On March 20, 2018, the United States Supreme Court issued its decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, reaffirming that a class action alleging only violations of the federal Securities Act of 1933 could be brought in either state or federal court. The Court’s unanimous decision, penned by Justice Kagan, is a deft textual analysis of an ambiguous statute. The Court’s decision also could prove significant for the many private companies headquartered in California whose initial public offerings have long been delayed but are expected in the near future. Absent Congressional action, many of those companies and their directors, officers, and underwriters could find themselves defending Securities Act class actions in state courts ill-prepared for such litigation.
In Cyan, the key issue was the ambiguity created by different legislation passed by Congress over half-a-century apart. When it was adopted in 1933, the Securities Act included a provision for concurrent state and federal court jurisdiction of private claims brought under the act. Fast forward to the end of the 20th Century, when Congress passed the Private Securities Litigation Reform Act (“PSLRA”) to curtail frivolous securities class actions and the Securities Litigation Uniform Standards Act (“SLUSA”) to curtail attempts by plaintiffs to avoid the PSLRA by filing in state court class actions brought under state law. As drafted, SLUSA permitted both the removal of so-called “covered class actions” and their dismissal by a federal court. In Cyan the Court addressed whether Congress intended for SLUSA and its “covered class actions” to cover Securities Act class actions brought in state court.
The Court, adopting the most “straightforward” reading of SLUSA that “the statute says what it says—or perhaps better put here, does not say what it does not say,” held that concurrent jurisdiction remains in effect. SLUSA defined the term “covered class action” to mean a class action “based on the statutory or common law of any State” in which “damages are sought on behalf of more than 50 persons.” Such “covered class actions” brought under state law were removable to federal court for dismissal. However, SLUSA left relatively untouched the Securities Act’s provision for concurrent jurisdiction, other than to provide an exception to concurrent jurisdiction for “covered class actions” brought under state law. The Court held that this exception did not eliminate concurrent jurisdiction for Securities Act class actions. In so holding, the Court explained that this exception was too oblique a change to the Securities Act to upset the decades-long practice of concurrent jurisdiction—in effect, “Congress does not hide elephants in mouseholes.”
The Court’s holding in Cyan, combined with other trends, will likely prove significant for California headquartered companies. Before the Court accepted Cyan’s certiorari petition, plaintiffs were increasingly filing Securities Act complaints in California state court. After the Court granted certiorari, those filings abated while the Court’s final ruling remained uncertain. In addition, in recent years the plaintiffs’ securities bar has shown a greater willingness to pursue securities class actions with lower potential damages. That willingness will likely continue now that there is unfettered access to state courts with little experience addressing claims for securities fraud. Finally, there is a growing consensus that many private companies, which have delayed their initial public offerings, could soon go public. Once public, many of those companies will likely encounter the same events that would typically draw securities litigation. Accordingly, unless Congress acts to strike concurrent jurisdiction from the Securities Act, the Court’s ruling in Cyan could herald a surge in the need to defend Securities Act class actions in California state court.