On March 20, 2018, the Supreme Court decided Cyan, Inc. v. Beaver County Employee Retirement Fund, No. 15-1439, holding that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not strip state courts of jurisdiction over securities class actions alleging violations of only the Securities Act of 1933 (the 1933 Act) or permit defendants to remove such actions to federal court. This decision may encourage plaintiffs to file more class actions under the 1933 Act in state court. Because securities class actions filed in state court are not subject to many of the procedural reforms of the Private Securities Litigation Reform Act of 1995 (the PSLRA), including provisions requiring detailed disclosures by the named plaintiff of its transactions in the issuer’s securities, securities issuers and underwriters may face greater challenges in defending such cases than they would in federal court.
Following the 1929 stock market crash, Congress enacted the 1933 Act, which created private rights of action to aid the enforcement of disclosure obligations in connection with securities offerings. The 1933 Act granted federal and state courts concurrent jurisdiction over cases asserting claims under that Act, and it barred the removal of such cases from state to federal court. The Securities Exchange Act of 1934 (the 1934 Act) regulates subsequent trading of securities once offered, but suits brought under the 1934 Act may be filed only in federal court.
In 1995, in response to concerns about the filing of “abusive and meritless” securities class actions, Congress enacted the PSLRA. The PSLRA included a number of procedural reforms that apply only to securities class actions filed in federal court. To circumvent those procedural reforms, plaintiffs’ lawyers began filing an increasing number of cases alleging misstatements and omissions in connection with the purchase or sale of securities in state court, under state law. These plaintiffs argued – and some courts held – that many of the procedural reforms of the PSLRA do not apply in state court.
In order to halt plaintiffs’ efforts to end-run the PSLRA’s procedural reforms, Congress enacted SLUSA in 1998. As the House Report on the legislation put it, Congress intended to make “[f]ederal court the exclusive venue for most securities class action lawsuits.” At issue in Cyan was whether SLUSA’s amendments to the 1933 Act’s jurisdictional provision eliminated concurrent state court jurisdiction over class actions alleging only claims under the 1933 Act. Those amendments provide:
The district courts of the United States . . . shall have jurisdiction[,] concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. . . .
15 U.S.C § 77v(a) (emphasis added).
Federal district courts interpreting the italicized “Except Clause” had split as to its meaning. For example, federal district courts in California had generally held that 1933 Act class actions may proceed in state court and are not removable, while other federal district courts, including courts in New York, Delaware, and Tennessee, had held that SLUSA deprived state courts of jurisdiction over such class actions. The Solicitor General of the United States urged the Supreme Court to take an intermediate position. The Solicitor General argued that 1933 Act class action cases like Cyan are removable to federal court under SLUSA even if state courts still have concurrent jurisdiction, agreeing with Cyan that Congress did not intend defendants to be “stuck in state court” where many of the procedural protections of the PSLRA do not apply.
The Cyan Decision
In its Cyan decision, the Supreme Court unanimously ruled that “[b]y its terms,” SLUSA “does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 1933 Act.” In a decision written by Justice Elena Kagan, the Court explained that the purpose of the SLUSA amendments is to “completely disallow (in both state and federal courts) sizable class actions that are founded on state law and allege dishonest practices respecting a nationally traded security’s purchase or sale,” and to ensure “the dismissal of a prohibited state-law class action even when a state court ‘would not adequately enforce’ [SLUSA]’s bar.” (Emphasis added.) Notably, the Supreme Court stated that it was unable to explain why after SLUSA Congress required securities claims alleging fraud to be brought exclusively in federal court under the 1934 Act while allowing 1933 Act claims (which do not require fraudulent intent) to proceed in state court. But the Court speculated that “perhaps it was because of the long and unusually pronounced tradition of according authority to state courts over 1933 Act litigation.” In this regard, the Supreme Court rejected the Cyan defendants’ argument that the legislative purpose underlying SLUSA could not be fulfilled unless state court jurisdiction were withdrawn over 1933 Act claims, holding that SLUSA “largely” fulfilled its legislative purpose by entirely barring securities class actions based on state law and by requiring that all claims alleging fraud be brought under the 1934 Act and in federal court.
Finally, the Supreme Court also rejected the U.S. Solicitor General’s argument that SLUSA amended the 1933 Act to allow defendants to remove 1933 Act class actions to federal court as long as they allege misstatements in connection with the purchase or sale of a nationally traded security, because “Congress would not have been content to leave” such suits “stuck in state court.” The Supreme Court concluded that the Solicitor General’s attempt to interpret SLUSA in this fashion would contradict the Court’s prior precedent regarding statutory construction, and in any event would distort SLUSA’s text to reach the result that the Solicitor General believed Congress wanted.
The Supreme Court’s decision in Cyan may encourage plaintiffs to file more 1933 Act class actions in state court, where they can now be assured such actions will likely remain. (In certain limited scenarios, such as where the claims at issue relate to a bankruptcy proceeding, removal may still be available under other federal laws.) Following the pro-plaintiff interpretations of SLUSA from federal district courts in California, there was a sharp uptick in 1933 Act class actions filed in California state court in 2015 and 2016, when 15 and 18 cases were filed, respectively. Although the number of cases filed in California state court declined in 2017, when, according to Cornerstone Research, only seven California state 1933 Act cases were filed following the Supreme Court’s decision to hear Cyan, the number of 1933 Act state court filings may increase nationwide now.
To date, some courts have held that state court 1933 Act class actions are not subject to some of the heightened procedural requirements of the PSLRA. Perhaps as a result of those procedural protections not applying equally between state and federal court, more than one in three securities class actions filed in federal court were dismissed on defendants’ motions to dismiss, compared to only about one in 20 securities class actions filed in California state court. But there may be a silver lining in the Cyan decisions for defendants. Justice Kagan noted that the PSLRA contained “substantive protections” for defendants “wherever those suits go forward,” mentioning as one example the “safe harbor” provision for forward-looking statements enacted in the PSLRA. Justice Kagan’s observation may lead to efforts by defendants in future cases to argue that certain PSLRA reforms that some state courts previously have held apply only in federal court are in fact “substantive” and apply no matter where 1933 Act claims are filed.