not be maintained under state law. In reversing the district court, the Ninth Circuit held that the “claims for breach of contract and breach of the duty of good faith and fair dealing are not precluded by SLUSA, even if such claims relate to the purchase or sale of a covered security.” The Ninth Circuit advised the plaintiffs to amend their complaint and remove claims for concealment or fraudulent omission, holding that unlike the straightforward contract claims, the claims for concealment and fraudulent omission are precluded by SLUSA.

Freeman joins the ongoing debate over the limits of SLUSA, and is an important case as companies determine how best to defend against securities-based lawsuits.