A recent decision of the U.S. Supreme Court has important implications for certain securities class actions filed in state courts. In Cyan v. Beaver County Employees Retirement Fund, No. 15-1439 (March 20, 2018), the Supreme Court resolved a longstanding split among state and federal courts, unanimously holding that the Securities Litigation Uniform Standards Act (SLUSA) did not strip state courts of jurisdiction over class actions alleging violations of only the Securities Act of 1933 and did not empower defendants to remove those federal-law cases from state to federal court.

The first part of this article will discuss the history of the federal securities laws, the background to the Cyan case, and the decision. The second part will discuss the potential implications of Cyan for plaintiffs, defendants, state and federal courts, and Congress.

History of Federal Securities Laws

Following the 1929 stock-market crash, Congress enacted the Securities Act of 1933 (which applies to public securities offerings) and the Securities Exchange Act of 1934 (which regulates aftermarket transactions). The Securities Act provides for concurrent federal- and state-court jurisdiction and bars removal of Securities Act claims from state to federal court, whereas the Exchange Act provides for exclusive federal jurisdiction.

In the 1990s, Congress passed two statutes that amended the securities laws to prevent perceived abuses in securities class-action litigation. In 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA), which amended both the Securities Act and the Exchange Act. It made substantive changes (such as heightened pleading requirements and protections for forward-looking statements) that apply to federal-law actions regardless of forum and procedural changes (such as a process for appointment of lead plaintiff and lead counsel in class actions) that apply only to federal-court class actions.

The PSLRA's passage resulted in an increase in federal Securities Act claims and state-law claims filed in state courts. In response, Congress enacted SLUSA in 1998 to amend the Securities Act in several ways. With respect to state-law claims, §77p(b) of the Securities Act now prohibits in both state and federal courts “covered class actions” (defined in §77p(f)(2) as class actions in which damages are sought on behalf of more than 50 persons) alleging securities claims based on state law in connection with the purchase or sale of a “covered security” (defined in §77p(f)(3) as a security listed on a national stock exchange). In addition, SLUSA added a new §77p(c) to the Securities Act, which permits the removal of state-law class actions to federal court so that the actions can be dismissed.

SLUSA also amended the Securities Act with respect to federal-law claims. These amendments were at issue in Cyan. In particular, SLUSA's “conforming amendments” added two new phrases to the Securities Act's jurisdictional provision in §77v(a).

• The first amendment—and the key provision in Cyan—added an exception to the Securities Act's concurrent-jurisdiction provision in §77v(a), which is commonly known as the “except clause”: “The district courts of the United States … shall have jurisdiction of offenses and violations under this subchapter … and, 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.”

• The second amendment amended the Securities Act's anti-removal provision in §77v(a) by adding the following exception: “Except as provided in section 77p(c) of this title, no case arising under this subchapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States.”

Procedural History of 'Cyan'

The plaintiffs in Cyan were three pension funds and an individual (the Investors) who had purchased shares of Cyan, a telecommunications company, in an initial public offering. Following a decline in Cyan's stock value, the Investors filed a class action against Cyan in California Superior Court. The Investors alleged that Cyan's offering documents had contained material misstatements in violation of the Securities Act, but the Investors did not assert any state-law claims.

Cyan moved to dismiss for lack of subject-matter jurisdiction, arguing that SLUSA's “except clause” stripped state courts of power to adjudicate Securities Act claims in “covered class actions.” The California Superior Court denied Cyan's motion, and the state appellate courts denied review; but the U.S. Supreme Court granted Cyan's petition for certiorari to decide whether SLUSA deprived state courts of jurisdiction over covered class actions asserting only Securities Act claims.

The Supreme Court's Decision

The Supreme Court held that §77p bars certain securities class actions based on state law (§77p(b)) and authorizes the removal of those suits so that a federal court can dismiss them (§77p(c)), but §77p does not deprive state courts of concurrent jurisdiction over class actions based on federal law. The court disagreed with Cyan's argument that the except clause's reference to “covered class actions” refers only to §77p(f)(2)'s definition of that term. Instead, the court noted that the plain language of the except clause (in §77v(a)) points to §77p as a whole, and not only to the definition found in §77p(f)(2). The court also explained that a definition like §77p(f)(2) provides meaning to a term, rather than an exception to the rule of concurrent jurisdiction. The court further observed that Congress was highly unlikely to have used such a convoluted reference to reverse the 65-year practice of state courts' adjudicating “all manner of [Securities] Act claims, including class actions.”

The court also rejected Cyan's argument that SLUSA was intended to serve the PSLRA's objectives by divesting state courts of jurisdiction over all sizable Securities Act class actions. The court noted that meeting the objective of SLUSA's preamble—which states that the statute is designed “to limit the conduct of securities class actions under State law”—does not depend on stripping state courts of jurisdiction over Securities Act claims, whatever the size of the class.

The court further held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court. According to the court, §77p(c) allows for removal to federal court of covered class actions alleging securities misconduct under state law, but federal-law suits alleging only Securities Act claims “remain subject to the [Securities] Act's removal ban.”

Potential Implications of 'Cyan'

The Cyan decision is just about a month old, but already the potential implications of the decision for plaintiffs, defendants, state and federal courts, and Congress are coming into focus.

Plaintiffs. The Cyan decision might cause plaintiffs to file more state-court class actions asserting only Securities Act claims. Securities Act class actions filed in state court are not subject to the PSLRA's procedural provisions, including in particular the PSLRA's lead-plaintiff appointment process, which tries to avoid duplicative class actions. Accordingly, the plaintiffs' bar might seek to prosecute multiple related actions by using state-court forums.

Defendants. Defendants are likely assessing the potential ramifications of Cyan because of a perception that state courts are more favorable forums for Securities Act claims than federal courts—and that dismissals are therefore less frequent and settlements are larger. The potential for defendants having to litigate Securities Act class-action claims in multiple jurisdictions might also affect the premiums companies planning a public offering of securities must pay for liability insurance.

State and Federal Courts. The Cyan decision raises the prospect of multiple related class actions challenging securities offerings in federal and state courts. The existence of both federal and state forums poses difficulties in consolidating or transferring the actions to a single forum. Federal and state courts will therefore need to coordinate with each other to resolve these procedural inefficiencies. For example, one court might stay or adjourn its proceedings pending disposition of proceedings in another court, a decision in which the first-filed rule might have some influence. Forum non conveniens considerations might also be used to determine which is the more appropriate forum.

Courts might also focus on which action presents the case most comprehensively. For example, many federal securities class actions plead Exchange Act claims as well as Securities Act claims. The Exchange Act claims must be filed in federal court, but the Securities Act claims can be brought in federal or state court. Accordingly, if the federal case has both Exchange Act and Securities Act claims, that case is the more comprehensive one, and a state court might be willing to defer to it.

Cyan involved only Securities Act claims, so it did not address cases that plead both Securities Act claims and state-law claims. Thus, courts might also see litigation over the removability of such “mixed” cases. In addition, litigation might arise about forum-selection bylaws or charter provisions that attempt to channel securities cases into federal courts, and perhaps into federal courts in a particular forum.

Congress. The Supreme Court acknowledged the anomalous result of requiring the dismissal or removal to federal court of state-law claims, while prohibiting the removal of federal claims and requiring them to remain in state court. The court noted: “We do not know why Congress declined to require as well that [Securities] Act class actions be brought in federal court.” But the court declined to give the except clause “a broader reading that its language can bear,” and concluded that, “[i]f further steps are needed, they are up to Congress.” It remains to be seen whether Congress will take up that invitation.

Mark D. Harris and Margaret A. Dale are partners at Proskauer Rose. Alexandra K. Skellet, an associate, assisted in the preparation of this article.