421 U.S. 723 (1975), 74-124, Blue Chip Stamps v. Manor Drug Stores

Docket Nº:No. 74-124
Citation:421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539
Party Name:Blue Chip Stamps v. Manor Drug Stores
Case Date:June 09, 1975
Court:United States Supreme Court

Page 723

421 U.S. 723 (1975)

95 S.Ct. 1917, 44 L.Ed.2d 539

Blue Chip Stamps


Manor Drug Stores

No. 74-124

United States Supreme Court

June 9, 1975

Argued March 24, 1975



Under an antitrust consent decree, petitioner New Blue Chip was required to offer a substantial number of common stock shares in its new trading stamp business to retailers like respondent which had previously used the stamp service but which were not shareholders in petitioner's corporate predecessor. Charging that New Blue Chip and other petitioners devised a scheme to dissuade the offerees by means of materially misleading statements containing an overly pessimistic appraisal of the new business from purchasing the securities so that the rejected shares might later be offered to the public at a higher price, respondent brought this class action for damages for violation of the provisions of § 10(b) of the Securities Exchange Act of 1934 (Act) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission (SEC), which make it unlawful to use deceptive devices or make misleading statements "in connection with the purchase or sale of any security." Acting on the basis of the rule enunciated in 1952 in Birnbaum v. Newport Steel Corp., 193 F.2d 461, which states that a person who is neither a purchaser nor a seller of securities may not bring an action under § 10(b) of the Act or the SEC's Rule 10b-5, the District Court dismissed respondent's complaint. The Court of Appeals reversed, concluding that the facts warranted an exception to the Birnbaum rule. The court noted that prior cases had held that the rule did not exclude persons owning contractual rights to buy or sell securities, and that the offering of securities in this case in compliance with the antitrust decree served the same function as a securities purchase or sales contract.

Held: A private damages action under Rule 10b-5 is confined to actual purchasers or sellers of securities, and the Birnbaum rule bars respondent from maintaining this suit. Pp. 731-755.

(a) The longstanding judicial acceptance of the rule, together with Congress' failure to reject its interpretation of § 10(b)

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argues significantly in favor of this Court's acceptance of the rule. P. 733.

(b) Evidence from the texts of the Act and the Securities Act of 1933 supports the Birnbaum rule. When Congress wished to provide statutory remedies to others than purchasers or sellers of securities, it did so expressly. Pp. 733-736.

(c) Policy considerations predominantly favor adherence to the rule. Failure to follow it could well result in [95 S.Ct. 1920] vexatious litigation caused by a widely expanded class of plaintiffs bringing "strike" suits under Rule 10b-5 and opening litigation to hazy factual issues the proof of which would largely depend on uncorroborated oral testimony to the effect that a person situated like respondent consulted the security issuer's prospectus, and paid attention to it, and that its representations injured him. Pp. 737-749.

(d) Respondent, who derives no entitlement from the antitrust decree and does not otherwise possess any contractual rights relating to the offered stock, occupies the same position as any other disappointed offeree of stock registered under the 1933 Act who claims that an overly pessimistic prospectus has caused him to pass up the chance to purchase, and there is ample evidence that Congress did not intend to extend a private cause of action for money damages to the nonpurchasing offeree of stock registered under the 1933 Act for loss of the opportunity to purchase due to an overly pessimistic prospectus. Pp. 749-754.

(e) The exception to the Birnbaum rule that the Court of Appeals relied upon would expose the rule to case-by-case erosion depending upon whether a particular group of plaintiffs was deemed more discrete than potential purchasers in general so as to warrant departing from the rule, and would result in an unsatisfactory basis for establishing liability for the conduct of business transactions. Pp. 754-755.

492 F.2d 136, reversed.

REHNQUIST, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, WHITE, MARSHALL, and POWELL, JJ., joined. POWELL, J., filed a concurring opinion, in which STEWART and MARSHALL, JJ., joined, post, p. 755. BLACKMUN, J., filed a dissenting opinion, in which DOUGLAS and BRENNAN, JJ., joined, post, p. 761.

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REHNQUIST, J., lead opinion

MR. JUSTICE REHNQUIST delivered the opinion of the Court.

This case requires us to consider whether the offerees of a stock offering, made pursuant to an antitrust consent decree and registered under the Securities Act of 1933, 48 Stat. 74, as amended, 15 U.S.C. § 77a et seq. (1933 Act), may maintain a private cause of action for money damages where they allege that the offeror has violated the provisions of Rule 10b-5 of the Securities and Exchange Commission, but where they have neither purchased nor sold any of the offered shares. See Birnbaum v. Newport Steel Corp., 193 F.2d 461 (CA2), cert. denied, 343 U.S. 956 (1952).


In 1963, the United States filed a civil antitrust action against Blue Chip Stamp Co. (Old Blue Chip), a company in the business of providing trading stamps to retailers, and nine retailers who owned 90% of its shares. In 1967, the action was terminated by the entry of a consent decree. United States v. Blue Chip Stamp Co., 272 F.Supp. 432 (CD Cal.), aff'd sub nom. Thrifty Shoppers Scrip Co. v. United States, 389 U.S. 580 (1968).1 The decree contemplated a plan of reorganization

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whereby Old Blue Chip was to be merged into a newly formed corporation, Blue Chip Stamps (New Blue Chip). The holdings of the majority shareholders of Old Blue Chip were to be reduced, and New Blue Chip, one of the petitioners here, was required under the plan to offer a substantial number of its shares of common stock to retailers who had used the stamp [95 S.Ct. 1921] service in the past but who were not shareholders in the old company. Under the terms of the plan, the offering to nonshareholder users was to be proportional to past stamp usage, and the shares were to be offered in units consisting of common stock and debentures.

The reorganization plan was carried out, the offering was registered with the SEC as required by the 1933 Act, and a prospectus was distributed to all offerees as required by § 5 of that Act, 15 U.S.C. § 77e. Somewhat more than 50% of the offered units were actually purchased. In 1970, two years after the offering, respondent, a former user of the stamp service and therefore an offeree of the 1968 offering, filed this suit in the United States District Court for the Central District of California. Defendants below and petitioners here are Old and New Blue Chip, eight of the nine majority shareholders of Old Blue Chip, and the directors of New Blue Chip (collectively called Blue Chip).

Respondent's complaint alleged, inter alia, that the prospectus prepared and distributed by Blue Chip in connection with the offering was materially misleading in its overly pessimistic appraisal of Blue Chip's status and future prospects. It alleged that Blue Chip intentionally made the prospectus overly pessimistic in order to discourage respondent and other members of the allegedly large class whom it represents from accepting what was

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intended to be a bargain offer, so that the rejected shares might later be offered to the public at a higher price. The complaint alleged that class members, because of and in reliance on the false and misleading prospectus, failed to purchase the offered units. Respondent therefore sought on behalf of the alleged class some $21,400,000 in damages representing the lost opportunity to purchase the units; the right to purchase the previously rejected units at the 1968 price; and in addition, it sought some $25,000,000 in exemplary damages.

The only portion of the litigation thus initiated which is before us is whether respondent may base its action on Rule 10b-5 of the Securities and Exchange Commission without having either bought or sold the securities described in the allegedly misleading prospectus. The District Court dismissed respondent's complaint for failure to state a claim upon which relief might be granted.2 On appeal to the United States Court of Appeals for the Ninth Circuit, respondent pressed only its asserted claim under Rule 10b-5, and a divided panel of the Court of Appeals sustained its position and reversed the District Court.3 After the Ninth Circuit denied rehearing en banc, we granted Blue Chip's petition for certiorari. 419 U.S. 992 (1974). Our consideration of the correctness of the determination of the Court of Appeals requires us to consider what limitations there are on the class of plaintiffs who may maintain a private cause of action for money damages for violation of Rule 10b-5, and whether respondent was within that class.


During the early days of the New Deal, Congress enacted two landmark statutes regulating securities.

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The 1933 Act was described as an Act to

provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

The Securities Exchange Act of 1934. 48 Stat. 881, as amended, 15 U.S.C. § 78a et seq. (1934 Act), was described as an Act

to provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent [95 S.Ct. 1922] inequitable and unfair practices on such exchanges and markets, and for other purposes.

The various sections of the 1933 Act dealt at some length with the required contents of registration statements and prospectuses, and expressly provided for private...

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