On March 20, 2018, the United States Supreme Court released its unanimous decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S.Ct. 1061 (2018). In Cyan, the Court considered whether plaintiffs can file 1933 Securities Act (“1933 Act”) class actions in state courts, as the Cyan plaintiffs had done. The Court also considered whether such state court actions, if allowed, were subject to removal to federal court.
The 1933 Act requires that public offerings of securities contain “full and fair disclosure” of information relevant to potential investors. The 1934 Securities Act (“1934 Act”) regulates subsequent trading of securities. The 1933 Act gave state and federal courts concurrent jurisdiction over private actions brought under the Act. For 1933 Act claims brought in state court, removal to federal court was prohibited. In contrast, the 1934 Act gave federal courts exclusive jurisdiction over 1934 Act claims.
Perceiving abuses in securities class action litigation, Congress in 1995 passed the Private Securities Litigation Reform Act (“PSLRA”). The PSLRA modified certain substantive and procedural facets of the 1933 and 1934 Acts. These changes made asserting and maintaining 1933 and 1934 Act claims more difficult for plaintiffs.
To avoid these new obstacles, many plaintiffs reacted simply by asserting securities claims solely based on state law. Congress responded with the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). The SLUSA prohibited any securities class action based on state law if the securities class action was a “covered class action” directed at a “covered security.” A “covered class action” is one that seeks damages on behalf of more than fifty persons, and a “covered security” is a security listed on a national stock exchange.
The Cyan plaintiffs had filed a securities class action in state court asserting only 1933 Act claims, but no state law claims. Through an intricate analysis of several of the SLUSA’s ancillary provisions, the defendants argued that Congress intended to prohibit plaintiffs from filing in state court both securities class actions based on state law and class actions based on the 1933 Act. The defendants advanced that argument even though the SLUSA does not explicitly prohibit filing 1933 Act class actions in state court. In response to the defendants’ highly technical arguments based on these ancillary provisions, the Court stated that “Congress does not ‘hide elephants in mouseholes.’” The ability of plaintiffs to bring 1933 Act class actions in state court has been a fundamental part of the 1933 Act for decades. If Congress wanted to change that regime, the Court reasoned, it would have done so clearly, not through some complicated series of inferences based on ancillary provisions.
Cyan also argued that the legislative history of the SLUSA reflected a congressional intent to prohibit filing 1933 Act class actions in state court. The Court responded that for it to upend the statute’s plain text containing no such prohibition based on inferences from legislative history, “Cyan would need some monster arguments . . . .” The Court found no monster arguments.
The Court also considered a related argument that the federal government made in an amicus curiae brief. The government argued that even if the SLUSA did not prohibit filing 1933 Act class actions in state court, it did eliminate the 1933 Act’s prohibition against removal of such cases to federal court. The Court rejected that argument too. The Court held that 1933 Act class actions filed in state court must remain there.
Authored by Brian C. Kimball