As a consequence of increased IPO activity during the period 2013-15, IPO-related securities class action litigation has picked up as well, as I noted in my year-end review of 2015 securities class action litigation. An interesting aspect of this IPO-related litigation has been that much of it has been filed in state court, particularly in California state court, as detailed in a recent guest post on this site. Defendants in these suits can attempt to remove the state court lawsuits to federal court, but because of ongoing questions about whether or not SLUSA eliminated state court jurisdiction for class action lawsuits under the ’33 Act, some federal courts have remanded the federal actions back to state court. Because remand rulings are not appealable, defendants may find themselves consigned to litigating the plaintiffs’ federal securities class action lawsuit in state court, a jurisdiction in which plaintiffs potentially enjoy a number of advantages.
As the numbers of these state court class action lawsuits under federal law has mounted in recent months, defendants (particularly those sued in California state court) have continued to try to extricate themselves from the state court forum and transfer their cases to federal court. In some instances, defendants find themselves obliged to defend these state court lawsuits while also defending parallel or even identical federal court lawsuits raising essentially the same allegations.
A recent petition for writ of certiorari filed with the U.S. Supreme Court by Cyan,Inc. seeks to have the Court address these recurring questions and to specifically address the question of whether or not the Securities Litigation Uniform Standards Act of 1998 (SLUSA) eliminated concurrent state court jurisdiction for class action lawsuits filed under the ’33 Act. While it remains to be seen whether or not the Supreme Court will take up the case, Cyan’s petition at least potentially offers the prospect for a resolution that could eliminate the continuing phenomenon of state court class action lawsuits alleging claims under the ’33 Act. A copy of Cyan’s May 25, 2016 petition for writ of certiorari can be found here.
Section 22(a) of the Securities Act of 1933 provides for concurrent state court jurisdiction for civil actions alleging violations of the ’33 Act’s liability provisions. Section 22(a) specifies further that when an action is brought in state court alleging a ’33 Act violation, the case shall not be removed to federal court.
These provisions were significantly litigated in connection with state court lawsuits filed during the financial crisis, as discussed here. One question in particular was whether the provisions of SLUSA, requiring “covered class actions” to be litigated in federal court pre-empts the concurrent state court jurisdiction provisions in the ’33 Act. Suffice it to say here that the determinations of these issues have not been uniform, but that in the Ninth Circuit, the state of the law seems to be that ’33 Act cases filed in state court in reliance on Section 22’s concurrent jurisdiction provisions are not removable notwithstanding the provisions of SLUSA.
Moreover, as discussed here, on May 18, 2011, the California Intermediate Court of Appeal held in the Luther v. Countrywide Financial Corporation case that state courts have concurrent jurisdiction with federal courts to hear liability lawsuits under the Securities Act of 1933 and that more recent Congressional enactments did not eliminate the concurrent state court jurisdiction for the plaintiffs’ ’33 Act claims.
The Procedural Background in the Cyan Case
It is in this context that Cyan has filed its petition. The procedural context of the Cyan case is important to understand. Cyan completed its IPO in May 2013. As often happens for IPO companies, shortly after the IPO, Cyan was hit with a securities class action lawsuit. As has increasingly been the case for IPO-related ’33 Act securities class action lawsuits, the lawsuit against Cyan was filed in state court in California. However, rather than seeking to remove the lawsuit to federal court, Cyan filed a motion for judgment on the pleadings, in which the company argued in light of SLUSA that the state court lacked subject matter jurisdiction.
The California trial court denied the company’s dismissal motion. The state court intermediate appellate court denied the company’s writ of mandate and/or prohibition. The company then sought to pursue a petition of review to the California Supreme Court, which was denied. Thus, Cyan’s U.S. Supreme Court filing is a petition for a writ of certiorari to the California Supreme Court.
Cyan’s Cert Petition
Cyan’s petition seeks to have the U.S. Supreme Court address the question of “Whether state courts lack subject matter jurisdiction over covered class actions that allege only ’33 Act claims.” In urging the Supreme Court to take up this question, Cyan argues that SLUSA withdrew state courts’ concurrent jurisdiction over class actions alleging ’33 Act claims. They argue that the decision of the trial court in this case, which the state appellate courts declined to review, “subverts SLUSA’s requirement that the [PSLRA’s] reforms have uniform application in all class actions under the ’33 Act.”
The petition argues further that courts in other jurisdictions have concluded that SLUSA did eliminate concurrent state court jurisdiction for ’33 Act class action, meaning that different courts in different jurisdictions are reaching different conclusions on the same federal law issue, a circumstance the petition describes as “chaos.”
The “incorrect holding” that SLUSA continued state-court jurisdiction under the ’33 Act has provided plaintiffs “a revised opportunity to circumvent the Reform Act” – indeed, since the intermediate state court decision in Luther v. Countrywide Financial Corp, filings of ’33 Act class actions in California state courts have risen 1400 percent, according to the petition. (Footnote 5 of the petition states that in the five years after Countrywide, at least 38 class actions alleging Section 11 claims were filed in California state courts.)
Cyan argues that because federal court decisions to remand cases to state court are not appealable, the opportunity for appellate court to review a case presenting these issues is unlikely to arise. The company argues further that the unique procedural posture of this case (that is, having come up through the state court system) provides a distinct opportunity for the U.S. Supreme Court to address the issues presented—all of which, Cyan emphasizes, are questions of federal law.
Cyan argues further that the issues presented need to be addressed, as “uncertainty and divisions in the federal courts undermine the integrity of the judicial system, as like cases are not being treated alike.” Cyan also argues that absent appellate guidance, “SLUSA’s intent to give defendants a federal forum will be frustrated.”
Cyan’s petition presents interesting issues that many defendants and prospective defendants would like to see the U.S. Supreme Court address. However, whether or not the Court will take up the case remains to be seen. Obviously, the claimants in the underlying lawsuit have yet to file their opposition to the petition. Moreover, it requires the votes of four justices in order for the petition to be granted. Due to the death earlier this year of Justice Scalia and the continuing vacancy on the bench, there are simply fewer justices who might vote to take up the case.
There are significant arguments in favor of the Court taking up this case. As things stand, we are in the anomalous situation where litigants can seek to pursue ’33 class action lawsuits in state court in California, while litigants in other jurisdictions can only pursue these claims in federal court. This circumstance, allowing varying outcomes by jurisdiction, is not only contrary to general principles of consistency and uniformity, but they present a singular variance from the protocols Congress sought to impose in SLUSA, in which class actions asserting liability claims under the federal securities laws are to be litigated in federal court.
Whether or not Congress intended SLUSA’s requirements to override the ’33 Acts concurrent jurisdiction provisions is an important question for the Supreme Court to take up. The fact that under current circumstances a defendant could face parallel lawsuits in state and federal court involving identical allegations underscores the fact that judicial efficiency considerations militate in favor the Court taking up this case.
Plaintiffs’ advocates may well believe that SLUSA left the ’33 Act’s concurrent provisions unchanged. They may also believe they can show that there is nothing inefficient or inappropriate with class action lawsuits under the ’33 Act proceeding in state court. The plaintiffs’ advocates will have their opportunity to make these arguments if the Court takes up this case.
The arguments in favor of the Court taking up this case take on increased urgency in light of the recent surge in IPO-related lawsuits that have been filed in California state court. It may well be that the recent upsurge in California state court IPO-related lawsuits is simply a reflection of the increased IPO activity during the period 2013-2015 (the period during which Cyan completed its IPO). IPO activity has eased in 2016, a downturn that began in the second half of 2015. With the decrease in IPO activity, the incidence of IPO-related litigation will ease as well, meaning that in the months ahead there may be fewer state court IPO-related securities class action lawsuits filed. However, the circumstances that have allowed these state court lawsuits to be filed will remain unchanged, and could lead to further state court litigation if IPO activity were to increase again. Even if the state court litigation filings were to diminish in the months ahead, there would still be reason for the Supreme Court to address the issues raise here, as otherwise the current circumstance could simply recur in the future.
An interesting post on the California Corporate & Securities Law Blog about Cyan’s cert petition can be found here.
Special thanks to the several loyal readers who forwarded me a copy of the cert petition.