The Supreme Court Grants Cert. To Consider Jurisdiction Of State Courts To Hear Securities Act Class Actions

• Posted on: Jul 5 2017

On June 27, 2017, the United States Supreme Court agreed to consider whether state courts retain concurrent jurisdiction over lawsuits brought under the Securities Act of 1933 (the “’33 Act” or the “Securities Act”), or whether the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) pre-empts them from considering such cases. (Here.) Resolution of the issue will address a concern for issuers, underwriters and others involved in initial public offerings (“IPOs”) – i.e., the use of state courts to avoid application of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

In recent years, the number of ‘33 Act class action filings in state court, especially in California, has grown significantly. Though, many federal courts have found that SLUSA removed subject matter jurisdiction over ‘33 Act class actions from the states, others, most notably in the Ninth Circuit, have reached the opposite conclusion, finding concurrent federal and state jurisdiction over such actions.

On June 27, 2017, the Supreme Court granted the petition for a writ of certiorari (here) in Cyan, Inc. v. Beaver County Employees Retirement Fund, 15-1439, to consider whether state courts lack subject matter jurisdiction over covered class actions under SLUSA that allege only Securities Act claims.

Legal Issues

In 1995, Congress passed the PSLRA to address perceived abuses in securities class action litigation. Among other things, the PSLRA imposed heightened pleading requirements on plaintiffs filing securities class action complaints in federal court, as well as an automatic stay of discovery during the pendency of a motion to dismiss those complaints.

Thereafter, plaintiffs began bringing securities class actions in state court, rather than in federal court, seeking relief under state law rather than under federal law. Plaintiffs also bypassed federal court in favor of state court for class actions brought under the Securities Act class where state and federal courts have concurrent jurisdiction. This phenomenon lead to concerns by those involved in IPOs, as well as legal commentators, that plaintiffs were using state courts to circumvent the PSLRA.

In 1998, Congress enacted SLUSA to address those concerns. Among other things, SLUSA eliminated concurrent state court jurisdiction over “covered class actions” (defined as “any damages action on behalf of more than 50 people”). Congress did so to ensure that, among other things, federal securities claims remained in federal court subject to the PSLRA’s heightened pleading requirements. Despite what seemed to be straightforward legislation, judicial interpretation of SLUSA proved to be less than uniform.

Following enactment of SLUSA, the number of state court class action filings declined. In the cases that were filed in state court, defendants often removed them to federal court, where the issue was hotly litigated. In a few cases, however, the courts (e.g., mostly in the Ninth Circuit, and in particular in California) remanded the actions to the state courts, finding that SLUSA applied only to state securities law class actions. Notably, these courts found that concurrent jurisdiction found in the Securities Act survived SLUSA.

Concerns about the issue increased exponentially after a California intermediate appellate court decided Luther v. Countrywide Financial Corp., 195 Cal. App. 4th 789 (2011) (“Countrywide”). In Countrywide, the plaintiffs filed a state-court class action asserting ’33 Act claims against the issuers of mortgage-backed securities not traded on a national exchange. Reversing the lower court’s dismissal for lack of subject matter jurisdiction, the California Court of Appeal, Second Appellate District, held that state courts after SLUSA retain concurrent jurisdiction over class actions alleging only ’33 Act claims.

Since Countrywide was decided, state-court filings alleging ’33 Act claims increased significantly. As noted by Cyan and one of the amici, California state-court filings rose by 1400 percent after Countrywide. In the 12 years between the enactment of SLUSA and the Countrywide decision, only six class actions alleging Securities Act claims were filed in California state courts – an average of one case every two years. In the five years after Countrywide, at least 38 class actions alleging ’33 Act claims were filed in California state courts – an average of more than seven cases every year. Fourteen were filed in 2015, and 10 were filed within the first five months of 2016.

While many lower courts noted the split of authority on whether concurrent jurisdiction survived SLUSA, the issue has evaded review by the courts of appeals – procedurally, district court decisions involving motions to remand are not reviewable on appeal under 28 U.S.C. § 1447(d) (“An order remanding a case to the State court from which it was removed is not reviewable on appeal or otherwise . . . .”), and decisions from lower courts are unlikely to be reviewed since they require discretionary approval, which is seldom granted.

Cyan, Inc. v. Beaver County Employees Retirement Fund

In May 2013, Cyan Inc. (“Cyan”) issued shares of stock pursuant to an initial public offering. Approximately one year later, following an announcement of weaker-than-expected results, shareholders sued the company in California superior court, seeking relief under the Securities Act. The plaintiffs did not allege any state-law claims.

Cyan moved for judgment on the pleadings for lack of subject matter jurisdiction. The court denied the motion, explaining that because of Countrywide its “hands [were] tied . . . .”

The California Court of Appeal denied Cyan’s petition for a writ of mandate and/or prohibition or other relief. Thereafter, the California Supreme Court denied Cyan’s petition for review.

In May 2016, Cyan petitioned the U.S. Supreme Court for a writ of certiorari. Cyan argued that review was appropriate despite the absence of conflicting appellate authority because of the “bitter[]” division among the lower courts about the question presented and because the issue often evades appellate review:

Federal district courts in removal cases have divided bitterly over the question presented. Because of the procedural roadblocks to review of remand orders, federal appeals courts are unlikely to rule on, let alone resolve, the conflict. Absent this Court’s guidance, the district courts will remain in disarray with no end in sight.

Beaver County Employees’ Retirement Fund opposed the petition (here), arguing that certiorari should be denied because of the absence of conflicting appellate authority and because the court below correctly determined that concurrent jurisdiction survived the enactment of SLUSA.

Two amici briefs were filed in support of Cyan.

The first brief (here), filed by the Securities Industry and Financial Markets, the U.S. Chamber of Commerce and the National Venture Capital Association, argued that the petition should be granted to undo “the shift in federal securities litigation from federal to state courts” and “because the decision below conflicts with SLUSA’s plain language and purpose.”

The second brief (here), filed by a group of law professors, argued that the Court should grant the petition “to give guidance to district courts” about the interplay between the PSLRA and SLUSA, especially given the differences of opinion among the district courts over what Congress intended in passing SLUSA.

Regardless of what one believes SLUSA’s jurisdictional amendments did, it is indisputable that Congress could not have intended the Securities Litigation Uniform Standards Act to result in this morass of inconsistent rulings across the country. Nor could Congress have intended that cases filed in California be litigated in state court, while substantively identical cases filed in New York are litigated in federal court.

Only a decision by this Court can put an end to the inconsistencies in how district courts apply SLUSA.

On October 3, 2016, after the parties and amici submitted their briefs, the Court invited the Solicitor General to express the government’s views on the issue. On May 23, 2017, the Solicitor General filed a brief (here), recommending that the Court grant certiorari based on “the frequency with which this issue arises, the ongoing confusion in the lower courts, and the obstacles to appellate resolution of the question presented.”

As noted, on June 27, 2017, the last day of the Term, the Court granted Cyan’s petition.

Takeaway

Whether state courts retain jurisdiction for Securities Act lawsuits after SLUSA is an important question. As the law professors argued in their brief, there is a need for uniformity and consistency. For example, the heightened pleading requirements found in the PSLRA have no application in state court – “[m]any of the provisions apply only to actions brought ‘pursuant to the Federal Rules of Civil Procedure,’ i.e., brought in federal court. 15 U.S.C. § 77z-1(a).” Also, the automatic stay of discovery under the PSLRA applies only in federal court – state courts “usually do not stay discovery.” “This is particularly important” because the costs of discovery can be high “and could cause defendants to settle” an action “rather than incur those costs.”

Moreover, the risk of inconsistent judgments can be eliminated by a uniform rule. As the professors noted: “[f]iling in state court can also allow a plaintiff to avoid consolidation with federal actions asserting the same claims, leading to identical cases proceeding simultaneously in federal and state court.”

Further, “state courts are not bound by federal court decisions,” except for those decided by the U.S. Supreme Court. Without a uniform rule, each state “will be a circuit unto itself, leading to a patchwork of legal standards for nationally traded securities.” Such a result would conflict with the “national interest in consistent enforcement of the federal securities laws.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78 (2006) (“[t]he magnitude of the federal interest in protecting the integrity and efficient operation of the market for nationally traded securities cannot be overstated.”).

The question of whether state courts retain jurisdiction over Securities Act claims after SLUSA has divided the courts and litigants for years. The Supreme Court now can answer this important question and provide the uniformity and consistency the courts and litigants desperately need.

This Blog will continue to follow the case. Argument should be scheduled for the Court’s next term, which begins in October.

Tagged with: Financial Markets, Initial Public Offerings, Securities, Securities Class Actions