BLUE CHIP STAMPS V. MANOR DRUG STORES

Decision Date09 June 1975
CourtU.S. Supreme Court

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

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. P P. 731-755.

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

Page 421 U. S. 724

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. P P. 733-736.

(c) Policy considerations predominantly favor adherence to the rule. Failure to follow it could well result in 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. P P. 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. P P. 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.

Page 421 U. S. 725

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).

I

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). [Footnote 1] The decree contemplated a plan of reorganization

Page 421 U. S. 726

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 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

Page 421 U. S. 727

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 ,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 ,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. [Footnote 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. [Footnote 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.

II

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

Page 421 U. S. 728

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 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 civil causes of action. Section 11(a) gave a right of action by reason of a false registration statement to "any person acquiring" the...

To continue reading

Request your trial
1942 cases
  • Coronet Ins. Co. v. Seyfarth
    • United States
    • U.S. District Court — Northern District of Illinois
    • July 16, 1987
    ...transaction under Section 10(b) and Rule 10b-5 when he bought or sold stock in the transaction. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). Also, a non-buying and non-selling shareholder may bring a derivative Section 10(b) and Rule 10b-5 actio......
  • In re Kerwin-White
    • United States
    • U.S. Bankruptcy Court — District of Vermont
    • May 23, 1991
    ...intent in every case involving statutory construction begins with the actual language. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539, 561 (1975) (Powell, J., concurring: "The starting point in every case involving construction of a statute is ......
  • Chanoff v. US Surgical Corp., Civ. No. 3:93CV01522 (AHN).
    • United States
    • U.S. District Court — District of Connecticut
    • January 4, 1994
    ...either bought or sold shares during the time in which the market was allegedly defrauded. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-38, 95 S.Ct. 1917, 1926, 44 L.Ed.2d 539 (1975) (shareholders who have neither bought nor sold shares have no standing to bring Rule 10b-5 privat......
  • In re Smartalk Teleservices Securities Litigation, No. 00-1315.
    • United States
    • U.S. District Court — Southern District of Ohio
    • November 1, 2000
    ...vexatiousness different in degree and kind from that which accompanies litigation in general." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 739-44, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). As the Court then observed, groundless claims of securities fraud tended to delay the normal busi......
  • Request a trial to view additional results
14 firm's commentaries
  • Class Certification In Securities Fraud Actions: A View From The Second Circuit
    • United States
    • Mondaq United States
    • December 8, 2011
    ...(2d Cir. 1952). This "purchaser or seller" requirement was later confirmed by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754-55 (holding that individuals who failed to purchase a stock due to misrepresentation of its value did not have standing to sue because ......
  • Limiting Securities Litigation Risks In EB-5 Offerings: What Regional Centers And Issuers Need To Know
    • United States
    • Mondaq United States
    • December 1, 2015
    ...and Rule 10b-5. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 318 (2007); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975). Who is potentially liable? Rule 10b-5(b) states that it is unlawful to "make" any untrue statement of a material fact or any misleading......
  • US IPO Guide - 2022 Edition
    • United States
    • JD Supra United States
    • June 17, 2022
    ...suered. 15 U.S.C. § 78u-4(b)(4).19. Cf., e.g., SEC v. Zandford, 535 U.S. 813, 822 (2002).20. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 754-55 (1975).21. Loss, Seligman & Paredes, Chapter 9.B.7 (Fraud; Issuers and Insiders; Scope of Rule 10b-5), n.678.22. See id. (explaining that......
  • Gibson Dunn Offers 2022 Year-End Securities Litigation Update
    • United States
    • LexBlog United States
    • March 28, 2023
    ...or sold by the plaintiffs.” Id. Defendants’ rule rested on “four bases:” “(i) consistency with Blue Chip [Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)], (ii) precedence set by the Second Circuit, (iii) other supporting caselaw, and (iv) the need to construe the statute narrowly.” Id. Th......
  • Request a trial to view additional results
33 books & journal articles
  • TO CALL A DONKEY A RACEHORSE - THE FIDUCIARY DUTY MISNOMER IN CORPORATE AND SECURITIES LAW.
    • United States
    • The Journal of Corporation Law Vol. 48 No. 1, September 2022
    • September 22, 2022
    ...we deal with private actions under Rule 10b-5, we deal with a judicial oak which has grown from little more than a legislative acorn." 421 U.S. 723, 737 (1975). For the seminal treatise on Rule 10b-5, see ALAN R. BROMBERG ET AL., BROMBERG AND LOWENFELS ON SECURITIES FRAUD (142.) 15 U.S.C. [......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 45 No. 2, March 2008
    • March 22, 2008
    ...exists for criminal prosecutions. United States v. O'Hagan, 521 U.S. 642, 664 (1997) (citing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737 (14.) Dirks v. SEC, 463 U.S. 646, 654-55 (1983) (stating that those with a fiduciary duty to investors will be held liable under Rule 10b-5 o......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 42 No. 2, March 2005
    • March 22, 2005
    ...bought nor sold, but asserted they would have traded absent fraudulent conduct." Id. (discussing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). However, the purchaser and seller requirements for standing in private actions have "no import in criminal prosecutions for willful v......
  • Securities fraud.
    • United States
    • American Criminal Law Review Vol. 44 No. 2, March 2007
    • March 22, 2007
    ...bought nor sold, but asserted they would have traded absent fraudulent conduct." Id. (discussing Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)). However, the purchaser and seller requirements for standing in private actions have "no import in criminal prosecutions for willful v......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT