The United States District Court for the Northern District of California recently clarified the criteria for removal of a securities class action filed in state court under the Securities Act of 1933, 15 U.S.C. §§ 77a, et seq. (the “Securities Act”).

Under the Securities Act’s anti-removal provision, state and federal courts generally have concurrent jurisdiction over Securities Act claims, but a Securities Act claim initially filed in state court cannot be removed to federal court. An exception to this rule was created with the 1998 enactment of the Securities Litigation Uniform Standards Act (SLUSA), which amended the Securities Act to make certain types of securities class actions removable to federal court, and to preclude altogether class actions based on state law claims involving either (1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security, or (2) the defendant’s use or employment of any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security. Courts have differed in their interpretations of the Securities Act’s anti-removal rule as amended by SLUSA.

In this case, a class action was commenced in California state court against Etsy, Inc., its directors, and corporate entities that served as underwriters (Etsy) in connection with Etsy’s initial public offering. The complaint alleged violations of the Securities Act by Etsy. Etsy removed to federal court, and the plaintiff filed a motion to remand.

The issue presented to the district court was whether the Securities Act, as amended by SLUSA, prohibits the removal of a securities fraud class action involving claims only under the federal Securities Act, and not under state law.

In support of his motion to remand, the plaintiff argued that the SLUSA amendments to the Securities Act make only class actions based on state law claims (as opposed to Securities Act claims) removable, and that state court actions alleging only Securities Act claims–such as the class action he filed–still may not be removed.

In opposition to the plaintiff’s motion to remand, Etsy argued that SLUSA stripped state courts of jurisdiction over class actions arising under the Securities Act, and that the anti-removal provision therefore does not apply because it only bars removal of an action originally brought in a state court that has subject matter jurisdiction in the first instance.

Acknowledging that the disputed provisions of the amended Securities Act are not a model of clarity, the district court adopted what it characterized as an “increasing majority” view among district courts within the Ninth Circuit—that only covered class actions based on state law can be removed to federal court, and only for the purpose of dismissing the precluded state law claims as required by the statute. The court stated that this view is also consistent with the Ninth Circuit’s interpretation in its 2009 opinion in Madden v. Cowen & Co.:

To prevent actions precluded by SLUSA from being litigated in state court, SLUSA authorizes defendants to remove such actions to federal court, effectively ensuring that federal courts will have the opportunity to determine whether a state action is precluded. As the Supreme Court has explained [in Kircher v. Putnam Funds Tr. (2006)], any suit removable under SLUSA’s removal provision, § 77p(c), is precluded under SLUSA’s preclusion provision, § 77p(b), and any suit not precluded is not removable. . . .

[If a federal court finds that an action is not precluded,] it has no jurisdiction to touch the case on the merits, and the proper course is to remand to the state court that can deal with it.

Beyond the statute’s narrow exception allowing federal courts to dismiss precluded state law class actions, there is nothing to suggest that SLUSA created any other basis for removal.  Because the plaintiff did not even allege any state law claims, the district court concluded that the removal of the plaintiff’s action was prohibited by the statute, and accordingly granted the plaintiff’s motion to remand.

Cervantes v. Dickerson, et al., No. 15-cv-3825-PJH (N.D. Cal. Oct. 21, 2015).