Yesterday, SCOTUS heard oral argument in Cyan Inc. v. Beaver County Employees Retirement Fund, which addressed whether state courts have jurisdiction over cases brought solely under the Securities Act of 1933.  Here is the transcript of the oral argument for Cyan, which is discussed briefly below.

The Court also heard oral argument in a second case, Somers v. Digital Realty Trust, which addressed the split in the circuits regarding whether the Dodd-Frank whistleblower anti-retaliation provisions apply regardless of whether the whistleblower blows the whistle all the way to the SEC or just internally at the company.  Digital Realty will be discussed in a subsequent post.

Cyan Inc. v. Beaver County Employees Retirement Fund

Background: The Private Securities Litigation Reform Act of 1995 imposed a number of requirements in connection with class actions under the federal securities laws, such as heightened pleading standards and selection criteria for lead plaintiffs.  To circumvent those requirements, however, many plaintiffs instead began to bring their class actions in the state courts.  That shift to the state courts led to the adoption, in 1998, of  the Securities Litigation Uniform Standards Act. SLUSA was designed to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA].”

This case was initially filed in 2014 in the California courts by Beaver County Employees Retirement Fund and others, alleging violations of provisions of the ’33 Act with regard to disclosures in an IPO registration statement. Cyan sought to dismiss the case, arguing that, under SLUSA, the state court did not have subject matter jurisdiction. The court rejected that contention, saying that its hands were tied as a result of the earlier California appellate court decision in Luther v. Countrywide Financial Corp., which held that SLUSA did not prohibit concurrent state and federal court jurisdiction.  Cyan petitioned for cert. In its petition, Cyan observed that “[p]laintiffs have taken note of this revived opportunity to circumvent the [PSLRA]: since Countrywide, filings of ’33 Act class actions in California state courts have risen 1400 percent.”

SLUSA, Cyan contended in its cert petition, withdrew state courts’ concurrent jurisdiction over covered class actions alleging only ’33 Act claims. Beaver County responded that, while SLUSA precluded certain state law securities class actions outright, it did not eliminate concurrent state court jurisdiction for ’33 Act claims.   In an amicus brief, the U.S. took the position that, while SLUSA did not divest the state court of jurisdiction over a ’33 Act case, it did authorize removal of ’33 Act cases, and, properly interpreted, “it provides appropriate protection against the use of state-court lawsuits to circumvent the PSLRA’s substantive and procedural safeguards.” The case, the U.S. contended, “presents a difficult interpretive issue that has generated confusion in lower courts.” 

Full disclosure: Cooley represented a group of the nation’s leading securities law professors, who filed an amicus brief in support of Cyan’s position that state courts lack jurisdiction over covered class actions asserting ’33 Act claims. 

Question presented: As stated in the SCOTUS QPReport:  “The question presented—which has split federal district courts in removal cases and thus sidelined federal appeals courts—is: Whether state courts lack subject matter jurisdiction over covered class actions that allege only ’33 Act claims.” 

Oral argument:  For almost the entire discussion, the Justices seemed to have gotten their knickers in a twist attempting to interpret the text of the statute itself, which they generally agreed was not exactly a model of clarity—“just gibberish” according to Justice Alito. Justice Alito asked, seriously, whether there was “a certain point at which we say this means nothing, we can’t figure out what it means, and, therefore, it has no effect, it means nothing?” but Justice Gorsuch argued that “respect for the legislative process dictates that we afford some meaning to these words.”

The focus of the arguments that generated so much frustration was the language in Section 22 of the ’33 Act which states that the “district courts of the United States and the United States courts of any Territory shall have jurisdiction of offenses and violations under this title and under the rules and regulations promulgated by the Commission in respect thereto, and, concurrent with State and territorial courts, except as provided in Section 16 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 title.”  The dispute was over the meaning of the “except” clause, which some courts have interpreted as divesting state courts of jurisdiction over ’33 Act cases.

As Cyan read the statute, the “except” clause divested state courts of jurisdiction over all ’33 Act class actions involving more than 50 class members.  According to Cyan, only its interpretation was consistent with SLUSA’s underlying purposes and did not render the “except” clause a dead letter: “I understand the statute is a hard one to read, but we’re the only ones giving it a reading that, A, makes sense; and that is, B, consistent with the legislative history; and, C, most importantly, is textual.” Cyan’s “story,” it maintained,  “is in the legislative history itself. The first line of the conference report: ‘Title 1 of SLUSA makes federal court the exclusive venue for most securities class action lawsuits.’ The manager in the Senate, Senator D’Amato, and the chair: ‘There shall be a uniform standard and there should be a uniform procedure, and that’s why you move these nationally traded securities to a federal forum.’” Justice Sotomayor, who viewed the purpose of SLUSA as ensuring that claims of this type were covered under federal law, not state law, asked  “what difference does it make who adjudicates the claim if both courts are going to be bound by federal law?” Cyan responded that the difference is that Congress cared very much about the protective procedures imposed under the PSLRA.

The U.S., as amicus, agreed with Cyan that the purpose of SLUSA was “to reestablish federal courts as the preferred venue for large class actions involving nationally traded securities,” but maintained that Congress “did so not by eliminating state court jurisdiction over suits involving federal claims but by permitting removal of such suits from state to federal court.”  However, some of the Justices appeared concerned that this particular case did not involve removal and so the issue of “removal” was not clearly before the Court. The U.S. also observed that Cyan’s policy-based argument was “very powerful”: “that Congress could not have intended for federal claims to be stuck in state court where they wouldn’t benefit from the protections of the Reform Act. That was the whole point of SLUSA.”

Beaver County essentially argued that Cyan was reading too much into the provision at issue. It argued that SLUSA eliminated concurrent state jurisdiction only for complaints that included both federal and state claims, but not for solely federal claims. But Justice Alito asked: “What sense does that—what sense does that make? The fed—the state courts have concurrent jurisdiction over ’33 Act claims, except if a lawyer is foolish enough to include in the state court complaint state claims that fall within the—the prohibition?” Justice Ginsburg asked why Congress would want to allow all of these protections to be eliminated in state court. Beaver County responded that SLUSA was “a door-closing  statute,” which “looks back to the PSLRA, and says we’ve got a statute that’s been evaded a bunch. We just don’t want it to happen again. So we’re going to ban a set of cases that have shifted from federal to state court. Those are ’34 Act cases by and large. We’re going to ban those. What might a clever plaintiff’s lawyer do? Well, what they might do is slap a ’33 Act claim on here and say it’s still within the concurrent jurisdiction of the state courts. So we’re just going to make clear that’s not true. That’s all.”

Unfortunately, it was not any clearer, after reading the transcript, how the case will turn out. So no prognosticating here—we’ll just have to wait for the decision.

Posted by Cydney Posner