United States: Supreme Court Preserves State Courts As A Forum For IPO Securities Class Actions

Last Updated: March 27 2018
Article by Kevin C. Conroy

In a unanimous decision issued Tuesday, March 20, 2018, the United States Supreme Court clarified that certain securities law class action cases may proceed in state courts.  The Court declined to find that Congress intended to make federal courts the exclusive or preferred forum for resolving such claims.

The case – Cyan, Inc. v. Beaver County Employees Retirement Fund – involved the interpretation of the Securities Litigation Uniform Standards Act of 1998 (also referred to as SLUSA) and the changes that law made to the Securities Act of 1933.  The Securities Act governs the offering of securities to the public and requires "full and fair disclosure" of relevant information.  The Securities Act gives plaintiffs the option of pursuing a claim in either federal or state court.  Ordinarily a defendant facing a lawsuit brought in state court but based on federal law (such as the Securities Act) would have the option to "remove" the case to the appropriate federal court.  The Securities Act, however, expressly prohibits the removal of such cases to federal courts.  If a plaintiff choses to bring the claim in state court, the defendant is forced to litigate the claim in that forum.  The Securities Exchange Act of 1934 takes a different approach.  The Exchange Act (which governs trading in securities and which was not at issue in Cyan) granted federal courts exclusive jurisdiction over claims brought pursuant to that act.  Plaintiffs alleging violations of the Exchange Act could only bring their claims in federal court.

In 1995, Congress passed the Private Securities Litigation Reform Act, amending both the Securities Act and Exchange Act.  These amendments included both substantive changes that applied to cases brought in either federal or state courts and procedural changes that only applied to actions brought in federal court.  Because the procedural changes were generally more favorable to the defendant, one effect of the 1995 reforms was to make state court an even more attractive option for plaintiffs bringing claims under the Securities Act.  Plaintiffs could also circumvent the substantive changes by alleging separate claims based on state law rather than on the Securities Act or Exchange Act.

In 1998, Congress amended the securities laws once again by passing SLUSA.  The purpose of SLUSA was to curb perceived abuses in securities litigation, including the use of state courts to circumvent the changes enacted in the 1995 amendments.  SLUSA barred class action lawsuits involving more than 50 class members and a security listed on a national stock exchange where the claim was based on state securities laws.  The bar applied to both federal and state courts.  In other words, SLUSA made the Securities Act and Exchange Act the exclusive means to redress alleged deception in the offering or sale of listed securities, with a limited exception for small and local matters.  SLUSA also provided a limited exception to the Securities Act's prohibition on removal of actions from state to federal courts.

The Cyan case arose when the plaintiffs (three pension funds and an individual) bought shares of a telecommunications company (Cyan) in an initial public offering registered under the Securities Act.  The shares declined in value, and the plaintiffs brought a class action in a California state court alleging violations of the Securities Act.  Cyan moved to dismiss the case, arguing that SLUSA made federal courts the exclusive forum for litigating such cases.  Cyan lost its argument in the state courts, and the case made its way to the Supreme Court.

The Supreme Court, in a unanimous decision, found that SLUSA had not stripped the state courts of jurisdiction to hear cases involving alleged violations of the Securities Act.  Instead, the Court found that SLUSA barred the litigation of securities claims based on state law, but did not otherwise change the ability of state courts to adjudicate securities law claims.  The Supreme Court also declined to find that SLUSA permitted the removal of Securities Act claims from state to federal courts (a position advocated by the United States Solicitor General).

Although the justices had expressed concern about the clarity of the statutory language during oral arguments, the Court ultimately used a straightforward textual analysis to reach its conclusion, finding that "The statute says what it says—or perhaps better put here, does not say what it does not say."  If Congress had intended to strip state courts of jurisdiction over Securities Act claims, it could have expressly done so, as it had done from the start with the Exchange Act.  The Court easily rejected Cyan's arguments based on Congress's purpose in enacting SLUSA, observing that the act "largely accomplished the purpose articulated" by Congress, and that the Court does "not generally expect statutes to fulfill 100% of all of their goals."

As for the possibility of defendants removing Securities Act claims from state to federal court, the Court found that SLUSA's limited exception to the Securities Act's general prohibition on removal only applies to those claims that plaintiffs may attempt to bring based on state securities laws (which SLUSA simultaneously bars on the merits).  While a state court applying the Securities Act as amended by SLUSA should dismiss such barred claims itself, defendants can elect to remove the case to a federal court to avoid any perceived risk of the state court failing to dismiss the case.

Following the Supreme Court's Cyan decision, it is clear that those involved in the offering of securities remain exposed to potential litigation in state courts, where they will not have the full slate of procedural protections they would have in federal court.  Perhaps the most significant procedural protection lost in such instances is the opportunity to consolidate potentially duplicative class action lawsuits.  Different groups of plaintiffs could pursue separate class actions simultaneously in multiple states against the same defendants for the same alleged violations.  Defendants would have no ability to consolidate the various actions, unless Congress decides to further amend the securities laws to prevent that outcome.

To view Foley Hoag's IPO, Then What? Blog please click here

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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.


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.


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