Clarifying “Gibberish”: Supreme Court Holds That State Courts Can Hear Securities Act Lawsuits

Legal Sidebari

Clarifying “Gibberish”: Supreme Court Holds
That State Courts Can Hear Securities Act
Lawsuits
March 29, 2018
On March 20, in a case watched closely by the securities bar, the Supreme Court addressed the
implications of the Securities Litigation Uniform Standards Act of 1998 (SLUSA)—a statute that Justices
Alito and Gorsuch described during oral argument as “gibberish.” In Cyan, Inc. v. Beaver County
Employees Retirement Fund, the Court unanimously held in a decision by Justice Kagan that SLUSA does
not (1) strip state courts of jurisdiction over class actions alleging violations of only the Securities Act of
1933 (the 1933 Act), or (2) allow defendants to remove such actions from state court to federal court. This
Sidebar discusses the case’s background, the Court’s decision, and the decision’s implications for
securities litigation.
Background
The details of Cyan and the circuit split that preceded the Court’s decision are discussed in a prior
Sidebar. In short, the 1933 Act—which principally regulates initial offerings of securities—provides a
cause of action against an issuer of securities and certain other persons if certain documents associated
with a securities offering contain untrue or misleading statements or omissions of material fact. As
originally enacted, the 1933 Act provided that (1) state courts had concurrent jurisdiction with federal
courts to hear lawsuits to enforce the Act’s provisions, and (2) if such lawsuits were brought in state court,
defendants could not remove them to federal court.

In 1995, Congress passed the Private Securities Litigation Reform Act (PSLRA) “to combat perceived
abuses in securities litigation.” Among other things, the PSLRA provided certain defendant friendly
requirements for large securities class actions involving claims under the 1933 Act. Some of these
provisions made substantive changes to the 1933 Act, which apply in both state and federal court.
However, other PSLRA provisions made procedural changes to securities class actions, which apply only
in federal court. After the PSLRA’s enactment, securities plaintiffs “began bringing class actions under
state [securities] law, often in state court” to avoid the PSLRA’s defendant friendly requirements.
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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 the following three provisions amending the
1933 Act:

1. a preclusion provision providing that “covered class actions” (class actions involving
more than 50 plaintiffs) alleging conduct that is prohibited by the 1933 Act may not be
brought under state law in either state or federal court;
2. a removal provision allowing defendants to remove such state-law actions from state
court to federal court for adjudication of a motion to dismiss; and
3. a jurisdictional provision amending the 1933 Act’s general jurisdictional provision,
which originally provided state courts with concurrent jurisdiction over 1933 Act claims.

With respect to the latter item, SLUSA amended that provision to provide for concurrent jurisdiction over
1933 Act claims “except as provided in section [16] . . . with respect to covered class actions.” Among
other things, Section 16 of SLUSA includes a definition of the term “covered class action” (defined to
mean class actions in which damages are sought on behalf of more than 50 persons, among other
requirements). However, Section 16 contains no explicit limitations on the jurisdiction of state courts.
Prior to Cyan, federal courts were divided as to whether SLUSA’s jurisdictional provision stripped state
courts of jurisdiction over 1933 Act claims in “covered class actions.”

The petitioners in Cyan, a hardware and software supplier and associated individuals defending a
“covered class action” brought under the 1933 Act in California state court, argued that SLUSA stripped
state courts of jurisdiction over such actions. By contrast, the respondents (plaintiffs in the California state
court litigation) and the U.S. Office of the Solicitor General (OSG) as amicus argued that because Section
16 of SLUSA—the provision referenced by SLUSA’s jurisdictional amendment as “provid[ing] . . .
except[ions]” to the 1933 Act’s general rule of concurrent jurisdiction—contains no explicit limitations on
state court jurisdiction over 1933 Act claims, SLUSA did not strip state courts of jurisdiction over such
claims.

Moreover, although the defendants did not seek removal of the Cyan litigation to federal court, the OSG
asked the Court to “provide helpful guidance to lower courts” concerning defendants’ ability to remove
1933 Act claims in “covered class actions” from state court to federal court. The OSG read SLUSA’s
removal provision—which provides for the removal of actions described in SLUSA’s preclusion
provision—as allowing defendants to remove (1) state-law claims alleging conduct that is also prohibited
by the 1933 Act, and (2) 1933 Act claims. By contrast, the plaintiffs argued that SLUSA allows for the
removal of only the former category of claims.
The Court’s Decision
In Cyan, the Court sided with the plaintiffs on both the jurisdictional and removal issues, holding that
SLUSA does not (1) strip state courts of jurisdiction over “covered class actions” alleging violations of
only the 1933 Act, or (2) allow defendants to remove such actions from state court to federal court.
The Jurisdictional Question
With respect to the first holding, the Court concluded that Section 16 of SLUSA “says nothing, and so
does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” The Court
rejected the defendants’ alternative reading of SLUSA’s jurisdictional provision, according to which

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Section 16’s definition of the term “covered class action” “provided” the relevant “except[ion]” to
concurrent jurisdiction over 1933 Act claims. In rejecting this argument, the Court reasoned that
SLUSA’s jurisdictional provision referred to Section 16 “as a whole,” and that the defendants accordingly
erred by cherry-picking its definition of “covered class action.” Moreover, the Court explained that
Section 16’s definition of “covered class action” “cannot be read to ‘provide[]’ an ‘except[ion]’ to the rule
of concurrent jurisdiction” because “[a] definition does not provide an exception, but instead gives
meaning to a term.” “Congress,” the Court reasoned, “well knows the difference between these two
functions.”

The Court also reasoned that the defendants’ proposed interpretation of SLUSA’s jurisdictional provision
was inconsistent with the remainder of the relevant statutory scheme. The Court noted that SLUSA’s
preclusion and removal provisions apply only to class actions involving “covered securities,” a term
defined to mean securities traded on a national securities exchange. However, the Court reasoned that the
defendants’ interpretation of SLUSA’s jurisdictional provision—according to which Section 16’s
definition of “covered class action” divested state courts of jurisdiction over 1933 Act claims—would
divest state courts of jurisdiction over 1933 claims that do not involve “covered securities.” According to
the Court, that conclusion would follow from the defendants’ interpretation because, unlike SLUSA’s
preclusion and removal provisions, Section 16’s definition of “covered class action” does not explicitly
exclude actions that do not involve “covered securities.” Reading SLUSA as divesting state courts of
jurisdiction over 1933 Act claims that do not involve “covered securities,” the Court explained, would be
“out of line with SLUSA’s overall scope.”

Finally, the Court explained that the defendants’ interpretation of SLUSA’s jurisdictional provision was
untenable because it “read[] too much into a mere ‘conforming amendment.’” In the Court’s view, had
Congress intended to change the 65-year tradition of concurrent jurisdiction over 1933 Act claims, it
would have done so using more “direct” means.

After its analysis of SLUSA’s text and structure, the Court proceeded to reject the defendants’ appeals to
SLUSA’s purpose to “make good on the promise of the [PSLRA]” to combat perceived abuses in
securities litigation. In rejecting this argument, the Court explained that its reading of SLUSA was
consistent with the statute’s purpose, because the PSLRA’s substantive protections still apply to 1933 Act
claims brought in state court, and SLUSA’s preclusion provision still prevents plaintiffs from
refashioning 1933 Act claims under state law in order to avoid those protections. In rejecting the
defendants’ related argument that the Court’s interpretation rendered SLUSA’s jurisdictional provision
purposeless, the Court identified a number of plausible functions that the provision served other than
divesting state courts of jurisdiction over 1933 Act claims. However, the Court noted that irrespective of
any “uncertainty surrounding Congress’s reasons for drafting [SLUSA’s jurisdictional provision] . . . we
have no sound basis for giving [it] a broader reading than its language can bear.”
The Removal Question
The Court also held that SLUSA’s removal provision does not allow defendants to remove 1933 Act
claims from state court to federal court. In arriving at this conclusion, the Court reasoned that because
SLUSA’s removal provision allows for the removal of actions “as set forth in” SLUSA’s preclusion
provision, and SLUSA’s preclusion provision applies only to state-law claims, 1933 Act claims cannot be
removed. After a detailed textual analysis of the relevant provisions, the Court rejected an alternative
interpretation proffered by the OSG, according to which SLUSA’s removal provision allows for the
removal of actions involving the types of misconduct described by SLUSA’s preclusion provision (a
category that would include 1933 Act claims). The Court explained that the OSG’s interpretation was

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inconsistent with its prior case law interpreting SLUSA’s preclusion and removal provisions and
“disregard[ed the] clear language” of the statute.
Cyan’s Implications
The Court’s decision in Cyan may be a boon to plaintiffs suing under the 1933 Act. Cyan makes clear that
plaintiffs can bring 1933 Act claims in state court, and that defendants cannot remove such claims to
federal court. Some commentators have contended that companies defending securities fraud lawsuits
generally prefer to litigate in a federal forum, where they enjoy the procedural protections of the PSLRA.
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. Moreover, the median settlement value in securities class
actions was 92 percent higher in California courts than federal courts during that period. Accordingly,
Cyan’s preservation of state-court jurisdiction over 1933 Act claims, and its rejection of the proposition
that defendants can remove such claims to federal court, sustains the availability of what many plaintiffs
regard as favorable forums to bring securities law actions. While there is at least one legislative proposal
to provide for exclusive federal jurisdiction over 1933 Act claims and thereby reverse the effect of Cyan,
it remains to be seen whether Congress will seek to amend the 1933 Act along those lines.



Author Information

Jay B. Sykes

Legislative Attorney




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