The Supreme Court Grants Cert to Provide Long-Awaited Clarification of Removability to Federal Court of Securities Act Claims Under SLUSA
On June 27, the United States Supreme Court granted certiorari in Cyan, Inc. v. Beaver County Employees Retirement Fund, et al. (15-1439) to address the apparent conflict between the anti-removal language found in the Securities Act of 1933 and the language of the Securities Litigation Uniform Standards Act (SLUSA) which sought to preempt state securities claims and provide federal court jurisdiction over securities class actions. This matter, which will be heard in the upcoming Supreme Court term starting in October 2017, may bring long awaited clarity regarding the appropriate jurisdiction for Securities Act claims.
While the Securities Exchange Act of 1934 provides for exclusive federal court jurisdiction, the Securities Act of 1933 includes a concurrent jurisdiction (or anti-removal) provision.1 This allowed plaintiffs to avoid the heightened pleading requirements and other hurdles of federal court by bringing Securities Act claims in state court. It also created significant uncertainty and the potential for defendants to face simultaneous litigation in both federal and state courts.
In 1998, Congress passed SLUSA which sought to curb abuses of the state court system and preempted state law with respect to securities class actions. SLUSA prohibits "covered class actions," defined as suits brought on behalf of more than 50 shareholders, alleging fraud in connection with the purchase or sale of covered securities under state law.2 SLUSA includes an exception to concurrent state and federal jurisdiction over Securities Act cases for covered class actions identified in Section 77p and provides for the removability of such cases to federal court.3
Following the passage of SLUSA, district courts have issued conflicting decisions on the removability of suits alleging only violations of the Securities Act, and state courts have been divided over whether they retain subject matter jurisdiction over such cases.
In the only appellate decision (either state or federal) to address the issue, the California Court of Appeal concluded that the SLUSA exception to concurrent jurisdiction is limited and that in the circumstances of the case before it removal to federal court was not appropriate.4 The Supreme Court declined review in Luther, and federal appeals courts have not had opportunity to weigh in on the issue as decisions remanding to state court are generally not appealable. As a result, litigants have long awaited clarification. The Supreme Court's grant of certiorari in Cyan will be an opportunity for the Supreme Court to provide this much needed guidance.
Cyan, Inc. v. Beaver County Employees Retirement Fund
In April 2014, plaintiffs filed suit in California state court alleging violations of Section 11 of the Securities Act. Cyan moved for judgment on the pleadings, arguing that SLUSA precludes state court jurisdiction over class actions alleging violations of the Securities Act. The California state court denied the motion, relying on the decision in Luther.
Cyan moved for a writ of certiorari arguing that the lower court erred both by violating "basic norms of statutory interpretation" and in ignoring the express purpose of SLUSA, which sought to curb abusive class actions and prevent the circumvention of the Reform Act with state court actions. After an invitation from the Court, the Solicitor General of the United States filed an amicus brief urging the Supreme Court to grant certiorari to provide clarity and ensure uniformity on the issue.
The Cyan case will be heard in the Supreme Court's October 2017 term, and its decision may have important economic implications for companies who now face the possibility of suit in both state and federal court for claims under the Securities Act.
© 2017 Arnold & Porter Kaye Scholer LLP. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.