Supreme Court Upholds State Court Jurisdiction Over ’33 Act Class Actions in Cyan

The Court also held that defendants may not remove ’33 Act class actions to federal court. Although the removal issue was not squarely presented by the facts of the case — the defendants had not attempted to remove — the Court nevertheless expressly addressed and resolved the issue, holding that it was closely related to the parties’ jurisdictional arguments. And just as the 1998 amendments did not supplant the ’33 Act’s original grant of jurisdiction to state courts, the Court held, the 1998 amendments also left intact the longstanding bar on removing ’33 Act cases to federal court.

State Court Jurisdiction

The Court first rejected Cyan’s argument that the amendments made to the ’33 Act by the Securities Litigation Uniform Standards Act of 1998 (SLUSA) strip state courts of jurisdiction over class actions raising ’33 Act claims. Since its enactment, the ’33 Act has provided for concurrent state and federal jurisdiction over claims by purchasers of securities in public offerings. Cyan’s argument was based on a clause, added by SLUSA, that modifies the grant of jurisdiction to state courts with the qualification “except as provided in section 77p of this title with respect to covered class actions.” The Court rejected Cyan’s argument that this language — which the Court called the “except clause” — divests state courts of jurisdiction. The Court characterized the clause as a “conforming amendment” and held that although its purpose is to some extent obscure, the clause ultimately refers only to class claims arising under state law. The clause is a “minor tweak” and does nothing to disturb the “background rule” — and 65 years of pre-SLUSA practice — that state courts have jurisdiction over ’33 Act suits, including class actions. In the Court’s words, “Congress does not ‘hide elephants in mouseholes.’ ” Slip op. at 12. More specifically:

SLUSA’s text, read most straightforwardly, leaves in place state courts’ jurisdiction over 1933 Act claims, including when brought in class actions. Recall that the background rule of §77v(a) — in place since the 1933 Act’s passage — gives state courts concurrent jurisdiction over all suits “brought to enforce any liability or duty created by” that statute…. The except clause — once again, “except as provided in section 77p of this title with respect to covered class actions” — is drafted as a limitation on that rule: It ensures that in any case in which §77v(a) and §77p come into conflict, §77p will control. The critical question for this case is therefore whether §77p limits state-court jurisdiction over class actions brought under the 1933 Act. It does not.... [Section] 77p bars certain securities class actions based on state law…. But the section says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.

Slip op. at 8 (italics in original). The Court was also concerned that reading SLUSA’s amendment to divest state courts of jurisdiction over ’33 Act class actions would mean that federal court would be the sole forum for even those ’33 Act class actions arising from purchases of securities not traded on a national exchange. That result would be anomalous, in the Court’s view, because such cases “rais[e] no particular national interest.” Id. at 11.

Removal

The Court also rejected what it called the “halfway house” argument that state courts retain jurisdiction over ’33 Act class actions but that defendants may remove those cases to federal court. This argument, which the Solicitor General introduced into the case, was based on a different clause added by SLUSA — a qualification to the removal bar in the ’33 Act’s jurisdictional provision (“Except as provided in section 77p(c) of this title”). That clause too, the Court held, points only to state-law class actions. It therefore permits securities defendants to remove state-law class actions to federal court but does not alter the ’33 Act’s ban on removing federal claims to federal court.

Mixed Class Actions

The Court noted several times that the case before it raised only ’33 Act claims. Id. at 6, 24. Do the ’33 Act’s antiremoval provisions prevent the removal of “mixed” class actions containing both state-law covered class action claims and ’33 Act claims? Some language in the decision suggests that a “mixed” case would present a conflict between the general rule — that ’33 Act cases cannot be removed — and the SLUSA amendments — that certain class actions asserting state-law securities claims can be removed — and that this conflict should be resolved in favor of the SLUSA amendments and hence in favor of removal. In practice, however, it appears unlikely that this conflict will arise very often. Plaintiffs’ attorneys may easily avoid the conflict by electing not to include state-law claims in ’33 Act class actions — as has been the practice of many plaintiffs’ firms in the two decades since SLUSA was enacted.

Effect of the Decision

Prior to the Cyan decision, the federal district courts have been divided on the jurisdictional issue, with district courts in the Ninth Circuit holding — consistent with Cyan — that state courts have jurisdiction over ’33 Act class actions and some courts in the Second and Third Circuits holding that ’33 Act class actions may be adjudicated solely in federal court or may be removed to federal court. The Cyan decision is a victory for the plaintiffs’ bar, given securities defendants’ usual preference for litigating in a federal forum. Plaintiffs’ attorneys can be expected to continue filing ’33 Act class actions in state courts in California with renewed confidence that the cases will remain in the court plaintiffs have chosen. Plaintiffs’ attorneys who have previously filed ’33 Act class actions in federal court in New York, New Jersey and Delaware may now begin migrating to state courts as well. In the shorter term, a tranche of ’33 Act class actions filed in state courts while the Cyan appeal was pending — and in limbo pending its outcome — will now move forward.  

One reason defendants in securities actions often prefer a federal forum is that certain procedural protections created under the Private Securities Litigation Reform Act of 1995 apply only to securities actions in federal court. These protections include, among others, lead plaintiff procedures designed to ensure that investors with the greatest losses direct the litigation on the plaintiffs’ side and certification requirements under which plaintiffs must disclose all of their transactions in the securities at issue in their complaints. Neither provision applies in state courts. On the other hand, as the Cyan Court explained, the Reform Act’s substantive provisions, including safe harbor protection for forward-looking statements, apply in both federal and state courts. The Court did not comment on whether a third set of protections, including a discovery stay during the pendency of a motion to dismiss, applies in state court proceedings as well. The applicability of those protections will likely continue to be litigated in the state courts.