Cyan Decided

The U.S. Supreme Court has issued a decision in the Cyan v. Beaver County Employees Retirement Fund case holding that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) does not divest state courts of jurisdiction over class actions asserting claims arising under the Securities Act of 1933 (e.g., claims alleging a material misstatement in a registration statement).  It is a unanimous decision authored by Justice Kagan.

Cases alleging 1933 Act claims historically have enjoyed concurrent jurisdiction in state or federal court.  In Cyan, the court considered whether SLUSA’s text and legislative purpose mandated that these cases – if brought as class actions – must be heard in federal court.  There was good reason to believe that Congress may have intended that outcome.  The overall purpose of SLUSA was to prohibit plaintiffs from bringing securities class actions based on state law.  As Justice Alito suggested at the Cyan oral argument, why would Congress want to bar “a claim in state court under a state cause of action that mirrors the ’33 Act” but then allow “the state court to be able to entertain the real thing, an actual ’33 Act [claim].”

In the Cyan decision, however, the Court concluded that the “recalcitrant statutory language” did not allow it to conclude that SLUSA had divested state courts of jurisdiction.  SLUSA modified the concurrent jurisdiction provision in the 1933 Act by adding an except clause – “except as provided in section 77p of this title with respect to covered class actions.”  Defendants argued that the except clause’s reference to “covered class actions” was intended to direct the reader to the definition of “covered class actions” in section 77p(f)(2), which defines that term to mean any suit (whether based on state or federal law) seeking damages on behalf of more than 50 persons.   In other words, SLUSA made concurrent jurisdiction unavailable for class actions.

The Court disagreed.  First, the Court noted that Congress could have expressly pointed to the “covered class action” definition in its except clause, but instead referred generally to section 77p.  Given that section 77p makes no specific reference to securities class actions based on federal law, there is no reason to think that Congress intended its except clause to be read to alter the existence of state court jurisdiction for those cases.  Second, the Court found that “the definitional paragraph on which Cyan relies cannot be read to ‘provide[]’ an ‘except[ion]’ to the rule of concurrent jurisdiction” because a “definition does not provide an exception, but instead gives meaning to a term—and Congress well knows the difference between those two functions.”  To find otherwise would be to conclude that Congress decided to make a radical change to the securities laws through a conforming statutory amendment and Congress does not “hide elephants in mouseholes.”

The Court also held that leaving concurrent jurisdiction intact does not undermine SLUSA’s objectives.  SLUSA’s primary purpose of barring state-law securities class actions “does not depend on stripping state courts of jurisdiction over 1933 Act class suits.”  Moreover, SLUSA still ensures that “the bulk of securities class actions [will] proceed in federal court – because the 1934 Act regulates all trading of securities whereas the 1933 Act addresses only securities offerings.”   While the Court conceded that its reading of the except clause leaves open the question of why Congress included that clause at all (although there are possible explanations), it found that this “does not matter” because “we have no sound basis for giving the except clause a broader reading than its language can bear.”

Holding: Judgement below affirmed.  (The Court also rejected a compromise position put forward by federal government.)

Quote of note: “[T]his Court has no license to disregard clear language based on an intuition that Congress must have intended something broader.  SLUSA did quite a bit to ‘make good on the promise of the Reform Act’ (as Cyan puts it).  If further steps are needed, they are up to Congress.”