On March 20, 2018, the United States Supreme Court, in a unanimous decision, ruled that state courts have jurisdiction to adjudicate class actions brought under the Securities Act and that such actions cannot be removed from state to federal court.

By way of background, the Securities Act authorized both federal and state courts to exercise jurisdiction over private causes of action relating to securities offerings and barred removal of such suits from state to federal court. In 1995, in order to stem perceived abuses of the class-action mechanism in securities litigation, the U.S. Congress enacted the Private Securities Litigation Reform Act (PSLRA). The PSLRA amended the Securities Act by introducing procedural reforms for securities class actions in federal court. When plaintiffs began filing securities class actions in state courts instead, to avoid the federal procedural standards, Congress passed the Securities Litigation Uniform Standards Act of 1998 (SLUSA).

Cyan, Inc. ("Cyan"), a telecommunications company, and its officers and directors, argued that the SLUSA amendments gave federal courts exclusive jurisdiction over class actions brought under the Securities Act. The Supreme Court disagreed, and held that those amendments did not divest state courts of concurrent jurisdiction over class actions pursuant to the Securities Act. The Court, rejecting a separate argument regarding removal of such actions, held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court.

This decision may result in more Securities Act class actions being brought by plaintiffs in state courts across the country, including those located in districts that previously had held that SLUSA deprived state courts of jurisdiction over such actions. Several other points are worth noting:

  • First, as the Supreme Court emphasized, the PSLRA "included substantive sections protecting defendants (like a safe harbour for forward-looking statements) in suits brought under the federal securities laws" and, "wherever those suits go forward, the [PSLRA]'s substantive protections necessarily apply." The Court did not address whether some of the most important PSLRA protections—such as the discovery stay pending a motion to dismiss—are "substantive" or "procedural." Moreover, the case does not undermine a defendant's ability to seek to stay discovery in a parallel state action while a motion to dismiss is pending in federal court, coordinate multiple parallel actions or stay one action entirely while another proceeds.
  • Second, other potential avenues for removal of Securities Act claims are unaffected. The Court's opinion addressed only removal under SLUSA, not removal on other grounds. For example, "related to bankruptcy" removal—a critical route to federal court for underwriters, directors and officers, and audit firms in cases where the corporate issuer has filed for bankruptcy, alleged damages may be large and the ability to collect on indemnification rights may be affected—is untouched by the Court's decision.
  • Third, the case may lead more companies to consider adopting bylaws that designate federal courts as the exclusive forum for resolution of claims under the Securities Act. Such bylaws are currently being challenged in litigation pending in Delaware Chancery Court, which is receiving close attention in the securities bar.
  • Finally, as the Court noted, a legislative solution is available. Ending state court jurisdiction over Securities Act class actions, or at least permitting removal, would arguably give greater coherence to the statutory scheme. Class actions under both the Exchange Act of 1933 and state law are already channelled to federal court, so class actions filed exclusively under the federal Securities Act are in that respect an outlier.

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