U.S. Supreme Court Permits Federal Class Action Securities Cases to Proceed in State Court

by Weiner Brodsky Kider PC
Contact

Weiner Brodsky Kider PC

The U.S. Supreme Court recently ruled that state courts retain jurisdiction over federal class actions securities cases for violations of the Securities Act of 1933.  The Court was unanimous in confirming that when Congress made reforms to the Securities Act of 1933 with the Securities Litigation Uniform Standards Act of 1998 (SLUSA), those reforms did not strip state courts of jurisdiction over class action cases alleging only 1933 Act violations.

In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA) to control abusive securities litigation practices.  Some securities litigants sought to avoid these restrictions by filing state-law and 1933 Act securities class action cases in state courts.  The 1998 SLUSA was enacted in response to the perceived “end-around,” and specifically preempted state-law class action claims for nationally traded securities, and allowed for the removal of these cases from state to federal courts, where they would face dismissal under the statute.

The Court’s opinion in this case turned on interpretation of an “except” clause in the SLUSA.  That clause granted jurisdiction over covered class action cases to federal courts, concurrent with state and federal courts, “except as provided in section 77p of this title with respect to covered class actions….”

A “covered class action” is defined under SLUSA as a class action in which damages are sought on behalf of 50 or more persons.  SLUSA’s section 77p(b) prohibits state and federal class actions by more than 50 persons that are based on state law and allege dishonest practices regarding the sale or purchase of a nationally traded security.  Section 77p(c) allows for removal of a covered state court class action to federal court, and ensures the dismissal of prohibited state-law class actions.

The Petitioners, a telecommunications company, and its officers and directors, made an initial public offering and were sued in state court by Respondents, a group of investors that included three pension funds.  The suit alleged that offering documents made material misstatements in violation of the 1933 Act.  The investors made no state law claims.

The telecom company moved to dismiss for lack of subject matter jurisdiction and argued that under the 1998 SLUSA amendments to the 1933 Securities Act, state courts do not have jurisdiction over 1933 Act claims in covered class actions.  The investors countered that SLUSA permits state court actions that only allege federal 1933 Act violations.  The state court denied the investor’s motion to dismiss, state appellate courts denied review, and the Supreme Court granted certiorari to resolve state and federal court splits about whether SLUSA prohibits state court jurisdiction over covered class actions asserting only 1933 Act claims.

Petitioners argued that the “except” clause and related language should be read as prohibiting state court jurisdiction over federal securities class actions.  This argument was based on a reading of SLUSA that said it was intended to limit state court jurisdiction for large class actions regardless of whether the suit is based on state or federal law.  Petitioners contended their reading of the text of the statutory language of SLUSA was also in line with legislative intent to reform abusive practices in class actions securities cases.

The Court rejected this reading of SLUSA, affirmed that the SLUSA provisions had to be read as a whole, and rejected Petitioner’s cherry-picked reading of the language; the Court noted that if Congress wanted the SLUSA provision to deny state court jurisdiction over such federal claims, it would have expressly done so, and it did not.  Petitioner’s argument also failed because it would prevent state courts from deciding any 1933 Act-related cases, including those that do not involve nationally traded securities.  That would be inconsistent with the scope and intention of SLUSA, according to the Court, which made it clear that the “except” clause was not intended to remove 65 years’ of state court adjudication of 1933 Act cases, including class actions.

The Federal Government made an amicus argument that while SLUSA does not preclude state courts from having jurisdiction over 1933 Act cases, those cases should be removable to federal court under SLUSA provisions.  But the Court found that SLUSA does not preclude federal-law class action cases from being heard in state courts, and does not authorize their removal when they are filed in state courts.  That means that other plaintiffs similarly situated to the investors in this case are not prevented from bringing Securities Act cases in state court going forward.  However, under SLUSA, large, class action state-law securities cases remain preempted and may be removed to federal court where they must be dismissed.

The Court’s opinion in this case, Cyan, Inc., et al. v. Beaver County Employees Retirement Fund, et al., may be viewed here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Weiner Brodsky Kider PC | Attorney Advertising

Written by:

Weiner Brodsky Kider PC
Contact
more
less

Weiner Brodsky Kider PC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.