Supreme Court to Address State Court Jurisdiction over Federal Securities Lawsuits

Supreme Court to Address State Court Jurisdiction over Federal Securities Lawsuits

Legal Sidebari

Supreme Court to Address State Court
Jurisdiction over Federal Securities Lawsuits
Updated October 16, 2017
This term the Supreme Court will hear oral arguments in Cyan, Inc. v. Beaver County Employees
Retirement Fund, a case that may “shift the jurisdictional landscape for securities class actions.” The case
will likely resolve a question that has divided the federal courts for two decades: whether the Securities
Litigation Uniform Standards Act of 1998 (SLUSA) strips state courts of jurisdiction over certain class
actions that solely involve claims under the Securities Act of 1933 (the 1933 Act). A decision rendered by
the Court could strip state courts of jurisdiction over 1933 Act claims, or, alternatively, hold that state
courts have concurrent jurisdiction with federal courts over such claims. This Sidebar discusses the legal
issues involved in Cyan and the implications of the Court’s decision for securities litigation generally.
The 1933 Act, the PSLRA, and SLUSA
Securities are regulated under both state and federal law. For much of American history, state
governments possessed primary authority to regulate securities. After the October 1929 stock market
crash and ensuing financial crisis, however, the federal government assumed increased responsibility over
securities regulation, as Congress enacted a number of President Roosevelt’s New Deal reform proposals.
The 1933 Act—the first major federal enactment regulating the sale of securities—“primarily concern[s]”
new offerings of securities. Among other things, the Act imposes certain registration and disclosure
requirements on companies that issue new offerings, and provides a cause of action against an issuer and
certain other persons if documents associated with new offerings of securities contain untrue or
misleading statements or omissions of material fact.
The 1933 Act’s jurisdictional provision contained two rules that have been modified by subsequent
legislation. First, as originally enacted, the 1933 Act provided that state courts had concurrent jurisdiction
with federal courts to hear lawsuits to enforce the Act’s provisions. Second, the Act prohibited defendants
from removing such lawsuits from state court to federal court.
Over six decades after the enactment of the 1933 Act, Congress became concerned about the possibility
that class action lawsuits, and securities class actions in particular, were “injur[ing] the entire U.S.
economy.” In 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA) “to combat
perceived abuses in securities litigation.” The PSLRA imposes certain defendant-friendly requirements
for large securities class actions. These protections address federal securities claims, and most apply only
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in federal court. After the PSLRA’s enactment, securities plaintiffs increasingly “began bringing class
actions under state [securities] law, often in state court” to avoid the PSLRA’s requirements.
Three years later, in order to combat this “shift from Federal to State courts” and “prevent certain State
private securities class action[s] . . . from being used to frustrate the objectives” of the PSLRA, Congress
enacted SLUSA. As relevant in Cyan, SLUSA contained amendments to the 1933 Act related to (1) the
preclusion of certain state-law securities claims alleging conduct also prohibited by the 1933 Act, (2) the
removal of certain claims from state to federal court, and (3) state court jurisdiction over 1933 Act claims.
Specifically, SLUSA’s preclusion provision provides that certain large class actions alleging conduct that
is prohibited by the 1933 Act may not be brought under state law in either state or federal court. SLUSA’s
removal provision allows defendants to remove claims alleging conduct that is prohibited by the 1933 Act
from state to federal court for adjudication of a motion to dismiss.
Finally, SLUSA’s jurisdictional provision amended the 1933Act’s general jurisdictional provision, which
originally provided state courts with concurrent jurisdiction over 1933 Act claims. SLUSA amended that
provision to provide for concurrent jurisdiction over such claims “except as provided in section [16] . . .
with respect to covered class actions.” Section 16 of SLUSA—the provision referenced by this
amendment—includes a definition of “covered class action” for purposes of the SLUSA, but contains no
explicit limitations on the jurisdiction of state courts.
Accordingly, under SLUSA, plaintiffs may not bring state-law actions alleging conduct that is also
prohibited by the 1933 Act, and defendants may remove such actions from state to federal court for
adjudication of motions to dismiss. But federal courts are divided as to whether state courts retain
jurisdiction over 1933 Act claims, and whether such claims may be removed from state to federal court.
Issues Presented in Cyan
The central question in Cyan is whether SLUSA divests state courts of jurisdiction over 1933 Act claims
in “covered class actions” (certain suits seeking damages on behalf of more than 50 plaintiffs).
The petitioners in Cyan are a hardware and software supplier and associated individuals defending 1933
Act claims brought in California state court. They argue that SLUSA’s amendment to the 1933 Act’s
jurisdictional provision strips state courts of jurisdiction over 1933 Act claims in “covered class actions.”
By contrast, the respondents (plaintiffs in the California state court litigation) and the U.S. Office of the
Solicitor General (OSG) as amicus argue that because Section 16 of SLUSA contains no explicit
limitations on state court jurisdiction over 1933 Act claims, SLUSA does not strip state courts of
jurisdiction over those claims. That is, the respondents and the OSG argue that because SLUSA’s
jurisdictional amendment indicates that Section 16 “provide[s]” any “except[ions]” to the 1933 Act’s
general rule of concurrent state court jurisdiction, and Section 16 does not in fact contain any such
exceptions, state courts retain jurisdiction over 1933 Act claims post-SLUSA.
Cyan also offers the Court an opportunity to clarify the scope of SLUSA’s removal provisions, though it
is unclear whether the Court will take up that issue. Although the defendants have not sought removal of
this litigation to federal court before the Supreme Court agreed to review the case, the OSG has asked the
Court to “provide helpful guidance to lower courts” concerning defendants’ ability to remove 1933 Act
claims from state court to federal court. The respondents contend that SLUSA allows for the removal only
of claims brought under state law concerning conduct that is also prohibited by the 1933 Act. The OSG,
by contrast, reads SLUSA as allowing defendants to remove such claims and 1933 Act claims from state
court to federal court.

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Implications of the Court’s Decision
The Court’s decision in Cyan may have important implications for securities litigation. Some observers
have contended that companies defending securities fraud lawsuits generally prefer to litigate in a federal
forum, where they enjoy the protections of the PSLRA. Indeed, the PSLRA arguably affords companies
significant economic benefits. For example, a study submitted to the Court via an amicus brief found that
25 percent of class actions based on Section 11 of the 1933 Act brought in federal court between 2011 and
2016 were involuntarily dismissed, while six percent of 1933 Act suits brought in California courts
(where the Cyan litigation was brought) during that period were involuntarily dismissed, and the median
settlement value in securities class actions was 92 percent higher in California courts than federal courts
during that period. Moreover, the PSLRA automatically stays discovery pending adjudication of a motion
to dismiss. Accordingly, defendants litigating in federal court can generally avoid expensive discovery
costs during the early stages of litigation.
Even if the Court does not hold that SLUSA strips state courts of jurisdiction over 1933 Act claims, it
may address the scope of SLUSA’s removal provisions. Indeed, many securities fraud defendants would
likely welcome a holding that 1933 Act claims brought in state court are removable to federal court.
Accordingly, even if respondents prevail on the jurisdictional question, the Court may offer securities
fraud defendants another means of obtaining the PSLRA’s protections in 1933 Act cases.

Author Information

Jay B. Sykes

Legislative Attorney

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