The U.S. Supreme Court has agreed to decide whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) abolishes concurrent state court jurisdiction over class action lawsuits that allege only claims under the Securities Act of 1933 (the 1933 Act). The case is Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439.
In 1995, prompted by concerns about “abusive and meritless” securities lawsuits, Congress enacted the Private Securities Litigation Reform Act (the PSLRA). The PSLRA imposed various reforms—including heightened pleading standards, mandatory disclosures by plaintiffs and an automatic stay of discovery pending resolution of any motions to dismiss—on most federal securities lawsuits. In response, many plaintiffs began filing securities claims (including 1933 Act claims) in state courts, where they contended that the PSLRA’s procedural reforms did not apply. While ordinarily a federal claim can be removed to federal court, the 1933 Act is unusual in that it bars removal of claims filed in state court.
In 1998, Congress responded to plaintiffs’ efforts to evade the PSLRA’s reforms by enacting SLUSA, which, as the House Report put it, sought to make “[f]ederal court the exclusive venue for most securities class action lawsuits. . . ” Among other things, SLUSA amended the 1933 Act’s removal bar to permit removal of certain securities class actions to federal court, and amended the 1933 Act’s jurisdictional provision to eliminate concurrent state court jurisdiction as to certain securities class actions.
The question before the Supreme Court in Cyan is whether SLUSA’s amendment to the 1933 Act’s jurisdictional provision, 15 U.S.C. § 77v(a) (originally enacted as § 22(a) of the 1933 Act), eliminated state court jurisdiction as to class actions that allege only claims under the 1933 Act. For more than 70 years prior to SLUSA’s enactment, the 1933 Act had conferred concurrent jurisdiction on both the state and federal courts over cases alleging violation of the 1933 Act. The Cyan defendants argue that the amendment eliminated state court jurisdiction over 1933 Act class actions, and that this reading of the amendment is consistent with SLUSA’s purpose of preventing evasion of the PSLRA’s reforms and centralizing securities class action litigation in the federal courts.
The Cyan plaintiffs argue that state courts have retained jurisdiction as to 1933 Act class actions because the amendment eliminates state court jurisdiction only as to certain state law class actions—namely (according to plaintiffs) only those class actions in which only claims under state law are asserted.
This issue arises in two contexts. First, plaintiffs whose 1933 Act class actions are removed to federal court often seek to have their cases sent back (remanded) to state court, arguing that removal was improper because the state court has jurisdiction despite SLUSA, and that the 1933 Act therefore bars removal. As described below, the dozens of federal district court decisions in this context are divided as to whether there is state court jurisdiction, and no federal court of appeals has addressed the issue. (This is because orders granting remand are generally not reviewable and orders denying remand are non-final, appealable only after final judgment). Second, as in Cyan, defendants in state court class actions alleging 1933 Act claims sometimes challenge the state court’s subject matter jurisdiction, arguing that state courts lack jurisdiction to hear 1933 Act class actions after SLUSA. Those decisions (Cyan is one of them) can be appealed through the state system. There are just a handful of state court decisions addressing this issue.
The need for Supreme Court guidance on this issue has taken on increased urgency in recent years as the number of 1933 Act class actions brought in state court has significantly increased. The federal district courts across the country have issued conflicting decisions on whether state courts have jurisdiction to hear class actions asserting claims solely under the 1933 Act in light of SLUSA’s jurisdictional amendment. The inconsistency is particularly noticeable in the two states where most securities class action litigation is conducted: California and New York. Federal district courts in California have generally held that such cases can be maintained in state court and cannot be removed, while federal judges in New York have largely ruled that SLUSA gives federal courts exclusive jurisdiction over such actions. (Recent decisions from federal judges in Delaware and Tennessee have followed the approach taken by these New York cases.)
As a result of the California rulings, there has been a sharp uptick in 1933 Act class actions filed in California state court. According to Cornerstone Research, an average of three 1933 Act class action lawsuits were filed in the California state courts each year from 2010 through 2014. In 2015, however, 15 such cases were filed. And in 2016, 18 such cases were filed. Importantly, these state court cases are often in addition to federal actions asserting the same claims against the same defendants, leading to identical cases proceeding simultaneously in federal and state court, resulting in inefficiency and potentially inconsistent rulings. Moreover, these state court 1933 Act class actions largely proceed unconstrained by the procedural reforms of the PSLRA, which can have a real effect on the resolution of these cases.
The Supreme Court’s decision in the Cyan case could have a significant impact on the future of securities class action litigation, whichever way it rules on the issue presented. A ruling for the defendants would result in the vast majority of new 1933 Act class actions being filed in federal court, where they could be consolidated and managed under the PSLRA’s procedural reforms. A ruling for the plaintiffs would likely speed the flow of 1933 Act class actions to state courts, where they would proceed outside of the procedural reforms of the PSLRA. In addition, the Acting Solicitor General of the United States has urged the Court to take an intermediate position—to use this case as a vehicle to opine on the scope of removal available under SLUSA, and to hold that 1933 Act cases like the Cyan litigation are now removable to federal court even if they are not subject to dismissal.
The Court will receive briefing over the summer, hear argument in the fall, and likely render a decision in the Cyan case in early 2018. An amicus brief supporting the defendants’ side would be due August 18, 2017, on the current schedule, but that time may be extended.