Today, the Supreme Court of the United States held that state courts have jurisdiction over class actions brought under the Securities Act of 1933 (Securities Act) and that such actions filed in state court may not be removed to federal court.1
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.
Cyan's Petition for Certiorari
The cert petition presented the question whether state courts lack subject matter jurisdiction over Securities Act class actions.
This question had divided dozens of federal district courts. In recent years, California's federal district courts had held that state courts retain jurisdiction over such actions and that such actions may not be removed to federal court, while federal district courts in New York, New Jersey, and Delaware had generally read SLUSA to mean that state courts lack jurisdiction over such actions.
This split in the courts made California a haven for Securities Act class actions. Plaintiffs sued even non-California companies in California state courts. In recent years, the number of Securities Act class actions filed in California state courts increased by more than 1,000 percent.
Cyan's petition requested that the U.S. Supreme Court grant certiorari to resolve the split in the lower courts, and to hold that state courts lack jurisdiction over Securities Act class actions.
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. However, the United States advocated an alternative reading of SLUSA. 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.
On June 27, 2017, the U.S. Supreme Court granted Cyan's cert petition. Cyan, plaintiffs, and the United States filed merits briefs, and amicus briefs were filed in support of both parties.
Merits Decision
On March 20, 2018, the Court ruled that SLUSA left intact state court jurisdiction over Securities Act class actions.2 The Court stated that SLUSA's statutory language "does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 1933 Act."3 In addition, the Court noted that "appeals to SLUSA's purposes and legislative history fail to overcome the clear statutory language."4 Accordingly, "[s]tate-court jurisdiction over" such actions "continues undisturbed."5
The Court also rejected the position of the United States, holding that such cases filed in state court may not be removed. SLUSA's statutory language allows removal only for "state-law class actions alleging securities misconduct."6 But class actions brought under the federal Securities Act "remain subject to the [Securities] Act's removal ban."7
Takeaways
Today's decision has a wide-ranging impact for newly public companies, their officers and directors, and IPO underwriters, who are often named as defendants in Securities Act class actions.
More State Court Litigation. The Court's ruling makes clear that such actions may be brought in any state court where venue is proper. The decision will have particular impact in New York, New Jersey, and Delaware, where federal courts had held that state courts lacked jurisdiction. Today's decision overrules those courts. State courts in those jurisdictions should expect to see Securities Act class action filings.
No Removal. Actions brought in state court cannot be removed to federal court, pursuant to the Court's broad interpretation of SLUSA's removal ban. Actions that proceed in state court may be more likely to survive dismissal, as state courts often have more lenient pleading standards than federal courts. Some procedural protections of the Reform Act may also not apply in state court.
