The Supreme Court Invites The Views Of The United States In A Case That Could Clarify The Scope Of SLUSA
On October 3, 2016, the Supreme Court invited the Acting Solicitor General to file a brief expressing the views of the United States in Cyan, Inc. v. Beaver County Employees Retirement Fund (“Cyan”), a case in which the Supreme Court is considering whether, under Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), a state court lacks subject matter jurisdiction over covered class actions that allege claims only under the Securities Act of 1933 (“Securities Act”). There is no obligation on the part of the Solicitor General to respond or a formal deadline for it to do so, but the invitation by the Supreme Court could be read to suggest an increased likelihood that the Supreme Court will hear the case.
The action in Cyan began in June 2014, when certain purported purchasers of Cyan’s common stock brought a securities class action in California state court alleging violations of Sections 11, 12(a)(2) and 15 of the Securities Act. Plaintiffs alleged that the registration statement and prospectus filed in connection with Cyan’s initial public offering in May 2013 contained materially inaccurate and misleading statements that did not fully disclose the Company’s revenue-related risks. Plaintiffs did not assert any state law claims. Defendants, which group included the company, several of its directors and officers, and underwriters, moved to dismiss the complaint for lack of subject matter jurisdiction, arguing that SLUSA deprived the California state court of jurisdiction over a putative class action asserting claims under the Securities Act. Following an earlier decision by the California intermediate appellate court in Luther v. Countrywide Financial Corporation, however, the trial court rejected defendants’ arguments. After both California appellate courts declined to hear an appeal, in May 2016, defendants filed a petition for writ of certiorari to the U.S. Supreme Court.
As the defendants in Cyan explained in their petition, there have been a significant number of securities class actions filed in state court in the last few years (particularly in California state court) that assert claims only under the Securities Act. Defendants routinely remove these cases to federal court and argue that SLUSA eliminated concurrent state court jurisdiction over class action lawsuits filed under the Securities Act. Federal district courts have split on this issue. Judges in the Southern District of New York (and certain other districts) have predominantly ruled that SLUSA divests state courts of subject matter jurisdiction and therefore have denied the plaintiffs’ motion to remand. Judges in the Northern District of California, however, have predominantly taken the opposite view and ruled that, even after SLUSA, state courts have jurisdiction over Securities Act claims. Those courts have remanded the Securities Act cases back to state court. The defendants in Cyan argued their case was uniquely positioned to allow the U.S. Supreme Court to address the issue because orders remanding cases to state court are generally not appealable and urged the Court to grant certiorari to resolve the conflicts among the lower courts. The defendants in Cyan also pointed out that, in the five years after the decision in Luther, at least 38 class actions alleging Section 11 claims have been filed in California state courts.