On Tuesday, the Supreme Court unanimously held in Cyan Inc. v. Beaver County Employees’ Retirement Fund, that state courts have concurrent jurisdiction over securities class actions brought under the Securities Act of 1933 (the “1933 Act”), and that such actions are not removable to federal court. The Supreme Court’s decision puts to rest a split among federal district courts about whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) stripped state courts of concurrent jurisdiction.
The Court held that SLUSA—“read most straightforwardly”—left state courts’ jurisdiction over 1933 Act claims intact. According to the Supreme Court, SLUSA “does not say what it does not say,” meaning that Congress would not take away 65 years of state court jurisdiction unless it did so explicitly and directly. One of Cyan’s main arguments was that this reading of SLUSA would be at odds with its legislative purpose—to prevent circumvention of the protections afforded 1933 Act defendants under the Private Securities Litigation Reform Act of 1995 (the “Reform Act”), which was enacted to curtail abusive securities litigation. In response, the Court held that Cyan would need some “monster arguments” to overcome SLUSA’s clear text and that, in any event, SLUSA’s legislative purpose does not depend on stripping state courts of jurisdiction, “[f]or wherever those suits go forward, the Reform Act’s substantive protections necessarily apply.”
Implications: In recent years, California state courts have seen an increase in 1933 Act litigation, with a particular concentration in San Mateo County. After Cyan, 1933 Act cases will not only continue to be filed in California state courts, but will start cropping up in state courts nationwide. This means that companies conducting IPOs or follow-on offerings now risk facing litigation in multiple jurisdictions – federal and various state courts.
Tips: There are several things defendants can do to mitigate the risks and costs of litigating in state court and multiple jurisdictions. First, in recent years, a number of companies, including Blue Apron, Stitch Fix, Roku, and Snap, have adopted bylaws designating federal courts as the exclusive forum for resolution of claims under the 1933 Act. A declaratory judgment action challenging these bylaws is currently pending in Delaware Chancery Court. If Chancery determines that such bylaws are valid and enforceable, this will provide an additional tool for the management of 1933 Act cases. Second, even though the Supreme Court has ruled that state courts have jurisdiction over 1933 Act claims, it does not mean that multiple actions have to proceed at the same time. Defendants should consider using various procedural mechanisms to stay one action in favor of another, stay discovery in state court pending the resolution of a motion to dismiss in federal court, or coordinate the multiple actions. Third, defendants should ensure that state courts apply the substantive protections of the Reform Act, as the Court repeatedly held state courts must do. It remains an open question which protections are substantive versus procedural. Finally, both the Reform Act and SLUSA passed with overwhelming bipartisan support. Given the importance of uniform application of the federal securities laws to the securities markets, issuers and underwriters should consider seeking legislative change to close this loophole. As the Supreme Court put it, “If further steps are needed, they are up to Congress.”