Tuesday, November 21, 2017

SCOTUS offered three competing interpretations of SLUSA jurisdiction

By Anne Sherry, J.D.

What effect did the Securities Litigation Uniform Standards Act have on state-court jurisdiction? Cyan, Inc., which successfully petitioned the Supreme Court for certiorari, argues that the statute withdraws, rather than continues, state courts’ concurrent jurisdiction over Securities Act class actions. The respondents counter that SLUSA does not strip state courts of concurrent jurisdiction. And the government, in an amicus brief, submits that defendants are authorized to remove Securities Act covered class actions involving covered securities to federal court (Cyan, Inc. v. Beaver County Employees Retirement Fund, November 13, 2017).

Cyan shareholders sued the company over weaker-than-expected results following its IPO. The complaint was brought as a class action to pursue strict-liability remedies under the Securities Act. It was brought in California state court, but alleged no state-law claims. Bound by California decisions holding that SLUSA continued state-court jurisdiction over class actions under the Securities Act, the state court denied Cyan’s motion for judgment on the pleadings.

SLUSA amended Securities Act Section 22 to close a loophole in the Private Securities Litigation Reform Act that many feared could lead to abusive litigation. The statute now provides that state courts have concurrent jurisdiction of Securities Act suits, “except as provided in [Section 16] with respect to covered class actions.” The parties and amici disagree on how this “except clause” operates.

Cyan’s take: excepting Securities Act claims. Cyan argues that its interpretation is the only one that gives effect to the “except” language of the statute. The clause must except some set of Securities Act claims from the concurrent jurisdiction of state courts, and its text makes clear that these excepted claims are Securities Act claims in “covered class actions,” as provided in Section 16. While Congress sometimes uses the words “as provided in” to refer to a self-operative limit from another statute, as the respondents and government argue, this is not always the case. Cyan presents a hypothetical parking sign that reads “No parking, except as provided in 5 U.S.C. §6103 with respect to legal public holidays.” That code section lists legal public holidays; it has nothing to do with parking, but a reader would understand that the sign bars parking except on the statutory holidays.

To the respondents’ argument that it would have been bizarre for Congress to prescribe different kinds of treatment for state-law class actions, mixed class actions, and Securities Act class actions, Cyan posits that the scheme works “just about as efficiently as possible.” State-law class actions, which are exempt from the PSLRA, are precluded entirely. Securities Act class actions must be filed directly in federal court, where the PSLRA applies. And a hybrid approach for mixed class actions authorizes defendants to remove the suits to federal court, where the state-law claims can be dismissed and the federal claims allowed to proceed subject to the PSLRA.

The less bad alternative: removal. If the Supreme Court does reject Cyan’s reading, Cyan urges it to adopt the government’s interpretation. Unlike Cyan, the government submits that the “except as provided in” language is naturally understood to mean that the cross-referenced provision provides the exception to the general principle. But nothing in Section 16 provides an exception to the general rule of concurrent state-court jurisdiction of a suit asserting only federal-law claims. Rather, Section 16(c) authorizes defendants to remove Securities Act covered class actions involving covered securities to federal court.

The government maintains that its interpretation is consistent with the text of Section 16(c), which does not turn on the source of law under which the removed claims arise. It is also consistent with the structure and purpose of SLUSA, through which Congress authorized removal of state-law actions because it was unwilling to leave preclusion decisions under Section 16(b) to state courts alone. Cyan disagrees, but concedes that while the government’s reading “is not as faithful to SLUSA’s text, structure, and purpose” as its own, it is closer than the respondents’ reading. It would ensure that Securities Act class actions could be heard in a federal forum and prevent circumvention of the PSLRA.

The case is No. 15-1439.