On June 27, 2017, the Supreme Court of the United States granted a petition for certiorari filed by Wilson Sonsini Goodrich & Rosati on behalf of its clients, Cyan, Inc. and its officers and directors. The question before the Supreme Court is whether securities class actions under the Securities Act of 1933 (Securities Act) may be brought in state courts. The grant of certiorari will let the Supreme Court resolve a split in the lower courts and is an important development for public companies—particularly for public companies in California, as many of the suits have been filed in California state court. 

Background

Telecommunications networking company Cyan went public in 2013. Months later, it was sued by shareholders in a class action. The plaintiffs alleged that Cyan’s IPO registration statement was misleading under Sections 11, 12(a)(2), and 15 of the Securities Act. The plaintiffs brought only federal claims but did not sue in federal court. Instead, they filed suit in California state court.

Cyan and its officers and directors moved for judgment on the pleadings for lack of subject matter jurisdiction. The motion argued that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) divested state courts of jurisdiction over federal Securities Act class actions. SLUSA was passed by Congress in 1998 to prevent securities plaintiffs from filing class actions in state court and thus evading the requirements of the Securities Litigation Reform Act of 1995 (Reform Act). 

Cyan’s motion was denied. Cyan then filed a writ petition with the California Court of Appeal, which denied relief without opinion. The California Supreme Court subsequently denied review. Cyan and its officers and directors then filed a petition for certiorari in the U.S. Supreme Court.

Petition for Certiorari

The cert petition presented the question whether state courts lack subject matter jurisdiction over Securities Act class actions.

This question has divided dozens of federal district courts. In recent years, the prevailing trend has been for California’s federal district courts to hold that state courts retain jurisdiction over such actions and to bar removal of such actions to federal court, while federal district courts in New York, New Jersey, and Delaware have generally read SLUSA to mean that state courts lack jurisdiction over such actions.

This split in the courts has made California a haven for Securities Act class actions. Even non-California companies have been sued in California state court. In recent years, the number of Securities Act class actions filed in California state courts has increased by well over 1,000 percent.

Cyan’s petition requested that the U.S. Supreme Court grant certiorari to resolve the split in the district courts, and to hold that state courts lack jurisdiction over Securities Act class actions. Two amicus briefs were filed in support of the petition, one by the Securities Industry and Financial Markets Association and the U.S. Chamber of Commerce, and the other by a group of law professors. The plaintiffs opposed the petition.

After reviewing Cyan’s petition and related briefing, the U.S. Supreme Court invited the Acting Solicitor General to file a brief expressing the views of the United States. 

Amicus Brief of the United States

On May 23, 2017, the Acting Solicitor General filed an amicus brief on behalf of the United States. In its brief, the United States urged the Court to grant Cyan’s cert petition. The brief emphasized the “substantial confusion” plaguing the district courts. It agreed with Cyan that this case is an appropriate vehicle for Supreme Court review in light of the procedural hurdles to appellate review of remand orders.

However, the United States urged an interpretation of SLUSA that is different from Cyan’s reading. The United States argued that SLUSA, rather than divesting state courts of jurisdiction, preserved state courts’ jurisdiction over Securities Act class actions, but allowed such actions to be removed to federal court.

Certiorari Is Granted

On June 27, 2017, the U.S. Supreme Court granted Cyan’s cert petition.

The Court’s eventual decision will resolve the split in the courts discussed above. If the Court holds either that state courts lack jurisdiction over Securities Act class actions, or that state courts have jurisdiction but that such actions can be removed to federal court, the holding will bar use of state-court litigation to circumvent the Reform Act.  

The Court will likely hear the case sometime in its October Term 2017.