• Supreme Court resolves split over whether state courts can hear ’33 Act class actions.
  • Unanimous Court holds that state and federal courts continue to have concurrent jurisdiction over ’33 Act class actions despite SLUSA.
  • Defendants cannot remove class actions asserting only ’33 Act claims to federal court.

Background

The two principal New Deal securities statutes—the Securities Act of 1933 (’33 Act) and the Securities Exchange Act of 1934 (’34 Act) —have taken different routes on the issue of which courts can hear private civil claims filed under them. The ’33 Act gave federal and state courts concurrent jurisdiction of ’33 Act claims, whereas the ’34 Act gave federal courts exclusive jurisdiction of ’34 Act claims (including the ever-popular Rule 10b-5 claims).

So things stood for sixty-plus years. Then came the Private Securities Litigation Reform Act of 1995 (PSLRA), which heightened pleadings standards for federal securities class actions. In response, the plaintiffs’ bar started bringing more claims in state courts under state law and under the ’33 Act. Three years later, Congress responded with the Securities Litigation Uniform Standards Act of 1998 (SLUSA), designed to prevent this evasion of the PSLRA.

SLUSA provides that “covered class actions” (essentially those seeking damages on behalf of more than 50 people) filed in state courts asserting state-law securities claims can be removed to federal courts and dismissed. That much is clear. But what about “covered class actions” asserting solely ’33 Act claims? May they be removed? May they be filed in state court at all? Did SLUSA change anything? Here, SLUSA proved less than a model of clarity; indeed, Supreme Court justices have referred to it as “gibberish.”

A split developed among federal district courts, largely among geographic lines. Courts in the East generally have interpreted SLUSA to allow the removal of ’33 Act covered class actions. Courts in the West (and particularly California) have not; consequently, the plaintiffs’ bar has flocked to file ’33 Act cases in California state courts, particularly in Silicon Valley’s San Mateo County, a venue popular with many plaintiffs (principally because the dismissal rate of complaints in that court is said to be much lower than it is in federal courts).

The Cyan Case

Cyan Inc., a video game developer, filed its IPO in May 2013. Following weaker-than-expected results, shareholders began filing actions under sections 11, 12(a)(2) and 15 of the ’33 Act, alleging that Cyan’s offering documents contained misrepresentations. This action was filed in the California Superior Court in San Francisco. Defendants moved for judgment on the pleadings, arguing lack of subject matter jurisdiction on the theory that SLUSA deprived state courts of jurisdiction over covered class actions asserting solely ’33 Act claims. The Superior Court denied the motion, and neither the California Court of Appeal nor the California Supreme Court granted relief. But the U.S. Supreme Court agreed to consider the issue, granting Cyan’s petition for a writ of certiorari.

Gibberish, Three Ways to Sunday?

The argument is over how to read Sections 16 and 22(a) of the ’33 Act, 15 U.S.C. §§ 77p and 77v(a), both as amended by SLUSA. Section 77v(a) provides that state courts have “concurrent” “jurisdiction … of all suits … brought to enforce [the 1933 Act],” “except as provided in section 77p of this title with respect to covered class actions ….” Later, in what the Court calls the “except clause,” Section 77v(a) goes on: “Except as provided in section 77p(c) of this title, no case arising under this Act and brought in any State court of competent jurisdiction shall be removed to any court of the United States.” So far, so good, but Section 77p seemingly does not address jurisdiction at all, leaving one to wonder what “except as provided in section 77p” means, if anything.

Cyan argued that SLUSA eliminated state-court concurrent jurisdiction over covered class actions alleging ’33 Act claims. After all, Cyan reasoned, what sense does it make to allow removal of a covered class action to federal court if it contains even one state-law claim, while denying removal of another covered class action from state court if it contains only federal ’33 Act claims?

Plaintiffs-respondents responded that SLUSA only prohibited, and allowed for the removal of, class actions asserting state-law securities fraud claims, and not those asserting solely ’33 Act claims. In their view, SLUSA ensures that covered class actions are decided under federal law, not that state courts be derived of the concurrent jurisdiction over ’33 Act claims that they had long enjoyed.

The Court invited the Solicitor General to weigh in; the SG took a third position, arguing that SLUSA did not deprive state courts of jurisdiction, but that Section 77p(c)’s exception to the anti-removal provision of Section 77v(a) nevertheless allowed removal of covered class action claims under the ’33 Act involving a covered security (mainly securities traded on national exchanges).

The Supreme Court’s Ruling

In an opinion by Justice Kagan, a unanimous Supreme Court held that SLUSA does not “strip state courts of jurisdiction over class actions alleging violations of only the Securities Act of 1933” and does not “empower defendants to remove such actions from state to federal court….” Cyan v. Beaver Cty. Empl. Retirement Fund, No. 15-1439 (U.S. Mar. 20, 2018), slip op. at 1. In answer to Cyan’s argument that reading Section 77v(a) this way deprives the new language of any effect, the Court reasons that it is belt and suspenders: “ensur[ing] that in any case in which §77v(a) and §77p come into conflict, §77p will control.” Slip op. at 8. Never mind the fact that nobody can identify any way Sections 77v(a) and 77p might come into conflict: “This Court has encountered many examples of Congress legislating in that hyper-vigilant way, to ‘remov[e] any doubt’ as to things not particularly doubtful in the first instance.” Slip op. at 17. As the Court put it, “it would be as if a parent told her child ‘you may have fruit after dinner, except for lollipops.’” Slip op. at 15. “The idea, to return to our prior example, is to make sure that even if the child thinks orange lollipops count as fruit, she will not act on that view.” Slip op. at 17.

The Court also rejected the Solicitor General’s middle view (permitting concurrent jurisdiction, but also removal), deeming it an unconvincing attempt to invoke the “‘rule of the last antecedent’” that really is a veiled invitation to the Court to reject its holding in Kircher v. Putnam Funds Trust, 547 U. S. 633, 644 (2006) (construing §§ 77p(b) and 77p(c)). Slip op. at 18-24. “At bottom, the Government makes the same mistake as Cyan: It distorts SLUSA’s text because it thinks Congress simply must have wanted 1933 Act class actions to be litigated in federal court. But this Court has no license to ‘disregard clear language’ based on an intuition that ‘Congress must have intended something broader.’ SLUSA did quite a bit to “make good on the promise of the Reform Act” (as Cyan puts it). If further steps are needed, they are up to Congress.” Slip op. at 24 (citations omitted).

The Court’s textualist approach in Cyan provides a striking contrast to the way the Court interpreted the securities laws in the 1960s, when the “Court did not simply apply the text as enacted by Congress, but instead invoked the securities laws’ purposes as a guide to interpretation.” Pritchard, Adam C. and Thompson, Robert B., Securities Law in the Sixties: The Supreme Court, the Second Circuit, and the Triumph of Purpose Over Text (February 7, 2018). U of Michigan Law & Econ Research Paper No. 18-004. Available at SSRN: https://ssrn.com/abstract=3119969 or http://dx.doi.org/10.2139/ssrn.3119969. But given the opacity of parts of SLUSA— “gibberish” if you will—it is perhaps unsurprising that nobody on the Court was willing to undertake the task of making a choicer cut of meat out of this sausage.