Supreme Court Holds That Securities Act Class Actions May Be Adjudicated in State Court

Skadden, Arps, Slate, Meagher & Flom LLP

Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, No. 15-1439 (U.S. Mar. 20, 2018)

In a unanimous decision, the U.S. Supreme Court held that state and federal courts have concurrent jurisdiction over class action claims brought under the Securities Act and that such claims are not removable to federal court under the Securities Litigation Uniform Standards Act (SLUSA). The act precludes certain securities class actions based on alleged violations of state law (“covered class actions”). The Supreme Court held that SLUSA does not deprive state courts of jurisdiction to adjudicate securities class actions that allege claims only under federal law and not also state law.

The plaintiffs-investors had filed a putative class action in California state court against a telecommunications company, alleging claims solely under the Securities Act in connection with purported misrepresentations made in the defendant’s initial public offering (IPO) documents. The company moved to dismiss, arguing that SLUSA stripped state courts of power to adjudicate federal law claims in covered class actions. The California state court disagreed and denied the company’s motion to dismiss.

The Supreme Court affirmed, holding that the plain language of SLUSA does not limit state court jurisdiction over class actions brought under the Securities Act. The Court explained that SLUSA bars certain securities class actions based on state law, but it “says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” The Court reasoned that a contrary interpretation would improperly prevent state courts from adjudicating any Securities Act claims, even if they did not involve a “covered security,” i.e., a security traded on a national stock exchange. As the Court has previously held, SLUSA “expresses no concern with transactions in uncovered securities” and “maintains state legal authority to address them.” Accordingly, the Court determined that SLUSA does not deprive state courts of jurisdiction to adjudicate in this area of state concern.

The Court further held that SLUSA does not alter the Securities Act’s general prohibition against removing state court actions brought under that statute to federal court and also does not authorize removal of federal law class actions.

This summary can be found in the June 2018 issue of Inside the Courts.