United States: The Supreme Court Holds That State Courts Have Jurisdiction Over Certain Securities Class Actions

Key Points

  • The United States Supreme Court held that certain securities class actions affecting issuer defendants may be brought in state court and may not be removed to federal court.
  • The decision will likely extend or expand the trend of plaintiffs bringing class actions based on the Securities Act of 1933 in state courts—particularly those that are perceived as plaintiff-friendly.
  • Issuer defendants, such as newly public companies, will likely be under increased pressure to defend themselves in state courts.

Summary

The U.S. Supreme Court on Tuesday issued a unanimous decision that will likely have a plaintiff-friendly effect on class actions brought under the Securities Act of 1933 (the "1933 Act"). In Cyan, Inc., et al. v. Beaver County Employees Ret. Fund et al., No. 15-1439, the Court held that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not strip state courts of jurisdiction over class action law suits brought under the 1933 Act. The Court also held that SLUSA does not permit defendants to remove class actions alleging only 1933 Act claims to federal court.

Issuer defendants should be aware that class actions alleging only 1933 Act claims are now likely to be brought and fully litigated in state court—particularly in jurisdictions, such as California, that are perceived to be plaintiff-friendly.

Background

The case stemmed from a class action brought in California state court by investors who purchased Cyan stock in an initial public offering. The investors alleged that Cyan's offering documents contained material misstatements in violation of the 1933 Act. The investors did not assert any claims based on state law.

Cyan moved to dismiss for lack of subject-matter jurisdiction, arguing that § 77v(a) of SLUSA stripped state courts of the power to adjudicate 1933 Act claims in covered class actions. The California state court denied Cyan's motion, and the California state appellate courts denied review of that ruling.

The Court granted certiorari, attracting briefs from numerous amicus curiae, including the United States, the Chamber of Commerce, former SEC Commissioners, the New York Stock Exchange, Business Roundtable, DRI – The Voice of the Defense Bar and legal scholars in favor of Cyan's position, as well as institutional investors, plaintiff-side securities lawyers and a consumer advocacy group in support of the respondent investors.

Opinion

Justice Kagan, writing for a unanimous Court, delved into SLUSA's legislative origins, tracing back to the 1929 stock market crash and Congress's response via the 1933 Act (relating to enforcement of obligations pertaining to securities offerings), the Securities Exchange Act of 1934 (regulating the trading of securities) and eventually the Private Securities Litigation Reform Act of 1995 (PSLRA), which included substantive and procedural reforms to limit perceived abuses in securities class action litigation. SLUSA, the Court noted, was enacted to fix an "unintended consequence" of the PSLRA because plaintiffs were dodging the PSLRA's procedural obstacles by bringing class actions under state law. SLUSA thus barred certain securities class actions that were based on state securities laws.

The 1933 Act contained a general rule permitting concurrent state and federal court jurisdiction over claims to enforce the 1933 Act. At issue in Cyan was SLUSA's amendment to that general rule, which the Court called the "except clause," permitting concurrent state and federal jurisdiction "except as provided in section 77p of this title with respect to covered class actions."

In analyzing SLUSA's statutory language (which the Court found to be clear), the Court determined that the except clause does not deprive state courts of jurisdiction to decide class actions brought under the 1933 Act. By its plain terms, the except clause refers to only § 77p, which limits securities class actions based on state law and authorizes removal of those suits to federal court for dismissal. Because § 77p does not expressly refer to jurisdiction over claims brought under the 1933 Act, the Court concluded that the except clause cannot limit such state court jurisdiction. The Court found Cyan's "alternative reading" of the clause overreaching, unpersuasive, and in conflict with the rest of the statutory language.

Looking to legislative history, the Court observed that SLUSA's primary objective was to bar state law class actions and that there was no clear congressional purpose to limit state court jurisdiction over 1933 Act class actions. The Court reasoned that, if another objective of SLUSA was generally to move securities class actions to federal court, that objective was "largely" fulfilled in that most securities class actions (including those alleging 1934 Act claims) must proceed in federal court, although those alleging 1933 Act claims may proceed in state court. The Court acknowledged possible questions as to Congress's purpose for drafting the except clause, but declined to read the statute beyond its plain language.

The Court also rejected the United States' position, which was that SLUSA allows removal of 1933 Act class actions to federal court as long as they allege the kinds of misconduct listed in § 77p(b), such as false statements in connection with a covered security's purchase or sale. The Court noted that § 77p(b) referred to only state law class actions alleging securities misconduct and not federal lawsuits. The Court declined to adopt the government's reading of the SLUSA because it preferred the natural reading of the statute only to bar state law class actions.

Finally, the Court summarized Cyan and the government's position as "distort[ing] SLUSA's text because [they think] Congress simply must have wanted 1933 Act class actions to be litigated in federal court." Declining to depart from the text, the Court concluded that, "[i]f further steps are needed, they are up to Congress."

Impact

Cyan will likely extend or expand the trend of plaintiffs bringing class actions alleging only violations of the 1933 Act (i.e., relating to securities offerings) in state court, particularly in jurisdictions that are perceived to be plaintiff-friendly, such as California. After all, the amicus brief of law professors observed that, between 2011 and 2016, federal courts dismissed 31 percent of cases bringing only 1933 Act claims, whereas state courts in California dismissed without leave to amend in only three of 47 such cases. The plaintiffs' bar is also incentivized to bring 1933 Act class actions in state court to avoid procedural protections associated with federal court litigation, such as the PSLRA's discovery stay, as well as to take advantage of lower pleading standards in many state courts.

After Cyan, issuer defendants will likely be under increased pressure to defend themselves in state court, increasing litigation expenses and the costs of settlement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Mayer Brown
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions