The Supreme Court yesterday agreed to consider whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) precludes state court jurisdiction in actions that solely allege violations under the Securities Act of 1933 (“1933 Act”). The issue has yielded split decisions among numerous federal district courts.
SLUSA was enacted to ensure that plaintiffs did not use state courts as a means to sidestep the stricter legal requirements for federal securities law class action claims imposed three years earlier by the Private Securities Litigation Reform Act of 1995. In short, SLUSA requires that class actions covered by the statute be litigated in federal court.
Section 22(a) of the 1933 Act, however, provides for both federal and state court jurisdiction for civil actions alleging violations of the 1933 Act’s liability provisions.
Thus, the question arises as to whether SLUSA supplants the concurrent state and federal jurisdiction of the 1933 Act, or whether 1933 Act claims can still be brought in state court. SLUSA contains language providing for concurrent federal and state jurisdiction of certain claims, but that has generated disputes over whether it applies to class actions alleging 1933 Act claims only. Yesterday the Supreme Court agreed to try to answer this question.
The case does not affect securities class actions brought under Section 10(b) of the Securities Exchange Act of 1934 (“1934 Act”), the most commonly used basis for such actions. Federal district courts have exclusive jurisdiction to decide claims under the 1934 Act.
At issue, instead, are claims brought under Section 11 of the 1933 Act, which concerns misstatements in registration statements, and Section 12 of the 1933 Act, which concerns misstatements in prospectuses (as well as “control person” claims under Section 15 of the 1933 Act). Claims under the 1933 Act are often brought in connection with company’s public offerings of their securities.
That was what was involved in the case the Supreme Court agreed yesterday to hear, an appeal by petitioner Cyan, Inc. (“Cyan”), which was sued by plaintiffs in California State Court under the 1933 Act for alleged false statements in connection with the company’s initial public offering. Cyan moved for judgment on the pleadings, arguing that the state court lacked subject-matter jurisdiction under SLUSA. The Superior Court of California denied the motion. Subsequently, both the Court of Appeals of the State of California, First Appellate District, and the Supreme Court of California denied Cyan’s request to review the decision. In 2011, the California Court of Appeals had issued a decision holding that SLUSA did not preclude concurrent state court jurisdiction over 1933 Act claims.
The Supreme Court’s decision to hear the case even absent a split among the federal circuit courts of appeal reflects the distinctive procedural posture in which the state-law preclusion issue arises. State-court decisions on this issue have come in response to motions to dismiss in state court, as made by Cyan. More cases have arisen in federal court, but in situations where defendants removed actions from state to federal court and the defendants then moved to remand to state court. Because of the limits on appellate review of remand decisions by federal district courts, there is no federal appellate precedent on the issue and not much prospect for any in the near future.
While the majority of federal district court decisions have found for plaintiffs and held that concurrent jurisdiction under the 1933 Act survives SLUSA, at least 10 have held that it does not.
Whether class claims under the 1933 Act may be heard in state courts is an important issue. Plaintiffs’ lawyers increasingly look to file 1933 Act claims in state court, particularly in California in light of the favorable decisions there. In recent years, there has been an uptick in IPO-related securities class actions in state courts. In some instances where state-filed actions could not be removed to federal court, defendants have found themselves having to fight similar class claims in both state and federal forums. A Supreme Court decision in Cyan could bring needed clarity.