On June 27, the Supreme Court granted certiorari in Cyan Inc. et al. v. Beaver County Employees Retirement Fund et al., agreeing to weigh in on whether state courts have jurisdiction to hear class action lawsuits brought under the Securities Act of 1933 (the 33 Act).1 The case raises a significant issue of statutory interpretation that has divided state and federal courts, and promises to set an important precedent as to how securities class actions under the 33 Act will be handled nationwide.
The 33 Act prohibits false statements made in connection with a public offering of securities, and creates several causes of action that, Congress originally provided, could be brought in either state or federal court. But the 33 Act’s concurrent state and federal jurisdiction was trimmed back in the 1990s: After Congress passed the Private Securities Litigation Reform Act of 1995 (PSLRA), imposing a variety of reforms such as heightened pleading standards and an automatic stay of discovery designed to target abusive class action practices viewed as damaging to the American economy, Congress took note that securities class action litigants were migrating from federal court to state court, where the reforms of the PSLRA did not apply. Congress then enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to prevent litigants from circumventing the PSLRA reforms. The dispute in Cyan centers on the following italicized language that SLUSA added to Section 77v(a) of the 33 Act which, as amended, gives state courts concurrent jurisdiction with federal courts, “except as provided in section 77p of this title with respect to covered class actions(.)”
The defendant-petitioners in Cyan took the position that the added clause removes state court jurisdiction from “covered class actions,” which are defined in Section 77p(f)(2) as class actions seeking relief for more than 50 class members. The Cyan plaintiff-respondents, on the other hand, interpreted the clause as simply referring the reader to Section 77p, part (b) of which limits the ability of plaintiffs to bring covered class actions based on state law, but not federal law. Therefore, the Cyan plaintiff-respondents argued that SLUSA did not remove state court jurisdiction to hear class actions based solely on the 33 Act. The California state court in Cyan agreed, sticking closely to the language of the statute and following the only appellate authority to address the issue, a California Court of Appeal case, Luther v. Countrywide Financial Corp., 195 Cal. App. 4th 789 (2011).2
While certain courts have echoed the Cyan plaintiff-respondents and found that the statutory provisions should be read to allow state courts to hear class actions asserting claims based on the 33 Act, many others have disagreed. Those courts have suggested that would be a strange result, both because the purpose of SLUSA was to eliminate a state court route around the PSLRA and cement a unified national standard for securities class actions, and because Congress usually does not legislate such that state courts are unable to hear claims based on state law but able to hear closely related claims based on federal law.
The United States, for its part, urged the Supreme Court to take the case and adopt a reading of the statute advocated by neither party. An amicus brief from the acting solicitor general came down in favor of state court jurisdiction, but took the position that another provision of SLUSA, Section 77p(c), would make the claim removable to federal court. The solicitor general’s reading would thus permit defendants to remove 33 Act class actions to federal court and in effect permit defendants to decide, on a case-by-case basis, whether to shift these class actions from state to federal court.
Cyan Inc. et al. v. Beaver County Employees Retirement Fund et al. is scheduled to be heard in the Supreme Court’s October 2017 term.