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.