United States: Race To The State Courthouse?: How The Ruling In Cyan Changes Where And How Securities Actions Are Fought

On March 20, 2018, the Supreme Court unanimously ruled in Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, that securities plaintiffs could bring class actions under the Securities Act of 1933 ("Securities Act") in state courts.1 This decision resolves a split among several state and federal courts as to whether the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") prevented securities plaintiffs from seeking refuge in state court from the procedural impediments the Private Securities Litigation Reform Act of 1995 (the "Reform Act") imposes on federal securities actions. The Supreme Court found that SLUSA's statutory text makes clear that plaintiffs can bring some Securities Act class actions in state court.

Cyan will ignite a race to the state courthouse, where the Reform Act's protections do not apply and judges have less experience with federal securities litigation.2 Public companies and their directors and officers will soon face new and more complicated risks. Now more than ever, defense counsel and D&O insurers and brokers must devise new tools and resources to address it.

The Legislative History

Congress, the courts, and litigators have grappled with ever-changing currents in securities class action litigation for decades. One topic that has spurred debate in this area has been whether securities plaintiffs can bring claims under the Securities Act in state court. This option has never been available to securities plaintiffs bringing actions under the Securities Exchange Act of 1934 ("Exchange Act"). That Act has always granted exclusive jurisdiction to federal courts to preside over private rights of action. But securities plaintiffs could historically bring actions under the Securities Act in state court because, since its inception, the Securities Act provided that federal and state courts have concurrent jurisdiction to adjudicate such actions.

Congress's enactment of the Private Securities Litigation Reform Act of 1995 (the "Reform Act")3 put the Securities Act's concurrent jurisdiction provision under the spotlight. The Reform Act imposes various restrictive measures, such as heightened pleading burdens and an automatic discovery stay, meant to deter frivolous federal securities class actions. As a result, securities plaintiffs began filing their Securities Act claims in state court to end-run around the Reform Act.

In response to this "shif[t] [of class actions] from Federal to State courts,"4 Congress passed SLUSA.5 Among other things, SLUSA amended the Securities Act's concurrent jurisdiction provision to deprive state courts of jurisdiction to hear "covered class actions,"6 which are actions with 50 or more prospective class members.7 This amendment, however, sparked some confusion as to whether state courts retained jurisdiction to hear any covered class actions post-SLUSA. The majority of courts have held that state court jurisdiction did not survive SLUSA, relying chiefly on Congress's intent to prevent securities plaintiffs to end-run around the Reform Act.

California state courts, however, have gone the other way. They uniformly find that SLUSA obviated state court jurisdiction only as to some covered class actions. Specifically, the Ninth Circuit Court of Appeals and California appellate court held in recent years that SLUSA continued state court jurisdiction over class actions that do not concern a "covered security"8 based on its interpretation of the statutory text of the Securities Act's concurrent jurisdiction provision.9

The Cyan Litigation

In Cyan, the plaintiff class sued Cyan, Inc., a telecommunications company, and its officers and directors (together, Cyan") in California Superior Court after their Cyan stock declined in value. They allege that Cyan's offering documents contained material misstatements in violation of the Securities Act.

Cyan moved to dismiss the Securities Act claims, arguing that the California court of first instance lacked jurisdiction to adjudicate them. The plaintiff class argued that precedent from the Ninth Circuit Court of Appeals and the California appellate court made clear that state courts retained jurisdiction post-SLUSA to adjudicate certain covered class actions under the Securities Act, such as the ones at issue in Cyan. The California Superior Court sided with the plaintiff class, ruling at oral argument and without issuing a written opinion that the aforementioned precedent permitted it to adjudicate these claims.10

The California appellate courts declined to review the lower court's decision, leading to this appeal. At the Supreme Court, Cyan11 and amici curiae supplemented their statutory interpretation arguments with extensive discussion of SLUSA's place in federal securities legislation and the harm state court securities litigation causes, illustrated by the 1,400-percent spike in California state court securities class action filings. Amicus curiae Washington Legal Foundation, in a brief authored by BakerHostetler partner Doug Greene, laid out in detail how concurrent jurisdiction is antithetical to the Reform Act and SLUSA.12 In response, the plaintiff class argued that the precedent from the Ninth Circuit Court of Appeals and the California state courts accurately interprets SLUSA's text, which on its face appears to strip state courts of concurrent jurisdiction only as to covered class actions that concern covered securities.

During oral argument, the Supreme Court tried to make sense of the confusion as to how the SLUSA amendments affect the concurrent jurisdiction provisions under the Securities Act. Justices Sonia Sotomayor and Elena Kagan seemed to agree with the plaintiff class that the SLUSA amendments permit securities class actions to be brought under federal law without regard to venue. They also seemed unpersuaded by the defendant's argument that it made little sense for Congress to prevent state courts to hear covered class actions under state law but to continue to allow them to hear such class actions under federal law. Justices Sotomayor and Kagan, as well as Justice Ruth Bader Ginsburg, noted that if Congress truly intended to confer exclusive jurisdiction over covered class actions pursuant to the Securities Act to federal courts, then it could have done so in a much clearer fashion, as it did under the Exchange Act.13

Other justices were concerned about how to interpret the plain text of the SLUSA amendments. For example, both Justices Samuel Alito and Neil Gorsuch characterized the text as "gibberish,"14 and Justice Alito commented, "all the readings that everybody has given to all of these provisions are a stretch."15 That included the interpretation of the Acting Solicitor General, who submitted an amicus curiae brief arguing that the SLUSA amendments continued state court concurrent jurisdiction of covered class actions under the Securities Act, but also allowed for such class actions to be removed to federal court. Justices Stephen Breyer, Ginsburg, and Anthony Kennedy seemed sympathetic to the Acting Solicitor General's interpretation of the text, but several Justices registered their view that the removal argument was not ripe because this removal issue was not at issue in Cyan.16

The Unanimous Supreme Court Decision

On March 20, 2018, in a unanimous decision authored by Justice Kagan, the Supreme Court held that state courts have jurisdiction to adjudicate class actions under the Securities Act that do not concern covered securities. The Supreme Court ruled that this was the more "straightforward[]" interpretation of the statutory text of the concurrent jurisdiction provision under the Securities Act.17 Specifically, the Supreme Court noted that SLUSA framed its amendments to that provision as creating an exception to the general rule that state courts have concurrent jurisdiction. If Congress truly intended to deprive state courts of jurisdiction altogether, the Supreme Court reasoned, then it would not have created an exception to the concurrent jurisdiction provision—it would have just struck that provision in its entirety.

The Supreme Court acknowledged that it does "not know why Congress declined to require that 1933 Act class actions be brought in federal court," as Congress had with claims under the Exchange Act.18 But the Supreme Court held that it "will not revise that legislative choice," noting that it "has no license to disregard clear language based on an intuition that Congress must have intended something broader."19

What Cyan Means

Cyan significantly increases and complicates the risk public companies and their directors and officers face in securities litigation. It is incumbent upon the repeat players in securities litigation defense—defense counsel, insurers, and brokers—to devise new tools and resources to address it. Without significant changes, many issuers and their directors and officers and D&O insurers will suffer severe financial consequences.20

At the most basic level, Cyan will increase the overall number of unconsolidated securities class actions. In any case involving a registered offering, the defendants must brace themselves for Securities Act claims in state court and parallel claims in federal court. There is no ability to consolidate related state and federal cases. The only way to coordinate them is to file motions to stay and/or coordinate—an approach that is always unpredictable and often unsuccessful. So the sheer number of unconsolidated cases will increase.

This means that state court litigation will swamp related federal litigation in the lion's share of cases. In federal court, the Reform Act's procedural protections—the lead-plaintiff, consolidation, and motion-to-dismiss procedures—can take more than a year to play out. That is fine if it is the only case, or even the driver, since the chances of complete dismissal are relatively high. But state court cases are subject only to state procedural rules and can move much faster than Reform Act litigation.

The most significant difference in state court is the lack of a meaningful motion to dismiss procedure. In many state courts, the pleading standard for falsity is far lower than the particularity standard established by Federal Rule of Civil Procedure 9(b), requiring no more than notice pleading. Indeed, as in many states, California's notice pleading standard does not even incorporate the "plausibility" requirement established by Bell Atlantic Corp. v. Twombly21 and Ashcroft v. Iqbal.22 Naturally, this means that significantly fewer Securities Act claims are dismissed at the pleading stage in state courts than in federal courts.

To make matters worse, with the state court case in the driver's seat, the Reform Act's procedural protections in the related federal court case will be weakened as a practical matter. For instance, the automatic stay of discovery in a securities fraud case under the Exchange Act becomes a weaker shield against abusive lawsuits when discovery can proceed full-bore in a closely related state court case. Likewise, plaintiffs who file their Securities Act claims in state court do not have to hand control of the lawsuit to the lead plaintiff who is the "most adequate" class representative. This means that a significant institutional investor in the federal court case will not control the prosecution of the overall litigation—a small retail shareholder plaintiff in the state court case could effectively run the related state and federal litigation.

These are just examples of the new world of securities litigation defense Cyan creates. Defense lawyers and D&O insurers and brokers have neither a map nor compass to navigate. For the past 20 years, the blueprint for defending securities class actions has been simple: move to dismiss the case at the pleading stage and, if unsuccessful, settle the case. But now, the most fundamental fights in the case will take place in state court, which will require a different way of litigating.

Of course, Congress may act here, similar to how it did two decades ago when it passed SLUSA, by abolishing concurrent jurisdiction to ensure that its vision for uniformity in securities litigation can (finally) become a reality. And an increasing number of companies may include federal-forum clauses in their articles of incorporation or bylaws, a solution proposed by Professor Joseph Grundfest – though time will tell whether they are enforceable. But until those or other structural solutions materialize, the repeat players in securities litigation defense will need to re-calibrate litigation strategies to address the perils that parallel claims create.

One thing is certain: securities litigation will involve more actual litigation, and it will force the development of new tools and resources among the securities litigation bar. Over the coming months, we will write and speak about the problem and potential solutions.

Footnotes

[1] Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, --- S.Ct. ----, 2018 WL 1384564 (2018).

[2] For more information about the factual and legal battle that led to the petition for certiorari, see our July 11, 2017, alert, "Supreme Court to Determine whether State Courts Have Jurisdiction to Adjudicate Covered Class Actions under the Securities Act of 1933," available at https://www.bakerlaw.com/alerts/supreme-court-to-determine-whether-state-courts-have-jurisdiction-to-adjudicate-covered-class-actions-under-the-securities-act-of-1933.

[3] Pub. L. 104-67, 109 Stat. 737.

[4] Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006).

[5] Pub. L. 105-353, 112 Stat. 3227.

[6] 15 U.S.C. § 77v(a) (emphasis added). That section also provides, "Except as provided in [15 U.S.C. § 77p(c)], no case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States." Id.

[7] 15 U.S.C. § 77p(f)(2)(A).

[8] Under the Securities Act, a "covered security" is a security sold on a national exchange. 15 U.S.C. §§ 77p(f)(3) & 77r(b)(1).

[9] Luther v. Countrywide Fin. Corp., 195 Cal. App. 4th 789 (Cal. App. 2011); Luther v. Countrywide Home Loans Serv. LP, 533 F.3d 1031 (9th Cir. 2008).

[10] Beaver Cty. Emps. Ret. Fund v. Cyan, Inc., No. CGC14538355 (Cal. Sup. Ct. Oct. 23, 2015) (Order Denying Defendants' Motion for Judgment on the Pleadings).

[11] Petition for a Writ of Certiorari, Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, No. 15-1439 (May 24, 2016).

[12] Brief of Washington Legal Foundation as Amicus Curiae in Support of Petitioners, Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, No. 15-1439 (Sep. 5, 2017).

[13] See Oral Arg. Tr. at 4 (Justice Ginsburg called defendant's interpretation "rather obtuse" and an "odd" method of conferring exclusive jurisdiction), available at https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/15-1439_linq.pdf at 26 (Justice Sotomayor)id.. at 10, 15-16 (Justice Kagan); see also id; .

[14] Id. at 11 (Justice Alito); id. at 47 (Justice Gorsuch).

[15] Id. at 41.

[16] Id. at 37 (Justice Ginsburg); id. at 45 (Justice Kennedy).

[17] Cyan, 2018 WL 1384564, at *8.

[18] Id. at *11.

[19] Id.

[20] For a helpful analysis, see B. Feldman & I Salceda, "After Cyan: Some Prognostications," available at https://www.dandodiary.com/2018/03/articles/securities-litigation/guest-post-cyan-prognostications/.

[21] 550 U.S. 544, 570 (2007).

[22] 556 U.S. 662, 678 (2009).

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