On March 20, 2018, the U.S. Supreme Court unanimously held, in Cyan, Inc. v. Beaver County Employees Retirement Fund[1] (“Cyan”), that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of jurisdiction over class-action lawsuits alleging violations of only the Securities Act of 1933 (“1933 Act”). In addition, the Supreme Court ruled that SLUSA does not empower defendants to remove such actions to federal court.

The 1933 Act and Class-Action Securities Litigation

The 1933 Act is a federal law that regulates original issuances of securities in the U.S. It requires companies offering securities to the public to make “full and fair disclosure” of relevant information. The 1933 Act made these obligations enforceable by creating private rights of action, and permitted 1933 Act plaintiffs to choose either federal or state court as the forum for litigation. The 1933 Act was unusual in that it prohibited the removal of claims from state to federal court. Thus, it has long been the law that if a plaintiff chooses to bring a 1933 Act claim in state court, the litigation will remain in that forum.

In 1995, Congress passed the Private Securities Litigation Reform Act (the “Reform Act”). The Reform Act recognized that for litigation involving nationally traded securities, the class-action vehicle poses significant risks of abuse. The provisions of the Reform Act made class-action securities litigation more difficult to pursue. Although some of the substantive protections in the new legislation applied equally in state and federal court, procedural changes to the law applied only in federal court. As an unforeseen result of the Reform Act, securities plaintiffs began more aggressively pursuing class-action lawsuits in state courts. These state court class-action lawsuits were based not only on the 1933 Act, but also on claims rooted in state law.

In 1998, Congress enacted SLUSA in response to the perceived flood of class-action securities litigation in state courts. SLUSA entirely prohibited certain class-action securities litigation involving claims rooted in state law.[2] In addition, SLUSA expressly permitted the removal of certain class-action securities lawsuits from state to federal court.[3] The question presented in Cyan was whether the SLUSA provisions in question also prevented plaintiffs from choosing state court as the forum for class-action securities litigation that is based solely on 1933 Act claims.

Cyan Inc.’s Petition to the Supreme Court

Cyan, Inc., a telecommunications company, issued shares in an initial public offering. After the company’s stock price declined in value, three pension funds and an individual (the “Investors”) who purchased stock in the IPO brought a damages class action against the company, as well as its officers and directors, in California Superior Court. The Investors alleged that the company’s offering documents contained material misstatements in violation of the 1933 Act. The Investors did not make any state law-based claims. The company moved to dismiss the Investors’ suit, contending that SLUSA’s bar on certain categories of securities class-action litigation stripped state courts of jurisdiction over 1933 Act class-action claims. The company also argued, with the support of the federal government as amicus curiae, that Congress intended for SLUSA to permit the removal of 1933 Act class-action lawsuits from state to federal court.

In a 9-0 decision, the Supreme Court roundly rejected the positions put forward by the company and the federal government. The Court relied on strict textual statutory construction to conclude that SLUSA does not prevent plaintiffs from choosing state court as the forum for 1933 Act class-action litigation.

Possible Consequences

The Supreme Court’s decision in Cyan could result in the following:

• More plaintiffs may choose to bring 1933 Act class-action lawsuits in state court, which is generally perceived as a more favorable forum by plaintiff securities lawyers.
• Prior to going public, many companies may choose to include exclusive-forum clauses in their articles of incorporation or bylaws, notwithstanding that the validity of such clauses has not been tested.
• Congress may attempt a statutory change to strip state courts of jurisdiction over 1933 Act class-action claims. The Supreme Court’s focus on statutory interpretation makes clear that only minor adjustments to the statutory language would be necessary.

This article has been prepared by Matthew E. Waters, an Associate in our Corporate & Business Group. For any questions, please contact Matthew, another one of our Securities attorneys, or the Hinckley Allen attorney with whom you regularly work.

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[1]Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, 2018 WL 1384564 (March 20, 2018).

[2] 15 U.S.C. § 77p(b).

[3] 15 U.S.C. § 77p(c).