The U.S. Supreme Court's recent decision in Cyan v. Beaver County Employees Retirement Fund, — U.S. —, 2018 WL 1384564 (March 20, 2018), resolved the previously-controversial issue of whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) stripped state courts of their ability to adjudicate class action lawsuits asserting claims only under the Securities Act of 1933 (1933 Act). The court in Cyan held that SLUSA does not prohibit state courts from adjudicating such claims, and that defendants may not remove such cases to federal court. As a result, it is likely that the recent trend of such claims being asserted in state courts will accelerate.

What the Supreme Court did not clarify in Cyan, and what is likely to now become an increasingly litigated issue, is the question of precisely which provisions and elements of the Private Securities Litigation Reform Act of 1995 (PSLRA) apply to state court class action lawsuits asserting claims under the 1933 Act. Court decisions and practitioner commentary are unclear on this question, at times taking conflicting views. This article examines several key PSLRA provisions, including the PSLRA's automatic stay of discovery during the pendency of a motion to dismiss, and considers their post-Cyan applicability in the context of state court class action lawsuits asserting 1933 Act claims.

From the time of its enactment in 1933 until the enactment of SLUSA in 1998, there was no question that the 1933 Act had authorized concurrent state and federal court jurisdiction for lawsuits brought exclusively under the 1933 Act, and that the 1933 Act prohibited the removal of such actions from state to federal court. See generally Securities Act §22(a), 15 U.S.C. §77v(a). This was called into question when, as part of SLUSA, the 1933 Act's jurisdictional provision was modified. SLUSA was enacted in response to an increased number of class actions based on violations of state securities laws, which the class action plaintiffs' bar began to bring in increasing numbers after the 1995 passage of the PSLRA. To combat the prevalence of perceived end-runs around the federal securities laws, SLUSA prohibited the filing of certain securities class actions based on state law.

Left uncertain after the passage of SLUSA, however, was the question of whether, in light of SLUSA, plaintiffs are still permitted to bring securities lawsuits in state court that assert only 1933 Act claims, and the related question of whether defendants are permitted to remove any such lawsuits to federal court. The court in Cyan held that SLUSA does not prohibit state courts from adjudicating such claims, and that defendants may not remove such cases to federal court.

The question of which provisions of the PSLRA apply in state court class actions asserting claims under the 1933 Act has arisen in the past, particularly with regard to the PSLRA's discovery stay. With the potential post-Cyan acceleration of such lawsuits, this question is bound to arise more frequently.

The court in Cyan recognized that some of the PSLRA's provisions are applicable even when a 1933 Act suit is brought in state court. As an example, the court cited the PSLRA's “safe harbor” from liability for certain forward-looking statements made by company officials, which the court explained was a “substantive change” to the 1933 Act and was applicable no matter the forum in which the 1933 Act claim was brought. In contrast, the court pointed to the requirement that a lead plaintiff in any class action brought under the Federal Rules of Civil Procedure file a sworn certification stating, among other things, that he had not purchased the relevant security at the direction of plaintiff's counsel. The court stated that this requirement merely “modified the procedures used in litigating securities actions” and thus “applied only when such a suit was brought in federal court.” Beyond those two examples, however, the court did not expressly decide which other PSLRA provisions apply in state court actions asserting 1933 Act claims. As described below, a close analysis of the PSLRA demonstrates which of its other provisions, consistent with the court's analysis, should be applicable even in state court actions, and which provisions merely modify the procedures for federal actions brought pursuant to the Federal Rules.

The PSLRA's amendments to the 1933 Act are codified in 15 U.S.C. §§77z-1 and 77z-2. Section 77z-2 details the parameters and requirements for the statutory safe harbor for forward-looking statements, while §77z-1 sets forth the PSLRA's other modifications to the 1933 Act. Section 77z-1 has four subsections, as described below.

The first subsection of §77z-1 (§77z-1(a)) contains an introductory clause stating that “[t]he provisions of this subsection shall apply to each private action arising under this subchapter [namely, the 1933 Act, 15 U.S.C. §§77a et seq.] that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.” When the Cyan court stated that the PSLRA modified the procedure for class actions “brought under the Federal Rules of Civil Procedure,” this appears to be the provision to which the court was referring. Section 77z-1(a) then goes on to list a series of statutory requirements (§§77z-1(a)(2)-(8)) for class actions brought pursuant to the Federal Rules, the first of which is the sworn certification requirement that the court gave as an example of a procedural requirement. In addition to the sworn certification requirement, §§77z-1(a)(2)-(8) cover the procedures for the appointment of a lead plaintiff, the share of recovery to be awarded to the representative party serving on behalf of the class in the event of a judgment or settlement, restrictions on settlements under seal, restrictions on payment of attorney fees and expenses, disclosure of settlement terms to class members, and procedures for a court to use to determine if there are certain attorney conflicts of interest. Because each of these provisions only applies in actions brought pursuant to the Federal Rules, it stands to reason, applying the court's analysis in Cyan, that these provisions would not apply in state court actions.

In contrast, the other three subsections of §77z-1 (§§77z-1(b)-(d)) do not contain introductory language limiting their application to actions brought pursuant to the Federal Rules. Rather, by their language, each of those subsections applies “[i]n any private action arising under this subchapter,” i.e., the 1933 Act. Those subsections govern the PSLRA's stay of discovery during the pendency of any motion to dismiss (and the concomitant requirement that defendants preserve documents during the pendency of the discovery stay), sanctions for abusive litigation, and the defendant's right to written interrogatories to the jury, in the specified circumstances, on the issue of each defendant's state of mind at the time of the alleged violation. Likewise, §77z-2's statutory safe harbor for forward-looking statements is not limited to actions brought pursuant to the Federal Rules but rather applies “in any private action arising under this subchapter.” 15 U.S.C. §77z-2(c). Because these provisions apply to any actions brought under the 1933 Act and are not limited to actions brought pursuant to the Federal Rules, they should be applicable even in state court actions asserting 1933 Act claims. Indeed, the Cyan court said as much in connection with the statutory safe harbor. It follows that the court's analysis should apply equally to the discovery stay, sanctions, and written interrogatories provisions, as well.

The foregoing analytical framework telegraphed (but not explicated) by the Cyan court should put to rest prior commentary questioning which parts of the PSLRA are applicable in 1933 Act actions brought in state court. Indeed, even before Cyan was decided, several California state courts zeroed in on this distinction between §77z-1(a) and §77z-1(b) and held that, although §77z-1(a)'s provisions do not apply in state court, the discovery stay set forth in §77z-1(b) is applicable no matter the forum in which a 1933 Act claim is brought. For example, in Milano v. Auhll, the court explained that in §27(a) of the PSLRA (codified as 15 U.S.C. §§77z-1(a)), “reference is extensive to the Federal Rules of Civil Procedure, and the inference is fairly strong that Congress intended these provisions to apply only in the federal courts.” 1996 WL 33398997, at *2 (Cal. Super. Ct., Oct. 2, 1996). In contrast, §27(b) of the PSLRA (codified as 15 U.S.C. §§77z-1(b)), “contains the statement that its provisions apply 'in any private action arising under this title', which appears to refer to the 'title' or principal division of the Act of [1933].” In other words, “an intention appears on the part of Congress to apply section 27(a) of the amendments only to class actions in federal court, but to apply section 27(b) to all private actions based on alleged violations of the 1933 Act, regardless of whether they were brought in state or federal court.”

As such, the Milano court held that, insofar as the discovery stay provisions are contained in §27(b), Congress intended the provisions creating a new right on the part of defendants to a stay of discovery to be applied to all 1933 Act cases in state as well as federal courts. Another California court likewise held that “the automatic stay provision in Section 27(b) of the [1933] Act applies to all cases filed under the [1933] Act, whether in state or federal court.” Shores v. Cinergi Pictures Entm't, No. BC149861 (Cal. Super. Ct., Sept. 11, 1996).

In the wake of Cyan, several commentators predicted that plaintiffs would be incentivized to bring class action claims pursuant to the 1933 Act in state court as a means to avoid the PSLRA's discovery stay. As discussed above, a close reading of the PSLRA and the court's Cyan decision demonstrates that such claims would be subject to the PSLRA's discovery stay (as well as its safe harbor for forward-looking statements and its provisions concerning sanctions for abusive litigation and the defendant's right to written interrogatories to the jury), regardless of the forum in which they are brought.

Israel David and Samuel P. Groner are partners in the litigation department of Fried, Frank, Harris, Shriver & Jacobson. Anthony Bagnuola, a litigation associate at the firm, provided research assistance in the preparation of this article.