Today, SCOTUS issued its opinion in Cyan Inc. v. Beaver County Employees Retirement Fund. The opinion by Justice Kagan for a unanimous Court answered two questions: Did the Securities Litigation Uniform Standards Act of 1998 eliminate state court jurisdiction over class actions alleging only ’33 Act violations, and, even if not, under SLUSA, can defendants remove these state court actions to federal court? SCOTUS said no in both cases: “SLUSA did nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions alleging only 1933 Act violations. Neither did SLUSA authorize removing such suits from state to federal court.”

The Private Securities Litigation Reform Act, adopted in 1995 to stem perceived abuses of class actions, imposed a number of requirements in connection with class actions under the federal securities laws, such as heightened pleading standards and selection criteria for lead plaintiffs. However, to circumvent those requirements, many plaintiffs instead began to bring their class actions in the state courts.  That shift to the state courts led to the adoption, in 1998, of  the Securities Litigation Uniform Standards Act. SLUSA was designed to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA].”

This case was initially filed in 2014 in the California courts by Beaver County Employees Retirement Fund and others, alleging violations of provisions of the ’33 Act with regard to disclosures in an IPO registration statement. There were no state law claims. Cyan sought to dismiss the case, arguing that, under SLUSA, the state court did not have subject matter jurisdiction. The court rejected that contention, saying that its hands were tied as a result of the earlier California appellate court decision in Luther v. Countrywide Financial Corp., which held that SLUSA did not prohibit concurrent state and federal court jurisdiction of “covered class actions” that made only ’33 Act claims. The circuits were split on this issue, and the Court granted cert. In its petition, Cyan observed that “[p]laintiffs have taken note of this revived opportunity to circumvent the [PSLRA]: since Countrywide, filings of ’33 Act class actions in California state courts have risen 1400 percent.”

SideBar

As discussed in this Cooley Alert, prior to 2011, ’33 Act “class actions were filed in California at a rate of one case every two years. In 2014, five cases were filed in California state court. The number increased to 14 in 2015 and to 18 in 2016. The influx of cases was due at least in part to California district courts determining that state courts have jurisdiction over [’33 Act ] Act class actions and that these cases are not removable under [SLUSA]. These decisions stand in stark contrast to the decisions by New York district courts and various other courts, which generally find that state courts lack jurisdiction over [’33 Act] class actions.”

The other issue before the Court was raised by the Federal Government in an amicus brief. There, the Government took the position that, while SLUSA did not divest the state court of jurisdiction over a ’33 Act case, it did authorize removal of ’33 Act cases, and, properly interpreted, “it provides appropriate protection against the use of state-court lawsuits to circumvent the PSLRA’s substantive and procedural safeguards.”

As discussed in the opinion, §77p of SLUSA prohibits in both state and federal courts “covered class actions” (i.e., class actions with over 50 class members) “that are founded on state law and allege dishonest practices respecting a nationally traded security’s purchase or sale.”  In addition, SLUSA allowed these cases to be removed to federal court “to ensure the dismissal of a prohibited state-law class action….”  SLUSA also added an “except clause,” which Kagan characterizes as “at the heart of the parties’ dispute.” The except clause—“except as provided in section 77p of this title with respect to covered class actions”—provided a caveat to the general rule that state and federal courts have concurrent jurisdiction over all ’33 Act claims. The question that has led to a split among the circuits is whether the “except clause” excluded from the general rule of concurrent jurisdiction all “covered class actions” (including those asserting only ’33 Act claims) or only those asserting state law claims.

Cyan contended that the reference in the “except clause” to “covered class actions” is only to the class actions as defined in paragraph 77p(f)(2), i.e., those seeking damages on behalf of more than 50 persons, and does not address whether the basis for claims is federal or state law. As a result, Cyan argued, the state court had no jurisdiction over the case.

But the Court rejected Cyan’s reading of the “except clause” for several reasons.  First, the Court held that the “except clause” refers to “section 77p” as a whole, not to the specific definitional paragraph. Second, the Court concluded that using the definition in paragraph 77p(f)(2) to give meaning to the “except clause” was untenable, because a definition “does not provide an exception, but instead gives meaning to a term—and Congress well knows the difference between those two functions.” Finally, the Court viewed Cyan’s interpretation as reading “too much into a mere ‘conforming amendment.’”

The Court also dismissed Cyan’s contentions that were based on the legislative history and underlying purpose of SLUSA.  Cyan argued that Congress had intended SLUSA to “make good” on the promises of the PSLRA, which included a number of procedural protections that apply only in federal court.  To promote that purpose, all covered class actions, including ’33 Act claims, would need to be litigated in federal court.   However, the Court relied on SLUSA’s other goals to reject that contention, holding that SLUSA was also intended to protect the heightened substantive standards of the PSLRA.  Even without Cyan’s reading of the “except clause,” SLUSA “largely accomplished” those purposes. “Faced with such recalcitrant statutory language,” Kagan wrote, “Cyan stakes much of its case on legislative purpose and history.…Even assuming clear text can ever give way to purpose, Cyan would need some monster arguments on this score to create doubts about SLUSA’s meaning. The points Cyan raises come nowhere close to that level.”

Finally,  Cyan argued that its interpretation is the only one that makes sense of the statutory language: otherwise, state courts are given jurisdiction over ’33 Act suits “except as provided in §77p,” which bars only certain state-law suits, which causes “the except clause [to except] ‘exactly nothing.’ (To use an example of our own, it would be as if a parent told her child ‘you may have fruit after dinner, except for lollipops.’) What on earth, Cyan asks, would be the point of such a provision?” Beaver County argued that the clause was intended to cover cases that were based on both state and federal law, but not solely federal claims. (During oral argument, Justice Alito had asked: “What sense does that—what sense does that make? The fed—the state courts have concurrent jurisdiction over ’33 Act claims, except if a lawyer is foolish enough to include in the state court complaint state claims that fall within the—the prohibition?”) Kagan admitted that the Court was “not sure whether Congress had that issue in mind”; Congress could have added the clause in an “excess of caution.” Notwithstanding this uncertainty about the purpose of the clause, the Court said, it has “no sound basis for giving the except clause a broader reading than its language can bear. And that is especially true in light of the dramatic change such an interpretation would work in the 1933 Act’s jurisdictional framework.”

According to Kagan, the “statute says what it says—or perhaps better put here, does not say what it does not say. State-court jurisdiction over 1933 Act claims thus continues undisturbed.” The “except clause” excepts from concurrent jurisdiction class actions based on state law, but “does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 1933 Act.”

SideBar

What’s fascinating about this decision is that, apparently, the meaning of the statute is now plain as day (“recalcitrant statutory language”)—clear enough to allow the Court to reach a unanimous opinion.  But in oral argument (see this PubCo post), for almost the entire discussion, the Justices seemed to have gotten their knickers in a twist attempting to interpret the text of the statute itself, which they generally agreed was not exactly a model of clarity—“just gibberish” according to Alito.  Alito asked, seriously, whether there was “a certain point at which we say this means nothing, we can’t figure out what it means, and, therefore, it has no effect, it means nothing?” but Justice Gorsuch argued that “respect for the legislative process dictates that we afford some meaning to these words.”

The Court then took up the “Federal Government’s proposed halfway-house position.” Applying the rule of construction known as “rule of the last antecedent,” the Government argued that §77p(c) of SLUSA would allow removal of ’33 Act class actions to federal court, so long as certain allegations of misconduct (listed in §77p(b)) were made. But I won’t get too weedy here.  Kagan was having none of it: in the Court’s view, 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 this Court has no license to ‘disregard clear language’ based on an intuition that ‘Congress must have intended something broader.’” Again interpreting the language of the statute and citing prior precedent, Kagan concluded that only state law claims—i.e., claims that are precluded—can be removed and that removal is for the purpose of dismissal.

SideBar

After Cyan, to  avoid state court litigation of ’33 Act claims, some companies may look to adopt “exclusive forum” bylaw provisions that designate the federal courts as the exclusive forum for litigation under the ’33 Act. Delaware law expressly permits the adoption of bylaws that designate Delaware as the exclusive forum for adjudicating “internal corporate claims,” i.e., claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery.   However, federal securities class actions are not expressly included. (See this PubCo post.) The enforceability of “exclusive federal forum” bylaw provisions is currently being challenged in the Delaware courts in a case seeking a declaratory judgment to invalidate the exclusive federal forum bylaw provisions included in the Delaware Certificates of Incorporation of three companies. After Cyan, that Delaware case now takes on much greater significance.

Full disclosure: Cooley represented a group of the nation’s leading securities law professors, who filed an amicusbrief in support of Cyan’s position that state courts lack jurisdiction over covered class actions asserting ’33 Act claims