On March 20, the Supreme Court reached two holdings important to securities litigators. First, the Court held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) did not strip state courts of their ability to adjudicate class actions under the Securities Act of 1933 (“Securities Act”). Second, the Court held that SLUSA does not allow removal to federal court of class actions alleging claims only under the Securities Act.
Petitioners were an issuer and its officers and directors who moved to dismiss a class action in California state court that alleged only violations of the Securities Act. The trial court rejected their argument that SLUSA stripped the state courts of power to adjudicate Securities Act class actions, and the state appellate courts denied review. The Court then granted certiorari to resolve a split among state and federal courts about the purported jurisdiction-stripping that SLUSA wrought. Justice Kagan wrote the unanimous opinion.
Jurisdiction Stripping: As to the first holding, the Court considered arguments both from SLUSA’s text and from its legislative history and purpose.
Petitioners primarily pointed to SLUSA’s “except clause,” 15 U.S.C. § 77v(a), which appears in italics below:
The district courts of the United States . . . shall have jurisdiction[,] 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.
Petitioners pointed to one particular subsection, § 77p(f)(2), related to suits seeking damages on behalf of more than 50 persons (with no mention of whether state or federal law underlies the claim), to argue that the “except clause” embraced larger Securities Act class actions. But the Court determined that “covered class actions,” as that term is used in the “except clause,” has the meaning stated in § 77p as a whole, which the Court characterized as reaching certain class actions for securities violations based on state statutory or state common law, and only for such class actions.
The Court then addressed petitioners’ argument that the legislative history and purpose of SLUSA were further evidence that the legislation stripped state courts of jurisdiction. The Court set the bar high: “Even assuming clear text can ever give way to purpose, [petitioners] would need some monster arguments on this score to create doubts about SLUSA’s meaning.” Not surprisingly, considering the standard applied, the Court found none.
The Court explained the key impact of SLUSA was its bar on securities class actions arising under state law. The Court stated that SLUSA to this effect “guaranteed that the [Private Securities Litigation] Reform Act [of 1995]’s heightened substantive standards would govern all future securities class litigation,” including those in state court. It was the clarity as to the substantive standard, and not the identity – state or federal – of the court deciding Securities Act matters, that provided issuers and their officers and directors the supposed protection from abusive litigation that was the promise of SLUSA.
Removal: The Court also held that SLUSA did not “authorize removing such suits from state to federal court.” The court considered this question despite the fact that it was raised by the United States as amicus curiae, rather than by petitioners. The United States had argued (consistent with the Court’s holding) that SLUSA did not strip state courts of jurisdiction over Securities Act class actions, but the government further argued that defendants could remove such state court actions to federal court, provided they alleged false statements or deceptive devices in connection with a purchase or sale, as in § 77p(b).
The analysis turned on an interpretation of § 77p(c):, which provides for removal of certain class actions to federal court:
Any covered class action brought in any State court involving a covered security, as set forth in subsection (b) of this section, shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b) of this section.
The Court again explained that § 77p(b), which the Court referred to as “state-law class-action bar,” “altogether prohibits certain securities class actions based on state law” rather than any class actions for securities violations in state court. Section 77p(c), the Court held, allows for the removal of state court actions premised on state law, and their prompt dismissal in federal court.
But the government had urged an interpretation of § 77p(c) where “as set forth in subsection (b)” only modified “involving a covered security” rather than the entire preceding phrase. From this, and a related close reading of § 77p(b), the United States further argued that Securities Act cases in state court could be removed.
The Court found several flaws with this argument, chief among them that “the Government is choosing where to start in the sentence . . . based only on what best serves its argument.” The Court found that the United States was making the same mistake petitioners made: “It distorts SLUSA’s text because it thinks Congress simply must have wanted 1933 Act class actions to be litigated in federal court.”
Conclusion: In sum, Cyan sets – and limits – the legacy of SLUSA as affixing the federal substantive standard to class actions for securities wrongdoing against issuers and their officers and directors. For now, unless and until Congress speaks more clearly, that substantive standard will be adjudicated in state and federal courts alike.
Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439 (U.S. Mar. 20, 2018).
