Can state courts adjudicate “covered class actions” that allege claims only under the Securities Act of 1933?
The Supreme Court will determine whether state courts can hear claims filed solely under the Securities Act of 1933 as “covered class actions.” The case arises out of a decrease in Cyan, Inc.’s stock prices, which led investors, including the Beaver County Employees Retirement Fund, to sue as a class in state court for alleged disclosure violations. Cyan argues that California state courts could not hear this case, because the Securities Act’s legislative history and existing regulatory structure suggests that Congress intended for all class actions filed under the Securities Act to be tried in federal courts. Beaver, on the other hand, claims that Congress intended to give state and federal courts concurrent jurisdiction—i.e., both state and federal courts can hear this case. The stakes of the case are also in dispute: organizations supporting Cyan claim that a Beaver victory would promote inconsistent Securities Act decisions in federal and state courts, encourage forum shopping, and harm the capital markets. Beaver’s supporters disagree, asserting that the effects of a decision in its favor would be minimal.
Questions as Framed for the Court by the Parties
Whether state courts lack subject-matter jurisdiction over “covered class actions,” 15 U.S.C. § 77v(a), that allege only claims under the Securities Act of 1933.
Congress enacted the Securities Act of 1933 (“Securities Act”) to regulate the securities industry after the 1929 stock market crash. The Securities Act allows securities acquirers to sue securities issuers if the issuers fail to comply with their obligations under the Securities Act. The original Securities Act gave plaintiffs the choice to file Securities Act claims in federal or state court. Then in 1995, Congress enacted the Private Securities Litigation Reform Act (“PSLRA”) to prevent the filing of abusive or meritless lawsuits. Some plaintiffs, however, still sued in state courts under state law. In response, Congress enacted the Securities Litigation Uniform Standards Act (“SLUSA”) to create a national standard for securities class actions. One section of SLUSA, 15 U.S.C. § 77v(a), provides that both state and federal courts will hear securities cases “except as provided in section 77p of this title with respect to covered class actions.” The meaning of this section became an issue in this class action lawsuit.
Cyan, Inc. (“Cyan”), a hardware and software supplier, began publicly selling its shares on the New York Stock Exchange in May 2013. After Cyan’s stock price decreased, one of Cyan’s stockholders, Beaver County Employees Retirement Fund (“Beaver”), alleged that the documents Cyan issued upon going public misrepresented information about the company, in violation of the Securities Act. In 2014, Beaver filed a class action lawsuit in California Superior Court against Cyan, its officers, and its directors, for their alleged misrepresentations.
Cyan petitioned the California Superior Court to dismiss the case, arguing that Congress had stripped state courts of their authority to hear cases based solely on Securities Act claims in covered class actions. The Superior Court disagreed and ordered the parties to begin collecting evidence to try the case. Unsatisfied with the decision, Cyan petitioned the California Court of Appeals to reverse the Superior Court’s decision. After the California Court of Appeals denied Cyan’s petition, Cyan petitioned the U.S. Supreme Court for relief. The Supreme Court granted certiorari on June 27, 2017. The Supreme Court also invited the United States to file a brief in this case.
DO SLUSA’S TEXT AND STRUCTURE PRECLUDE STATE SUITS?
Cyan asserts that the Securities Litigation Uniform Standards Act’s (“SLUSA”) text and structure indicate that state courts lack jurisdiction to hear Securities Act of 1933 (“Securities Act”) for covered class actions and, thus, this case. Cyan claims that SLUSA ended state courts’ historic concurrent jurisdiction with federal courts to hear Securities Act class actions as evidenced by the SLUSA amendments found in § 77v(a) and § 77p together. Cyan contends that § 77p(b) provides that pure, state-law covered class action claims of federal concern—i.e., state-law claims that do not involve any Securities Act claims, alleging an untrue statement, omission, or deceptive device in purchase with the sale of a covered security—cannot be brought in either state or federal courts. If the pure, state-law claim is brought in state court, then it can be removed by 15 U.S.C. § 77p(c) to federal court where it will be dismissed. Cyan states that § 77v(a) addresses covered class actions involving mixed claims—i.e., alleging both state-law and Securities Act claims. Cyan notes that the exception provides that a covered class action involving both a Securities Act federal claim (“arising under this subchapter”) and a claim under the scope of § 77p(c) (which requires state-law claims to be removed to federal court) can be removed. Cyan then concludes that in order to follow the “symmetrical and coherent regulatory scheme” the only category left to address is pure Securities Act covered class actions, and Congress filled the gap by excluding such cases from state courts’ jurisdiction. Otherwise, Cyan points out, claims that are solely based on Securities Act covered class actions can be brought in state court and remain there. This outcome is impossible, Cyan asserts, because Congress could not have intended to allow state-law claims and mixed covered class actions to be removable to federal courts but to except cases that solely involve Securities Act claims. Cyan claims that Beaver falsely uses 15 U.S.C. § 77p(b)’s preclusion provision to direct 77v(a)’s jurisdictional provision when preclusion and jurisdiction are entirely distinct concepts.
Beaver counters that SLUSA’s text and structure plainly allow state courts to hear Securities Act covered class actions. Beaver contends that the SLUSA § 77(v)(a) amendments clearly excluded cases involving state and federal law that violated § 77p from state jurisdiction and subjected them to removal to federal courts. Beaver asserts, however, that Congress did not intend to except all Securities Act covered class actions from state courts’ jurisdiction. Beaver maintains that if Congress wanted to except all Securities Act covered class actions from state jurisdiction in §77v(a) by solely using § 77p’s definition instead of § 77p in its entirety, Congress would have used a familiar phrase such as “as defined in” instead of “as provided in.” Specifically, Beaver argues that Congress would have cited the provision that defines covered class actions, 15 U.S.C. § 77p(f)(2), or would have given federal courts exclusive jurisdiction. . Beaver contends that in the same paragraph, however, Congress clearly uses “provided” to mean “supplied” in § 77v(a), and Congress usually uses consistent meaning with words that are in the same paragraph of a subsection. Beaver further asserts that no evidence supports Cyan’s interpretation. Beaver claims that when § 77v(a) solely references § 77p when describing exceptions to state jurisdiction, it would be odd to exclude federal-law claims since § 77p only deals with state-law claims. Beaver argues that Cyan lacks authority to assume that Congress cannot have a provision in § 77p to shape § 77v(a)’s jurisdictional provision and notes that laws are often written this way. Beaver maintains that Congress simply used § 77v(a)’s jurisdictional provision to exclude mixed cases involving state-law claims that were precluded by § 77p. Beaver asserts that Cyan would recognize that § 77v(a)’s anti-removal jurisdiction references 15 U.S.C. § 77p(c), and that this provision defines removal jurisdiction by referencing § 77p(b), the preclusion provision. According to Beaver, § 77v(a)’s incorporation of § 77p in its entirety is logically similar to § 77p(c)’s reference to § 77p(b).
Appearing at the request of the Supreme Court, the United States maintains that state courts have jurisdiction to hear Securities Act covered class action claims. The United States contends that § 77p should be read in its entirety, not just its definition of covered class actions, and that § 77p places no limitation on state courts hearing class actions alleging only federal-law claims. Also, the United States asserts that Cyan’s interpretation would lead to the incorrect conclusion that all Securities Act covered class action claims, even those involving non-covered securities and those that do not allege a material misstatement, omission of a material fact, or employment of a deceptive device regarding the purchase or sale of a covered security under § 77p(b), would be outside state jurisdiction.
DOES CONCURRENT JURISDICTION SERVE SLUSA’S PURPOSE AND HISTORY?
Cyan contends that SLUSA’s legislative history shows that Congress enacted SLUSA to exclude all Securities Act class actions from state courts’ jurisdiction. Cyan argues that Congress enacted SLUSA for three reasons: first, to effectuate the goals of the Private Securities Litigation Act of 1995 (“PSLRA”)—namely to stop litigation that was “draining value from the shareholders and employees of public companies.” According to Cyan, the PSLRA’s stringent requirements led many plaintiffs to file frivolous lawsuits in state court, and SLUSA was enacted to prevent plaintiffs from avoiding the PLSRA by limiting state’s concurrent jurisdiction over Securities Act covered-class-actions claims. Second, Cyan maintains that Congress enacted SLUSA to stem the influx of securities class actions brought in state courts. The third reason for SLUSA’s enactment, Cyan argues, was Congress’s desire for uniform standards for securities litigation. Cyan asserts that the federal interest is prominent in cases involving “nationally traded securities,” and thus Congress did not want disparate treatment among state courts regarding Securities Act claims. Cyan points out that SLUSA covers all covered class actions, including non-covered securities, but that this is not anomalous given that the Securities Exchange Act of 1934 made all Securities Exchange Act claims within the federal courts’ exclusive jurisdiction and the PSLRA’s protections apply to all Securities Act class actions, not just those involving covered securities. Cyan also maintains that SLUSA should be interpreted as excluding all Securities Act claims from state jurisdiction as this favors administrative simplicity, avoiding complex jurisdictional tests that lead to wasted time and money in litigation.
Beaver argues that Congress designed SLUSA to respect the jurisdiction of state courts and to address plaintiffs’ dodging of the PSLRA by bringing nationally traded-security claims under state law, but not removing all class action litigation to federal court. Beaver asserts that the SLUSA amendments in § 77v(a) were meant to conform to § 77p, limiting state court jurisdiction only to § 77p limitations. Beaver maintains that state courts had been hearing Securities Act cases for sixty years, as sanctioned by § 77v(a), and that the PLSRA modified federal and state courts’ handling of Securities Act cases and tightened procedures in the Securities Act itself. However, Beaver contends, the PSLRA was never intended to change state courts’ concurrent jurisdiction of Securities Act claims through procedural modifications in the same manner that was done with federal courts. One reason, Beaver claims, is because there is no evidence to indicate that Congress believed state courts were improperly adjudicating Securities Act claims or that the PSLRA encouraged more Securities Act class actions to be filed in state court. As a result, SLUSA’s purpose, according to Beaver, was only to prevent plaintiffs from bringing mixed Securities Act covered class actions rather than to remove all Securities Act covered class actions from state-court jurisdiction. Also, Beaver asserts that there is no evidence supporting the argument that SLUSA was enacted to address “uncovered” securities brought under a class action as Cyan asserts; rather, it addresses only covered securities under state law.
The United States argues that Securities Act class actions alleging conduct described in § 77p(b)(1) or § 77p(b)(2) are removable to federal courts. Considering the legislative history, the United States contends that before SLUSA enacted § 77p(c), § 77v(a) disallowed all Securities Act class action claims that were brought in state court from being removed to federal court. The United States maintains that this changed with the SLUSA amendments. The United States asserts that under § 77p(c), Congress allows any Securities Act covered class action claim—federal or state—that alleges either § 77p(b)(1) or § 77p(b)(2) to be removable to federal courts.
SHOULD THE COURT PROTECT DEFENDANTS FROM FORUM SHOPPING OR THE STATES FROM ENCROACHMENT OF FEDERAL POWER?
Business Roundtable and the Society for Corporate Governance (“Business Roundtable”), in support of Cyan, argue that allowing state courts to hear Securities Act cases compromises SLUSA’s fairness and efficiency goals because federal procedural protections are not applicable or enforced in state courts. Specifically, Business Roundtable claims that litigating securities claims in state courts may be unfair to defendants because state courts, unlike federal courts, do not have consistent rules regarding discovery, consolidation of multiple cases, and pleading requirements. Business Roundtable further argues that these inconsistent state-court rules will promote plaintiffs’ forum shopping, or selecting the court that will treat plaintiffs’ claims most favorably.Another amicus supporting Cyan, DRI, cautions the Court that plaintiffs may choose to bring their claims before judges who are biased against defendants. For example, a group of law professors in their brief supporting Cyan contend that shareholders have already flocked to California at increasing rates to file Securities Act claims because California has allowed plaintiffs to maintain lawsuits under the Securities Act in its state courts.
Los Angeles County Employees Retirement Association (“LACERA”), in support of Beaver, responds that there is little difference between state and federal court procedures. Specifically, LACERA contends that California state courts apply discovery rules and pleading standards similarly to federal courts, are aware of class actions’ abuse potential, and stay or dismiss actions if another court should hear the case. LACERA also asserts that any increase in Securities Act class-action filings in California corresponds with an increase in IPO offerings. Federal Jurisdiction and Securities Law Scholars (“the Scholars”), also supporting Beaver, argue that concurrent jurisdiction of federal claims is a fundamental role of state courts. Moreover, the Scholars hold that states should have concurrent jurisdiction over Securities Act claims even if inconsistencies in state and federal policies implicate federal interests, because Congress balanced federal and state interests through the PSLRA and SLUSA’s texts.
WILL ALLOWING STATE COURT JURISDICTION INCREASE OF LITIGATION COSTS?
In support of Cyan, Amici Law Professors and the New York Stock Exchange (“NYSE”) assert that allowing Securities Act lawsuits in state courts proves too costly for companies and discourages corporations from going public. Specifically, Law Professors assert that the variation between state and federal court procedural protections in Securities Act cases leads to larger settlements in state court than federal court. NYSE adds that allowing similar claims to proceed in both state and federal court increases litigation costs. Moreover, NYSE claims that the potential exposure to these high litigation and settlement costs discourages companies from going public, which not only harms companies, but also investors and the U.S. economy. When companies choose not to list their stock on the public market, NYSE argues that investors lose the transparent and standardized information that public companies are required to provide. NYSE holds that without this information, investors cannot make as informed investment decisions and may direct their money to less efficient investments, harming the overall economy.
Federal Jurisdiction and Securities Law Scholars, in support of Beaver, respond that Law Professors presented only limited anecdotal evidence to support their claim that state and federal courts reach different results on the same allegedly misleading statements. Moreover, the Scholars argue that nothing suggests the state and federal courts interpreted the legal standards differently; thus, the courts likely differently applied the law to the facts, just as two different federal courts could do. Concluding that state courts are incapable of consistently applying federal law ignores the history of concurrent jurisdiction for Securities Act claims and disrespects state courts, Federal Jurisdiction and Securities Law Scholars contend. Additionally, LACERA responds that litigation costs are actually lower in state court. LACERA explains that class actions often proceed quicker in state court than federal court due to class actions being assigned to “complex” litigation departments where judges are knowledgeable about class actions.
- Arthur H. Aufses, Supreme Court to Determine State Court Jurisdiction of Class Actions Under Securities Act of 1933, Kramer Levin (July 5, 2017).
- Jordan Eth, Joel Haims, Mark Foster, James Beha, and Robert Cortez Webb, High Court Takes Up Forum Shopping in Securities Cases, Law 360 (July 6, 2017).
- Gregory Silbert, Stacy Nettleton, Melanie A. Conroy, and Ellen Shapiro, Cyan and the Future of Federal Securities Class Action Claims in State Court, Weil, Gotshal & Manges LLP (June 2, 2017).