In Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, decided on March 20, 2018, the Supreme Court unanimously held that class actions based solely on the Securities Act of 1933 (33 Act) may be brought in either state or federal court, casting aside the argument that such claims fall within the exclusive jurisdiction of the federal courts and resolving a question that had divided state and federal courts across the country for nearly 20 years. The Court also clarified that class actions based on the 33 Act are not removable from state court to federal court, further protecting the state courts’ ability to adjudicate these claims.
The decision may cause significant changes in the behavior of securities plaintiffs and defendants alike: While plaintiffs may increasingly flock to the state courts, where the procedural rules may sometimes be more plaintiff-friendly than in federal court, public companies may look inward and experiment with adding provisions to their bylaws designed to funnel these actions back toward a federal forum. In fact, a number of high-profile companies that have recently gone public adopted bylaws that contain forum selection clauses designating the federal courts as the exclusive forum for resolving claims under the 33 Act. This trend will almost certainly accelerate in light of the Cyan decision. The enforceability of such forum selection clauses is still being tested.
The Cyan decision presented a difficult question of statutory interpretation concerning the way in which subsequent legislation changed – or, as the Supreme Court found, did not change – the 33 Act. The 33 Act prohibits false statements or omissions made in connection with public securities offerings, and creates several causes of action that can be brought in either state or federal court. That’s unlike America’s other major securities law, the Securities Exchange Act of 1934 (34 Act), where Congress provided that the federal courts would have exclusive jurisdiction over claims asserted under the Act.
Congress revised both the 33 and 34 acts in the Private Securities Litigation Reform Act of 1995 (PSLRA). That legislation instituted a number of substantive and procedural reforms designed to target abusive securities class actions. While the PSLRA’s substantive reforms apply in both state and federal court – for example, the safe harbor provision for certain forward-looking statements made by company officials – plaintiffs have contended that its procedural reforms – for example, the requirement that the lead plaintiff in a securities class action file a sworn statement that, among other things, the plaintiff had not purchased the security “at the direction of plaintiff’s counsel” – apply only in federal court. As originally enacted, the PSLRA had a major unintended consequence. Plaintiffs started to file securities actions under state law instead of federal law.
Intending to close the state law loophole, Congress passed the Securities Litigation Uniform Standards Act of 1998 (SLUSA). That act prohibits certain securities class actions based on state law. The question presented in Cyan was whether, notwithstanding Congress’s intent to eliminate vexatious state law securities class actions in SLUSA, plaintiffs could nonetheless still file class actions under the federal 33 Act in state court.
The Cyan Court said yes. Justice Kagan explained that the text of SLUSA simply did not support the position that Congress intended to strip the state courts of their long-held jurisdiction to hear claims brought under the 33 Act. She rejected what she called the “broad purposive argument” that SLUSA would make no sense without requiring that all securities lawsuits be brought in federal court: “We do not know why Congress declined to require as well that 1933 Act class actions be brought in federal court . . . . But in any event, we will not revise that legislative choice, by reading [the statute] in a most improbable way, in an effort to make the world of securities litigation more consistent or pure.” Justice Kagan also rejected a second argument – not put forth by either party but advocated by the solicitor general – that a different provision of SLUSA allowed defendants to remove 33 Act class actions from state to federal court. Here she employed the same textualist approach and concluded that the government “distorts SLUSA’s text because it thinks Congress simply must have wanted 1933 Act class actions to be litigated in federal court. But the Court has no license to disregard clear language based on an intuition that Congress must have intended something broader” (quotation marks and citations omitted).
So what’s next?
Following Cyan, we may see an uptick in plaintiffs filing 33 Act class actions in state court. The effect could be especially pronounced in the New York courts, where 33 Act class actions were rarely filed because, pre-Cyan, there had been a consensus among New York federal district courts that these actions were removable to federal court.
Second, we could see responsive measures from public companies as they seek to avoid 33 Act litigation in the state courts. Even before Cyan, companies had been starting to insert forum selection provisions into their bylaws, requiring that any shareholder action alleging a claim under the 33 Act proceed only in federal court. Somewhat analogous forum selection clauses have been upheld as a matter of Delaware corporate law. For example, the Delaware courts had allowed forum selection bylaws that designate Delaware as the sole forum for litigating corporate disputes. Similar legislation was signed into law in New Jersey in 2018, authorizing New Jersey corporations to pass bylaws designating the federal and state courts in New Jersey as the exclusive forum for corporate claims. Such forum clauses are consistent with the internal affairs doctrine, which provides that the internal corporate affairs of a company are subject to the laws of the state of its incorporation. But it is unclear how courts will view these new federal forum provision bylaws, considering that Congress has specifically given state courts jurisdiction over 33 Act claims, and even gone so far as to make them nonremovable.
Plaintiffs have begun to challenge the enforceability of these forum selection clauses. In one such case, on Dec. 29, 2017, a plaintiff shareholder brought an action in Delaware Chancery Court against the board members of Blue Apron, Stitch Fix and Roku, challenging what it describes as “substantively identical Federal Forum Provisions in their organizing documents.” The case remains pending.
While the Cyan decision was a victory for securities plaintiffs, it may be only one chapter in a much longer tale. And since the Cyan decision is ultimately about uncovering congressional intent – especially given Justice Kagan’s candid acknowledgment that the statutes as written may not “fulfill 100% of all their goals” – there could be a response from Congress itself.