The U.S. Supreme Court’s unanimous decision in Cyan, Inc. et al. v. Beaver County Employees Retirement Fund et al., 538 U.S. ___ (2018), clarified the appropriate jurisdictions in which certain securities class actions can proceed. After taking the unusual step of granting cert for a case arising from the denial of a motion to dismiss in the California Superior Court, the Supreme Court resolved a split between state and federal courts regarding the jurisdictional limitations in the Securities Litigation Uniform Standards Act (SLUSA). The decision answered two questions: 1) whether SLUSA deprived state courts of jurisdiction over “covered class actions” asserting only 1933 Act claims; and 2) whether SLUSA allows removal of 1933 Act class actions from state to federal court.
The Private Securities Litigation Reform Act (PSLRA) created both substantive and procedural safeguards meant to stem “perceived abuses of the class action vehicle in litigation involving nationally traded securities.” 583 U.S. ____, at 2 (2018). In particular, the PSLRA sought to eliminate claims of federal securities violations that instead were brought under state laws. Because the PSLRA’s passage resulted in an increase in securities class action filings in state court, SLUSA was passed to ensure that “covered class actions,” based on state law alleging a misstatement or omission “in connection with the purchase or sale of a covered security,” would be removable to federal court, and once there, subject to dismissal.
Parties and Claims
Petitioners Cyan, Inc. and its officers and directors were subject to a damages class action suit after a drop in stock price following the company’s initial public offering. Respondent investors sued in California state court, alleging that Cyan’s offering documents contained material misstatements in violation of the 1933 Act. Notably, the investors did not assert any claims based on state law.
Cyan moved to dismiss on the ground that the state court lacked subject-matter jurisdiction, arguing that the “except clause” (as defined by the Court for its opinion) in section 77v(a) of SLUSA eliminated state courts’ jurisdiction over 1933 Act claims in “covered class actions.” The investors did not dispute that their action was a “covered class action,” but they argued that SLUSA did not eliminate state courts’ concurrent jurisdiction over 1933 Act claims, even if brought as a class action on behalf of 50 or more people. Covered class actions alleging state law claims for securities misconduct, by contrast, would be subject to removal to federal court, and subsequent dismissal, under SLUSA.
The Court’s decision recognized the difference between the jurisdictional provisions in the 1933 Act and 1934 Act. Unlike the concurrent jurisdiction in the 1933 Act, the 1934 Act, which regulates subsequent trading in nationally traded stocks, places those suits within the “exclusive jurisdiction” of the federal courts. Thus, a 1934 Act claim could never be brought in a state court.
Holding and Analysis
State courts retain subject-matter jurisdiction over class actions alleging only 1933 Act claims. Defendants cannot remove these actions to federal court. Defendants in such a case can and should still insist on compliance with the substantive provisions of the PSLRA, however. Cyan reiterates that these provisions apply regardless of the jurisdiction, and filing a 1933 Act claim in state court does not allow an “end run” around the PSLRA.
Cyan did not resolve the interesting dilemma presented by a state court class action alleging both 1933 Act and state-law claims. Under the 1933 Act, and as clarified by Cyan, the federal-law claims must stay in state court. But the state-law claims (assuming they allege a misstatement or omission in connection with the purchase or sale of a covered security) are subject to removal to federal court (and dismissal) under SLUSA. Cyan does nothing to prevent this “hybrid” result, though the Court suggested in dicta that the proper resolution would be for the state court to dismiss the state-law claims.
Dylan C. Black is a partner at Bradley Arant Boult Cummings LLP in Birmingham, Alabama and is a cochair of the Professional Liability Litigation Committee. Tiffany A. Rowe is a senior associate at Kirkland & Ellis LLP in Washington, D.C.