Supreme Court: Certain Securities Class Actions to Remain in State Court

The Supreme Court concluded that a securities class action based solely on claims arising under the Securities Act can proceed in state court and can not be removed to federal court. In reaching its conclusion the Court rejected the position of the Government and the SEC. Cyan, Inc. v. Beaver County Employees Retirement Fund, Case No. 15-1439 (S.Ct. Decided March 20, 2018).

The Court granted Cyan’s petition for certiorari to resolve a split among the state and federal courts about whether the Securities Litigation Uniform Standards Act of 1998 or SLUSA, striped state courts of jurisdiction over class actions alleging violations of the Securities Act. The Court also agreed to resolve a related question — can such a case be removed from state to federal court. The Court answered no to both questions.

The opinion

Petitioners are Cyan, a telecommunications company, and its officers and directs. Respondents are three pension funds and an individual who purchased shares of Cyan in an IPO. Following a decline in share value suit was initiated in California Superior Court. The complaint alleged that the IPO offering documents contained material misstatements in violation of the Securities Act. No state law claims were asserted. The state court refused to dismiss the case. The state appellate courts declined to review the ruling. The Supreme Court affirmed.

Justice Kagan, writing for a unanimous Court, began and essentially ended her opinion with the statutory language. The 1933 Securities Act in Section 22(a) vested the federal and state courts with concurrent jurisdiction of suits brought to enforce any liability or duty created by the Act. The Securities Act also provided that no “case arising under this title and brought in any State court of competent jurisdiction shall be removed to any court of the United States.”

When Congress created the Securities Exchange Act of 1934 a jurisdictional provision for suits to enforce provisions of the Act was also included. Section 27 of that Act, which contains the provision, did not provide for concurrent state law jurisdiction. To the contrary, it granted exclusive jurisdiction of suits to enforce the Act to the federal courts.

In 1995 Congress created the Private Securities Litigation Reform Act. That Act was primarily designed to stem what were viewed as abuses of the class-action vehicle in litigation involving nationally traded securities. The Act thus incorporated a number of safe-guards such as a safe harbor from federal liability for certain forward looking statements made by company officials. Other provisions modified procedures used in litigating securities class actions.

Unintended consequences followed the passage of the Reform Act. Plaintiffs and their representatives initiated suits under state law. At the time this was a novel development. Accordingly, Congress again modified the securities laws, passing SLUSA. Two key provisions of that Act, and the related definitions, are at issue here. First, section 77p(b) prohibited certain securities class actions based on state law – a state law class-action bar. In this regard the section specifies that “No covered class action based upon the statutory or common law of any State . . . may be maintained in any State or Federal court by any private party. . .” alleging an untrue statement or omission of a material fact or that the defendant used or employed an manipulative or deceptive device. The term “covered class action” refers to a class action for damages on behalf of more than 50 persons while “covered security” refers to one listed on a national exchange. These provisions, the Court noted, completely disallow “sizable class actions that are founded on state law and allege dishonest practices” in either federal or state court.

Second, section 77p(e) reinforced the bar. That section provides for the removal to federal court of any covered securities class action brought in state court. Once removed the section provides for its dismissal.

The final SLUSA provisions involved here concern two amendments made to the jurisdictional provisions of the Securities Act. One amendment involved permitting the removal of actions in accord with the provision discussed above. The second involved a section known as “the except clause” which modified the concurrent jurisdiction provision of the 1933 Act. It provides that “The district courts of the United States . . . shale have jurisdiction[,] concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter.” (emphasis original; internal quotations omitted).

It is the “except clause” that is at the heart of the dispute in this action. “By its terms, Section 77v(a)’s ‘except clause’ does nothing to deprive state courts of their jurisdiction to decide class actions brought under the 1933 Act,” according to the Court. To the contrary, “State court jurisdiction over 1933 Act claims . . . continues undisturbed” in the wake of SLUSA. Rather, “Section 77p bars certain securities class actions based on state law . . . And as a corollary of that prohibition, it authorizes removal of those suits so that a federal court can dismiss them. . . But the section says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” (emphasis original).

Cyan claimed, however, that the statutory reference in the except clause points to the definition of covered securities class actions. Since that definition only refers to a class of over 50 persons without referencing federal or state law, Cyan argued that the except clause exempts all sizable class actions. That would include the suit brought by the investors here. The Court rejected this reading, however, noting that the except clause points to “section 77p” as a whole – not the subparagraph cited by Cyan. Essentially “Cyan wants to cherry pick from the material covered by the statutory cross-reference.” That cannot be done.

Cyan also contends that the overall purpose of SLUSA supports its reading of the except clause. Again the Court rejected the claim, stating that “Even assuming clear text can ever give way to purpose, Cyan would need some monster arguments on this score to create doubts about SLUSA’s meaning. The points Cyan raises come nowhere close to that level.”

The Government took a different approach, agreeing that the except clause did not bar the filing of the federal claims in state court. Rather, the Government argued that the claims can be removed to federal court if they allege false statement or deceptive devices in connection the purchase or sale of a covered security. The Court rejected this suggestion, noting that “But most naturally read . . . SLUSA’s exception to the 1933 Act’s general bar on removal – refutes, not supports, the Government’s view.” Again, the plain statutory text is clear.

Comment

Justice Kagan’s opinion for the Court is little more than a reading of the text of the statute. While there are scattered references to the purpose of the statutes involved, those passages are not the predicates for the conclusion reached. As the Court repeatedly states through its opinion, it is the plain statutory text of the provisions which dictates the result here and the rejection of arguments by Cyan and the Government.

It is instructive to compare the Court’s opinions in Digital Realty (here), handed down earlier this year, and Cyan. Both involved the construction of various provisions of the federal securities laws. Digital Radio focused on whistleblowers and the protections they are afforded under either Dodd-Frank or the Sarbanes-Oxley Act. Cyan centers on SLUSA and where certain clams can be brought. Both cases were decided by following the plain text of the statutes involved. In both cases all nine Justices concurred in the result.

Yet in Digital Realty Justice Thomas, joined by Justices Alito and Gorsuch, concurred with the result but with the majority opinion only to the extent it relied on the plain text of the statute. Justice Thomas disagreed with the citation to the legislative history by the majority to bolster the reading of the text of the statute.

In contrast, there were no separate opinions in Cyan. There the Court’s opinion is largely bereft of references to legislative history and the overall purpose of the statutes involved. The difference in approach is significant. In the future there will undoubtedly be cases were the language selected by Congress is less than clear. If various Justices, and perhaps ultimately the Court, eschew the decades old practice of consulting the legislative materials for the provisions to determine their purpose, statutory interpretation may become difficult at best.