On June 27, 2017, the Supreme Court granted certiorari in Cyan Inc. v. Beaver County Employees Retirement Fund, to decide whether the Securities Litigation Reform Act of 1998 (SLUSA) bars plaintiffs from filing any covered class actions under the Securities Act of 1933 in state court. The Supreme Court’s resolution of this issue could significantly change the landscape of securities class action litigation by deciding once and for all whether SLUSA bars such actions from state court.
Congress enacted SLUSA in 1998 as a response to “the shift of class actions from federal to state courts,” which occurred soon after Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA, which deters meritless federal securities actions by placing special burdens on securities plaintiffs, had the unintended effect of causing securities plaintiffs to start bringing securities class actions under the Securities Act of 1933 in state court, in order to find a more plaintiff-friendly forum. This practice was unavailable to plaintiffs under the Securities Exchange Act of 1934, since that Act has always granted exclusive jurisdiction to federal courts to preside over private rights of action. For class actions under the Securities Act of 1933, securities plaintiffs took advantage of the Act’s concurrent jurisdiction provision to take refuge in state court. Most courts have since interpreted SLUSA as having stripped state courts of such jurisdiction with respect to all covered class actions under the Securities Act of 1933, forcing securities plaintiffs to bring these actions in federal court.
Nevertheless, the plaintiffs in Cyan brought their class action in California state court, alleging that petitioner Cyan, Inc. violated sections 11, 12(a)(2), and 15 of the Securities Act of 1933 when it filed an inaccurate and misleading registration statement and prospectus that failed to disclose revenue deficiencies (which later became public). Cyan moved to dismiss these claims, arguing that the California court lacked jurisdiction to adjudicate them under SLUSA. The plaintiffs argued that the state court had jurisdiction to adjudicate these claims because SLUSA preemption only reached covered class actions that concern covered securities, and this was not such a case. The court denied Cyan’s motion to dismiss without issuing a written opinion, ruling instead at oral argument that the 2011 California appellate court decision in Luther v. Countrywide Financial Corp. permitted the suit to be brought in state court.
The Countrywide Financial decision holds that SLUSA continued state-court jurisdiction over class actions brought under the Securities Act of 1933 in certain cases. Specifically, the decision interprets SLUSA’s amendments to the Securities Act of 1933 as having only stripped state courts of jurisdiction to hear covered class actions that concern a “covered security.” A “covered security” under the Securities Act of 1933 is one traded nationally and listed on a regulated national exchange. The California appellate court acknowledged that its decision directly conflicts with those from the majority of federal courts that have decided this issue.
The California appellate courts declined to review the lower court’s decision in Cyan, leading to this Supreme Court appeal. Cyan argued in its petition for certiorari that Supreme Court review is paramount to resolve the “chaos” created by the superior court decision and the earlier Countrywide Financial decision. Cyan notes that California state court securities class action filings have spiked by 1,400 percent and that there is a clear conflict between Countrywide Financial (and the four California trial courts that have since followed it) and the federal courts that have held that state courts lack subject matter jurisdiction to adjudicate federal securities claims under SLUSA. In response, the plaintiffs argue that the Countrywide Financial ruling accurately interprets the text of SLUSA’s amendments to the Securities Act of 1933, which on their face appear to strip state courts of concurrent jurisdiction only as to covered class actions that concern covered securities. The Acting Solicitor General agrees with the plaintiffs’ position, arguing in an amicus curiae brief that they had the better of the argument in terms of statutory interpretation.
The Supreme Court’s final decision on this issue, expected in a year, could significantly change the landscape of securities class action litigation. For example, if the Supreme Court affirms the superior court ruling, the rest of the country can also expect to see a spike in state securities class action litigation, similar to the recent increase seen in California state courts. Conversely, if the Supreme Court overturns the California court’s ruling, it will cause the abrupt end of the current state securities class action litigation pending in California and throughout the United States, forcing plaintiffs back to federal court.