As the beginning of the next US Supreme Court term nears, one case in particular has caught our attention, as the question presented asks whether state courts have jurisdiction over certain securities class actions. The case before the Supreme Court that will hopefully decide the matter is Cyan v. Beaver County Employees Retirement Fund. The ultimate question is—will the Supreme Court issue an opinion that stays the trend of plaintiffs pursuing 1933 Act cases in state court over federal court?
Soon after Cyan, Inc. filed its IPO, shareholders sued in a class action in California Superior Court, seeking remedies under the Securities Act of 1933. Cyan’s motion to dismiss the case for lack of subject matter jurisdiction was denied by the court, who said its “hands are tied” by the Ninth Circuit’s decision in Luther v. Countrywide Financial Corp., which held that state courts have concurrent jurisdiction over 1933 Act claims and a statutory removal bar required that claims filed in state court stay there. After the California Court of Appeal and the Supreme Court of California both denied Cyan’s petitions for review, Cyan sought the US Supreme Court’s review, which was granted on June 27, 2017. With oral argument set for this October, Cyan recently filed their opening brief with the Supreme Court explaining why the 1933 Act prevents class actions raising solely 1933 Act claims from being tried in state court.
By way of background, the 1933 Act historically allowed for concurrent state and federal jurisdiction over its claims, and even precluded certain claims from being removed to federal court. This ensured that plaintiffs who chose to litigate in state court could maintain their choice of forum. However, in 1995, Congress recognized the harm that was being caused by “nuisance filings” that targeted deep-pocketed defendants and made vexatious discovery requests through “abusive and meritless suits.” To protect the national economy and create uniform application of the federal securities laws, Congress enacted the Private Securities Litigation Reform Act (the “Reform Act”).
As its name suggests, the Reform Act added procedural reforms to the 1933 Act such as requiring the “most adequate plaintiff” represent the class, a mandatory stay of discovery while motions to dismiss were pending, and restrictions on attorneys’ fees and expenses. However, most of these reforms only apply to federal courts. As an unintended result, plaintiffs began filing class action suits in state court, thereby evading the reforms under the Reform Act. Once again, Congress stepped in. In 1998, Congress enacted the Securities Litigation Uniform Standards Act (SLUSA) “to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court.”
Yet, despite Congress’s repeated efforts to prevent such actions being litigated in state court, the Ninth Circuit held in Countrywide that state courts retained concurrent jurisdiction over actions where only 1933 Act clams were alleged and such claims could not be in removed to federal court. This decision has led to an increase in 1933 Act claims being brought into state court, contradictory decisions among district courts with respect to the removability of such claims, and inconsistent parallel proceedings in state and federal courts that are brought under different provisions, but based entirely on the same facts.
Statistically speaking, the fact that the Supreme Court granted review of Cyan suggests that it is more likely than not it will overturn the lower court’s decision and find state courts do not have subject matter jurisdiction over actions where only 1933 Act claims are brought. But only time will tell, as the briefs continue to be filed and arguments made before the Court.