In a decision that has implications for both corporate and individual defendants, the US Supreme Court ruled that class actions being brought under the Securities Act of 1933 must remain in state court. As a result, defendants may have to litigate 1933 Act class actions in multiple jurisdictions, whether both state and federal courts or more than one state court, leaving defendants with greater risk and higher litigation costs.
On March 20, in Cyan, Inc. v. Beaver County Employees Retirement Fund, the US Supreme Court unanimously affirmed a California Superior Court ruling that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) left intact state court jurisdiction over claims under the Securities Act of 1933 (1933 Act). Specifically, the Court held that SLUSA’s amendments to the 1933 Act did not bar state court jurisdiction over class actions alleging only 1933 Act violations, nor did it authorize the removal of such suits from state to federal court.
In 2014, the Beaver County Employees Retirement Fund (the Fund), a pension fund that had purchased Cyan stock at its initial public offering, filed a class action in California Superior Court alleging only violations of the 1933 Act. Cyan moved to dismiss, arguing that the 1933 Act, as amended by SLUSA, deprived the court of jurisdiction over the action. The Superior Court rejected Cyan’s argument and denied the motion; the state appellate court denied review. The US Supreme Court then granted certiorari to resolve a split among federal and state courts about whether SLUSA deprived state courts of jurisdiction over class actions that allege only 1933 Act claims.
The 1933 Act requires companies offering securities to the public to make “full and fair disclosure” of relevant information. The statute creates private rights of action, authorizes federal and state courts to exercise concurrent jurisdiction over those private suits, and bars removal of actions from state to federal court. One year later, Congress enacted the Securities Exchange Act of 1934 (1934 Act), which regulates not the original issuance of securities but their subsequent trading. The 1934 Act also provides for enforcement through private actions, but federal courts have exclusive jurisdiction over those suits.
In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA) to amend the 1933 and 1934 Acts and address concerns of “abuses of the class-action vehicle in litigation involving nationally traded securities.” As a result, plaintiffs and their representatives began bringing class actions under state law to circumvent the PSLRA’s substantive and procedural hurdles.
In 1998, Congress enacted SLUSA to further amend both Acts. SLUSA added a significant qualification to the 1933 Act’s authorization of concurrent federal and state court jurisdiction: State courts now exercise concurrent jurisdiction “except as provided in section 77p . . . with respect to covered class actions.” Interpretation of this clause, called the “except clause,” determines whether the Fund’s 1933 Act class action may be adjudicated in state court.
State Court Jurisdiction over 1933 Act Claims
In its brief, Cyan urged that the term “covered class action,” defined in Section 77p(f)(2) of the 1933 Act as a suit seeking damages on behalf of more than 50 persons, informed the scope of the except clause. According to Cyan, class actions of more than 50 persons were exempted from state court jurisdiction—regardless of whether the action was based on the 1933 Act or state securities law.
The Court rejected that interpretation of the except clause as giving too much weight to a definitional provision and insufficient consideration to other provisions in Section 77p. The Court first observed that the 1933 Act gave state courts concurrent jurisdiction, and that SLUSA’s imposition of the except clause “is drafted as a limitation on that rule.” In other words, where the general rule and the except clause conflict, the except clause controls. Examining SLUSA’s amendments of provisions in the section, the Court noted that Section 77p(b) disallows, in both state and federal courts, any class actions in which damages are sought on behalf of more than 50 persons that are founded on state securities law with respect to a nationally traded security’s purchase or sale. As a corollary, Section 77p(c) requires any class action set forth in Section 77p(b) and brought in state court to be removed to federal court and dismissed. However, as the Court explained, “the section says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” Therefore, the Court concluded, the except clause does not prevent state courts from exercising jurisdiction over class actions based on the 1933 Act.
The Court also considered the US solicitor general’s middle-ground position that, although state courts had jurisdiction over 1933 Act class actions, those suits may be removed to federal court. The government explained, “Congress would not have been content to leave” such suits “stuck in state court,” where the PSLRA’s protections do not apply. Although the Court voiced no disagreement over Congress’s intent, it reasoned that the government’s position contravened the “straightforward reading” of statutory provisions that limited removal to those class actions under Section 77p(b). The Court declined to “‘disregard clear language’ based on an intuition that ‘Congress must have intended something broader.’”
Cyan also pointed to statements in SLUSA’s legislative reports that the purpose of the statute was “to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than Federal court.” Given that SLUSA was enacted to finish the work of the PSLRA, Cyan argued that the only way to do so was by divesting state courts of jurisdiction over all 1933 Act class actions that qualified as “covered class actions.”
The Supreme Court disagreed, observing that SLUSA “largely accomplished the purpose articulated in the Conference Report” of moving securities class actions to federal court. Notwithstanding, the Court acknowledged, “We do not know why Congress declined to require as well that 1933 Act class actions be brought in federal court,” noting that “[i]f further steps are needed, they are up to Congress.”
This decision leaves unresolved “the bizarre situation where class actions alleging only state claims or both state and federal claims must be removed to federal court, but those alleging only [1933 Act] claims may remain in state court.” As a result, corporate and individual defendants may have to litigate 1933 Act class actions in multiple jurisdictions, such as in both state and federal court, or in multiple state courts. Litigation in multiple state courts could become a particular concern: According to a recent Cornerstone Research annual report, in 2017, all 1933 Act class suits filed in California state court involved parallel state court actions. In state court, where the PSLRA’s substantive and procedural protections may be unavailable, judges are far less likely to dismiss these actions, and may not stay discovery pending any motion to dismiss. This leaves defendants with greater risk and higher litigation costs. Until Congress acts—if it does—Cyan likely will increase the number of 1933 Act suits invoking state court jurisdiction, and corporations will have to carefully navigate the risks of litigating complex securities matters in state courts.