On March 20, 2018, the Supreme Court of the United States, in a unanimous decision delivered by Justice Kagan, ruled that state courts have jurisdiction to adjudicate class actions brought under the Securities Act of 1933 (the “Securities Act”) and that such actions cannot be removed from state to federal court. Cyan, Inc. et al. v. Beaver County Employees Retirement Fund et al., 583 U.S. ___ (2018). The Securities Act authorized both federal and state courts to exercise jurisdiction over private causes of action relating to securities offerings and barred removal of such suits from state to federal court. In 1995, in order to stem perceived abuses of the class-action vehicle in securities litigation, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA amended the Securities Act by introducing procedural reforms for securities class actions in federal court. When plaintiffs began filing securities class actions in state courts instead, to avoid the federal procedural standards, Congress passed the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). Cyan, Inc. (“Cyan”), a telecommunications company, and its officers and directors, argued that the SLUSA amendments gave federal courts exclusive jurisdiction over class actions brought under the Securities Act. The Supreme Court disagreed, holding that those amendments did not divest state courts of concurrent jurisdiction over class actions pursuant to the Securities Act. The Court also rejected the separate argument regarding removal of such actions, advanced by the U.S. Solicitor General, as amicus curiae, and held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court.
The case began in June 2014, when Cyan stock purchasers brought a securities class action in California state court against Cyan, asserting violations of Sections 11, 12(a)(2), and 15 of the Securities Act. Cyan argued that SLUSA amended the Securities Act jurisdictional provision, 15 U.S.C. §77v(a), to provide an exception to the Securities Act’s general rule that state and federal courts have concurrent jurisdiction over Securities Act claims. Cyan moved to dismiss for lack of subject matter jurisdiction, arguing that SLUSA prohibited state courts from adjudicating Securities Act class actions. The California Superior Court disagreed, holding that SLUSA left intact state courts’ jurisdiction over class actions that allege violations of only the Securities Act, and the state appellate courts denied review of the ruling. The U.S. Supreme Court granted Cyan’s petition for certiorari to decide whether SLUSA deprived state courts of jurisdiction over “covered class actions” asserting only Securities Act claims. The Court also addressed the related question raised by the Solicitor General: whether SLUSA enabled defendants to remove Securities Act class actions from state to federal court for adjudication.
The Court first addressed whether SLUSA deprived state courts of jurisdiction over covered class actions asserting only Securities Act claims. The Court first focused on what the Court referred to as SLUSA’s “state-law class-action bar,” §77p(b) which “completely disallows (in both state and federal courts) sizable class actions that are founded on state law and allege dishonest practices respecting a nationally traded security’s purchase or sale.” The Court next addressed SLUSA’s key amendment at issue in this case. That amendment, to the Securities Act’s jurisdictional provision, provides that state and federal courts have concurrent jurisdiction over Securities Act claims “except as provided in section 77p . . . with respect to covered class actions.” 15 U.S.C. §77v(a) (emphasis added). Cyan argued that this provision must be read in conjunction with the definition of “covered class actions” in 15 U.S.C. §77p(f)(2), under which a “covered class action” is a suit that seeks damages on behalf of more than 50 individuals, without mention of whether it is based on state or federal law. Accordingly, Cyan argued, the “except clause” stripped state courts of the power to adjudicate Securities Act class actions involving 50 or more individuals. The Court disagreed, finding that SLUSA’s text, “read most straightforwardly,” leaves concurrent state court jurisdiction intact. The Court noted that the “background rule” in place since 1933 gives state courts concurrent jurisdiction over claims “brought to enforce any liability or duty created by” the Securities Act. The “except clause,” the Court held, reinforces the bar on certain securities class actions based on state law. The Court reasoned that the “except clause” contained a cross-reference to the entirety of Section 77p—which the Court found concerned state-law actions. The Court rejected Cyan’s argument that the cross-reference to 77p in 77v was specifically to the definition of “covered class actions” contained in 77p, finding that Congress does not make cross-references to definitions elsewhere in the statute. The Court concluded that 77p “says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” The Court noted that it was highly unlikely that Congress would “upend the 65-year practice of state courts’ adjudicating all manner of [Securities] Act cases by way of a mere conforming amendment.”
Cyan also argued that the legislative history behind SLUSA supported its interpretation of the clause as divesting state courts of jurisdiction, but the Court again disagreed, reasoning that the legislative history failed to “overcome the clear statutory language” of the clause. The Court found that the legislative history of SLUSA was equally supportive of the interpretation that SLUSA was not intended to strip state courts of jurisdiction over Securities Act claims. The Court observed that, by barring securities class actions brought under state law, SLUSA ensured that plaintiffs could not obviate the PSLRA’s substantive requirements (e.g., the “safe harbor” provision for forward-looking statements). The Court noted that “[w]e do not know why Congress declined to require . . . that 1933 Act class actions be brought in federal court” but concluded that it would not revise what appeared to be a legislative choice “by reading a conforming amendment and a definition in a most improbable way, in an effort to make the world of securities litigation more consistent or pure.” The Court recognized that “questions remain as to the except clause’s precise purpose” but concluded that “they do not give us permission to devise a statute (and at that, a transformative one) of our own.”
The Court then turned to the issue of whether defendants may remove federal class actions over which state courts retained jurisdiction to federal court. This question was put forth by the Solicitor General as amicus curiae and was not directly presented by Cyan, as Cyan never attempted to remove the suit. The Solicitor General’s argument was based on another SLUSA clause permitting any covered class action brought in state court involving a covered security to be removed to federal district court. That provision, §77p(c), provides that “[a]ny covered class action brought in any State court involving a covered security, as set forth in subsection (b) of this section, shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b) of this section.” According to the Government, “Congress would not have been content to leave” suits like those brought against Cyan “stuck in state court.” The Government argued that, under §77p(c), Securities Act class actions can be removed to federal court if they “allege the kinds of misconduct listed in §77p(b) (e.g., false statements or deceptive devices in connection with a covered security’s purchase or sale).” The Court, however, again pointed to its view that the “covered class actions” described in §77p(b) are state-law class actions alleging securities misconduct. The Court further rejected the Government’s argument that, in §77p(c), the phrase “as set forth in subsection (b)” modified only the reference to “a covered security.” The Court found, again, that the most natural and grammatical reading of §77p(c) is that it refers to the entirety of subsection (b). Accordingly, the Court rejected the Solicitor General’s argument and held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court.
This decision may result in an increased number of Securities Act class actions being brought by plaintiffs in state courts across the country, including those located in districts that previously had held that SLUSA deprived state courts of jurisdiction over such actions (for example, New York City). A number of additional points are worth noting, however.
First, as the Supreme Court emphasized, the PSLRA “included substantive sections protecting defendants (like a safe harbor for forward-looking statements) in suits brought under the federal securities laws” and, “wherever those suits go forward, the [PSLRA]’s substantive protections necessarily apply.” The Court did not address whether some of the most important PSLRA protections—such as the discovery stay pending a motion to dismiss—are “substantive” or “procedural.” Moreover, Cyan does not undermine a defendant’s ability to seek to stay discovery in a parallel state action while a motion to dismiss is pending in federal court, coordinate multiple parallel actions, or stay one action entirely while another proceeds.
Second, other potential avenues for removal of Securities Act claims are unaffected. The Court’s opinion in Cyan only addressed removal under SLUSA, not removal on other grounds. For example, “related to bankruptcy” removal—a critical route to federal court for underwriters, directors and officers, and audit firms in cases where the corporate issuer has filed for bankruptcy, alleged damages may be large and the ability to collect on indemnification rights may be affected—is untouched by the Court’s decision. Courts, including the Court of Appeals for the Second Circuit, have found that 28 U.S.C. §1452(a) provides a separate basis for removal of any claims, including those brought under the Securities Act, that are related to bankruptcy. California Pub. Employees’ Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 107 (2d Cir. 2004).
Third, Cyan may lead more companies to consider adopting bylaws that designate federal courts as the exclusive forum for resolution of claims under the Securities Act. Such bylaws are currently being challenged in litigation pending in Delaware Chancery Court (Sciabacucchi v. Salzberg, Case No. 2017-0931), which we will be watching closely. In that action, an investor has sued three recently-chartered Delaware companies (Blue Apron, Roku, and Stitch Fix, and their respective directors), seeking a declaratory judgment that such provisions are invalid under Delaware law. The plaintiff contends that, independent from the issues addressed in Cyan, “there has been no dispute that stockholders have the right to file an individual action in state court, asserting claims under the Securities Act and that such an action could not be removed.” The plaintiff argues that the forum selection clauses at issue are inconsistent with Delaware law, because (i) they do not pertain to internal corporate claims, and (ii) even if securities claims are internal corporate claims, they are inconsistent with Section 115 of Delaware’s General Corporation Law, which bars governance rules that prohibit bringing those claims in Delaware courts.
Finally, as the Court noted, a legislative solution is, of course, available. Ending state court jurisdiction over Securities Act class actions, or at least permitting removal, would give coherence to the statutory scheme given that covered class actions under both the Securities Exchange Act of 1934 and state law are already channeled to federal court, leaving covered class actions filed exclusively under the federal Securities Act as the outlier.