Last week in a unanimous and groundbreaking securities case, the United States Supreme Court held in Cyan v. Beaver County Employees Retirement Fund that the federal Securities Litigation Uniform Standards Act of 1998 (SLUSA) does nothing to strip state courts of their longstanding jurisdiction to adjudicate class actions brought under the Federal Securities Act of 1933. And more importantly, the Supreme Court held that SLUSA does not permit defendants to remove class actions alleging only 1933 act claims from state to federal court.
Plaintiffs in Cyan were three pension funds and an individual (the investors) who purchased shares of the stock of Cyan, a telecommunications company, in an initial public offering. After the stock declined in value, the investors brought a damages class action against Cyan in California Superior Court. Their complaint alleged that Cyan's offering documents contained material misstatements in violation of the 1933 act. It did not assert any claims based on state law.
Cyan moved to dismiss the investors' suit for lack of subject matter jurisdiction. It argued that SLUSA's “except clause”— i.e., the amendment made to § 77v(a)'s concurrent-jurisdiction grant — stripped state courts of power to adjudicate 1933 act claims in “covered class actions.” The investors did not dispute that their suit qualified as such an action under SLUSA's definition. But, they maintained that SLUSA left intact state courts' jurisdiction over all suits —including “covered class actions”— alleging only 1933 act claims. The California Superior Court agreed with the investors and denied Cyan's motion to dismiss. The California state appellate courts then denied review of that ruling.
THE SUPREME COURT’S RULING
The Supreme Court granted Cyan's petition for certiorari to resolve a split among state and federal courts about whether SLUSA deprived state courts of jurisdiction over “covered class actions” asserting only 1933 act claims. The Supreme Court unanimously held it did not. It explained that:
“By its terms, § 77v(a)'s “except clause” does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 1933 Act. And Cyan's various appeals to SLUSA's purposes and legislative history fail to overcome the clear statutory language. The statute says what it says—or perhaps better put here, does not say what it does not say. State-court jurisdiction over 1933 Act claims thus continues undisturbed.
Addressing removal, the Supreme Court also rejected the argument that “Congress would not have been content to leave” such suits “stuck in state court.” The Supreme Court held that argument “distorts SLUSA's text because it thinks Congress simply must have wanted 1933 act class actions to be litigated in federal court.” It further explained that “this Court has no license to disregard clear language based on an intuition that Congress must have intended something broader.
KEY TAKEAWAYSWhat are some practical takeaways for businesses in the wake of Cyan?
- Companies conducting IPOs now face class action litigation under the 1933 act in both state and federal courts.
- State courts are now an attractive forum for filing class action claims under the 1933 act because state courts generally have less familiarity with securities class actions, and therefore they may be less likely to dismiss such claims in response to common arguments lodged by defense counsel in 1933 act litigation.
- To mitigate this litigation risk, companies should consider adopting bylaws designating federal courts as the exclusive forum for resolving claims under the 1933 act.
- Finally, Cyan may not be the last word regarding this jurisdictional loophole. Indeed, the Supreme Court in Cyan noted that “[i]f further steps are needed, they are up to Congress.”