Words Are Important “Except” When They Are Not

Yesterday, the U.S. Supreme Court decided Cyan, Inc. et al. v. Beaver County Employees Retirement Fund. The Court addressed whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) requires class action claims under the federal Securities Act of 1933 (the ’33 Act) to be litigated only in federal courts. The Court unanimously held that those class action claims can be pursued in state courts as well as federal courts.

In light of poor Congressional draftsmanship, the Court’s decision is more of a grammatical exercise than a work of judicial scholarship. The decision focused on two sections of SLUSA found in Section 16(b) and Section 16(c) of the ’33 Act and two phrases in Section 22(a) of the ’33 Act.

Section 16(b) provides that class actions based on state securities law claims in connection with the purchase or sale of “covered securities”[1] may not be maintained in any state or federal court (the State Law Bar). Section 16(c) provides that any class action based on state securities law claims involving a “covered security,” if brought in state court, is removable to federal court where, presumably it will be dismissed (the Removability Provision).

But what if the action brought in state court is not based on state law claims but instead is based upon federal law? That was the situation before the Supreme Court – Beaver County brought its federal ’33 Act claims in state court.

That leads to Section 22(a) of the ’33 Act, which provides in part:

“The district courts of the United States . . . shall have jurisdiction of offenses and violations under [the ’33 Act] . . ., and, concurrent with State . . . courts, except as provided in Section 16 with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by [the ’33 Act].”

Section 16(b)’s State Law Bar, however, applies only to state law claims, not to federal claims under the ’33 Act. Accordingly, the Court read the “except” clause in Section 22(a) essentially as a nullity, removing nothing from state court jurisdiction except the ability to hear class actions based on state law claims. Because Beaver County’s case was based on federal claims, the Court held that the State Law Bar did not apply to Beaver County’s case, which was permitted to continue in state court.

The Court then considered the non-removal provision of Section 22(a), which states:

Except as provided in Section 16(c), no case arising under [the ’33 Act] and brought in any State court of competent jurisdiction shall be removed to any court of the United States.

Because Beaver County’s case was based on federal claims, Section 16(c)’s Removability Provision simply did not apply. The Court interpreted it as a nullity that did not affect Section 22(a)’s prohibition of removal of properly filed ’33 Act cases from state court.

Is this what Congress intended? As the Supreme Court pointed out, Congress knows how to create exclusive jurisdiction, which it did with the Securities Exchange Act of 1934. The “except” clauses that SLUSA added to the ’33 Act supposedly meant something to the drafters. The Supreme Court, however, could not ascertain the meaning, nor was the Court willing to do more than take Congress at its words (which, interestingly enough, were referred to as “gibberish” during oral argument).