On March 20, 2018, the Supreme Court unanimously decided Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., holding that the Securities Litigation Uniform Standards Act (SLUSA) neither stripped state courts of jurisdiction over class actions alleging violations of only the Securities Act of 1933 (Securities Act) nor permitted defendants to remove those actions to federal court.1
Background
The Securities Act creates a private right of action, while the Securities Exchange Act of 1934 (Exchange Act) has been interpreted to create an implied private right of action, for investors if they believe they have been defrauded. Securities Act claims are typically brought in conjunction with the purchase of public offerings (initial or secondary) based on alleged false or misleading statements in a prospectus or registration statements. The Exchange Act allows claims based on a broad variety of investor communications. While the Exchange Act provides for exclusive federal court jurisdiction, the Securities Act states that suits brought under the act may be filed in either state or federal courts and includes an anti-removal provision that prevented defendants from removing a case asserting violations of the Securities Act from state to federal court.2
In 1998, Congress passed SLUSA, which sought to make federal court the "exclusive venue for most securities fraud class actions."3 To this end, SLUSA precludes class actions based on state law that allege untruth or deception in connection with the purchase or sale of a covered security from being maintained by a private party in either state or federal court.4 SLUSA also added two exceptions to state court jurisdiction for Securities Act claims: (1) SLUSA provided an exception to concurrent jurisdiction for Securities Act claims, indicating that covered class actions described in § 77p of the title could proceed only in federal court (the "except clause"); and (2) SLUSA noted an exception to the Securities Act anti-removal provision allowing cases asserting violations of the Securities Act to be removed "as provided in Section 77p(c)."5
The language and scope of these exceptions has generated much confusion and litigation. Following the passage of SLUSA, district courts issued conflicting decisions on the removability of suits alleging only violations of the Securities Act, and state courts have been divided over whether they retain subject matter jurisdiction over such cases.
In April 2014, shareholder plaintiffs filed suit in California state court alleging only federal Securities Act violations in Cyan Inc.'s (Cyan) public offering documents. Cyan did not attempt to remove the case to federal court, and instead moved for judgment on the pleadings, arguing that SLUSA precludes state court jurisdiction over class actions alleging violations of the Securities Act. The trial court denied Cyan's motion. The decision was affirmed by the California Court of Appeal and the California Supreme Court. The Supreme Court then granted certiorari to provide much sought after clarity on this issue.
The Supreme Court's Decision
At oral argument, the Court was presented with three competing interpretations of SLUSA's effect on the Securities Act's jurisdictional provision: (i) Cyan argued that SLUSA precludes state courts from having jurisdiction over any covered class actions asserting Securities Act claims; (ii) the government, which supported Cyan's overall position, argued that SLUSA does not strip state courts of authority to hear such cases but allows for removal to federal court; and (iii) the investors argued that SLUSA had no impact on state court actions alleging only Securities Act claims, but conceded that their action would have been removable if the suit included claims of both state and federal law violations relating to the purchase or sale of a covered security.6
At oral argument, the Justices appeared to struggle to interpret the statutory language in a manner that would both give meaning to the text and be consistent with the primary purpose of SLUSA, which was to preclude plaintiffs from avoiding the Private Securities Litigation Reform Act of 1995 (PSLRA) by filing state-law securities class actions.
On March 20, 2018, the Court held, in a unanimous decision authored by Justice Elena Kagan, that SLUSA "did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations"; and rejected the argument that SLUSA allows for removal of Securities Act actions to federal court.7
In reaching this conclusion, the Court expressed reluctance to "giv[e] the except clause a broader reading than its language can bear," particularly because of "the dramatic change such an interpretation would work in the 1933 jurisdictional framework."8The Court then focused on the text and language of SLUSA noting that § 77p contains restrictions on state court jurisdiction over certain securities class actions based on state law, but says nothing regarding class actions based on federal law. Indeed, the Court observed that, "[i]f Congress had wanted to deprive state courts of jurisdiction over [Securities Act] class actions, it had an easy way to do so: just insert into §77p an exclusive federal jurisdiction provision (like the [Exchange Act's])."9
The Court also addressed arguments regarding legislative purpose, noting that the substantive protections of the PSLRA are in effect in state court when federal securities law is at issue and that as a result, its interpretation of SLUSA—to allow Securities Act actions to proceed in state court, under federal law, but prohibiting covered class actions under state law—is entirely consistent with congressional intent in avoiding adjudication of covered class actions under state law in an effort to avoid the PSLRA.
Finally, the Court noted that Congress had made the decision not to limit Securities Act claims to federal court in the way it did with the Exchange Act and that the Court would not "revise that legislative choice, by reading a conforming amendment and a definition in a most improbable way, in an effort to make the world of securities litigation more consistent or pure."10
Significance
Following the Court's decision we expect to see an increase in Securities Act claims filed in state courts where plaintiffs can avoid the heightened pleading requirements of the PSLRA and federal law and the mandatory discovery stays during the pendency of a motion to dismiss. Over the last few years, there has been an uptick in Securities Act filings in California state court following the California Court of Appeal and Ninth Circuit decisions allowing such cases to proceed in state court. The Supreme Court's decision will allow such cases to proceed in any state court with jurisdiction.
Footnotes
1 Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., No. 15–1439 (Mar. 20, 2018).
3 See H.R. Rep. No. 105-803, at 13, 15.
5 15 U.S.C. §§ 77v(a), 77p(c).
6 See Transcript of Oral Arguments, Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., No. 15–1439 (Nov. 28, 2017).
7 Cyan, No. 15–1439, slip op. at 24 (Mar. 20, 2018)
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