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One Constant in a Series of Changes: State Courts Retain Jurisdiction over Securities Act Claims after Cyan v. Beaver County

The Wall Street Crash of 1929 brought about significant financial market reform. One of those reforms still in effect today is the Securities Act of 1933 (“1933 Act” or “the Act”). The Act aims to force companies offering public securities to provide “full and fair disclosure” of pertinent information. ((Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066.)) To foster compliance, it also provides private rights of action. ((Id.)) In the Act’s original form, both state and federal courts have jurisdiction over 1933 Act claims, but, curiously, if a claim was filed in state court, it could not be removed to federal court. ((Id.)) Decades later, in 1995, Congress amended the 1933 Act by passing the Private Securities Litigation Reform Act (“PSLRA”). ((Id.)) The PSLRA sought to remedy alleged class action litigation abuses. ((Id. at 1066–67.)) In part, it enacted procedural “obstacles” for 1933 Act claims filed in federal court. ((Id. at 1067.)) The result was a rise in 1933 Act class actions filed in state court. ((Id.)) In 1998, the Act was again modified when Congress passed the Securities Litigation Uniform Standards Act (“SLUSA”). ((See Anthony Antonelli et al., Supreme Court Rules that Securities Act Claims can be Brought in State Court, Bloomberg BNA (Mar. 30, 2018), https://www.bna.com/supreme-court-rules-n57982090620/.)) SLUSA permits “covered class actions” (class actions with at least fifty class members) to be removed to federal court. ((Id.))

SLUSA’s procedural modification, however, led various federal district courts to opposing conclusions as to whether state court jurisdiction was eliminated altogether. ((Id.)) In 2017, the Supreme Court granted certiorari to resolve that issue in Cyan Inc. v. Beaver County Employees Retirement Fund. ((Cyan, supra note 1 at 1068.)) In Cyan, investors brought a 1933 Act claim against Cyan, Inc., a telecommunications company, for alleged material misstatements in its IPO documents. ((Cyan, supra note 1 at 1068.)) Cyan moved to dismiss the case for lack of subject matter jurisdiction, arguing that SLUSA stripped state courts of jurisdiction over 1933 Act covered class action suits. ((Cyan, supra note 1 at 1068.)) Affirming the denial of Cyan’s motion to dismiss, the Supreme Court unanimously held that SLUSA’s text makes clear that state courts are not denied jurisdiction over 1933 Act class actions, covered or otherwise. ((Baker and Hostetler LLP, Race to the State Courthouse?: How the Ruling in Cyan Changes Where and How Securities Actions are Brought, Lexology (Apr. 4, 2018), https://www.lexology.com/library/detail.aspx?g=1aedd999-8360-4329-9ccf-2a666ef47584.))

The Court’s decision in Cyan leads to several important ramifications. First, state courts should see a surge in 1933 Act claims. ((See id.)) State courts are typically much more plaintiff-friendly due to not being bound by the PSLRA’s federal court procedural “obstacles,” such as different motion to dismiss and consolidation procedures. ((See id.)) Second, Cyan should increase the number of unconsolidated securities class actions. ((Id.)) Defendants often face parallel 1933 Act claims in state and federal court. ((See id.)) State and federal claims cannot be consolidated. ((Id.)) And although a defendant can file motions to stay or coordinate separate claims, that approach is often unsuccessful and can be quite unpredictable. ((Id.)) Third, Cyan likely changes how companies approach 1933 Act litigation. The old model went as follows: (1) file motion to dismiss, (2) win motion to dismiss or settle the case. Given that state court motion to dismiss procedures are commonly more plaintiff-friendly, it follows that more actual litigation should occur post-Cyan. ((See id.)) Repeat players will have to develop novel strategies and tools to deal with the change. ((Id.)) Lastly, Cyan could change how public entities operate. For example, corporations could institute federal forum clauses in their by-laws or formation documents. ((Id.)) It is unclear, though, whether such clauses would be enforceable. ((Id.))