When the U.S. Supreme Court confirmed in its March 2018 Cyan decision that state courts retain concurrent jurisdiction over ’33 Act liability actions, commentators suggested that plaintiffs’ lawyers would opt to pursue Section 11 claims in state court, either in preference to or in addition to parallel federal court actions. Indeed, in many lawsuits filed in the past few months involving IPO companies, plaintiffs’ lawyers have indeed resorted to state court. However, a recent decision from a Texas state court highlights the fact that whatever advantages the plaintiffs’ lawyers may think they have by proceeding in state court, their claims will still face scrutiny – and in the specific case at issue in Texas, dismissal. As noted in a November 13, 2018 Law 360 article (here), the Texas court’s dismissal is among the first by a state court following the U.S. Supreme Court’s decision in Cyan.
Xbiotech is a biopharmaceutical company located in Texas. The company completed its IPO in April 2015. At the time of its IPO, Xbiotech was involved in clinical trials testing certain pharmaceutical products. In a securities class action lawsuit that was filed in the Western District of Texas federal court, a plaintiff shareholder alleged that in its IPO registration statement and prospectus, the company and certain of its directors and officers misled investors about the timeline of the clinical trials and likelihood of success. In a September 23, 2016 order (here), Western District of Texas Judge Sam Sparks entered an order granting the defendants motion to dismiss without prejudice. Judge Sparks found that the plaintiffs had failed to sufficiently plead scienter in order to establish a claim under Section 10 of the ’34 Act.
The same plaintiff and plaintiff law firm then filed a Section 11 action against the company in California state court. In July 2017, after litigating the case in California for many months, the plaintiffs re-filed their Section 11 action in Texas state court. The defendants sought to have the Texas action removed to federal court. However, in light of the Cyan case which was at that time pending before the U.S. Supreme Court, Judge Sparks granted a stay pending the outcome of Cyan. Following the Supreme Court’s decision in Cyan, Judge Sparks remanded the action to state court.
In his state court petition, the plaintiff alleged that the company had made a number of misrepresentations in its IPO registration statement about the company’s clinical trials that were pending at the time of the IPO. The plaintiffs’ allegations were substantially similar to the allegations he had raised in the ’34 Act lawsuit that Judge Sparks had dismissed.
The defendants moved to dismiss the plaintiff’s Texas state court action arguing that the plaintiffs had failed to establish that the alleged misrepresentations were actually misleading. On November 13, 2018, in a short order (here), Travis County (Texas) District Judge Dustin M. Howell granted the defendants’ motion to dismiss with prejudice.
The state court’33 Act lawsuit had the unusual attribute that it was preceded by a federal court ’34 Act lawsuit that had been dismissed (albeit without prejudice). Rather than attempting to amend his federal court’34 Act lawsuit, the plaintiff essentially refiled his claims as a state court ’33 Act lawsuit. The long and convoluted procedural history makes this case somewhat distinct, and as a result there is probably a limit to the generalizations that might be drawn from the dismissal of the state court ’33 Act lawsuit.
Just the same, the dismissal does show that whatever attractions state court may have for plaintiffs’ lawyers filing ’33 Act lawsuits, the state court cases they file are still going to face scrutiny. By resorting to state court, the claimants are not necessarily going to avoid the kind of close inspection to which securities suits are subject in federal court.
The Supreme Court entered its opinion in the Cyan case just a few months ago and we are still in the early days of seeing how cases will unfold in light of the decision. It certainly does seem that when the plaintiffs’ lawyers are filing securities suits against IPO companies, they are indeed resorting to state court, either instead of or in addition to parallel actions in federal court. It remains to be seen how these cases will fare. However, the recent Texas state court decision does suggest that state court might not necessarily turn out to be a preferable forum.