High Court Attempts to Sort Out Concurrent Jurisdiction Confusion over IPO Suits


Supreme Court Blog

It says "a covered security as set forth in subsection (b)." Now, there are commas around the (b), around that phrase I just read, I agree, but the most natural thing is it's referring to those covered actions that are referred to in (b). And what it refers to in (b) are covered actions all right.”

Oral arguments, Cyan, Inc. v. Beaver County Employees Retirement Fund, Justice Stephen Breyer (Nov. 28, 2017). 

“Section 77p does not say that there is an exception to concurrent jurisdiction for all covered class actions. Nor does it create its exception by referring to the definition of covered class actions in section 77p(f)(2). Instead, it refers to section 77p without limitation, and creates an exception to concurrent jurisdiction only as provided in section 77p ‘with respect to covered class actions.’”

Luther v. Countrywide Financial Corp. , 195 Cal.App.4th 789, 125 Cal.Rptr.3d 716 (App. 2d Dist. 2011).

"Our late colleague (Justice Scalia) wrote a book called Reading Law, which provides guidance about how you read statutes. And I looked through that to see what we are supposed to do when Congress writes gibberish. And that's what we have here. You said it's obtuse. That's flattering. And we have very smart lawyers here who have come up with creative interpretations, but this is gibberish. It's—it is just gibberish.”

Oral arguments, Cyan, Inc. v. Beaver County Employees Retirement Fund, Justice Samuel Alito (Nov. 28, 2017).

“If the law supposes that," said Mr. Bumble, squeezing his hat emphatically in both hands, "the law is a ass—a idiot.”

Charles Dickens, Oliver Twist.

 

Cases before the U.S. Supreme Court often involve the use of powerful and evocative advocacy on both sides in an attempt to persuade the justices as they wrestle with some of the most complex and significant legal issues of the day.

Cyan, Inc. v. Beaver County Employees Retirement Fund is not one of those cases.

Rather, Cyan, involves the court’s struggles with a statute that is, to put it mildly, awkwardly drafted, and some equally confusing attempts by the lower federal courts and the state courts to deal with the perplexing statutory mandate. The Supreme Court heard oral argument in November 2017, and the case is currently under consideration. The question sounds simple enough, do state courts have jurisdiction over actions brought under the Securities Act, but simple the answer is not.

The case has its roots in §22(a) of the Securities Act.  Passed in the wake of the epic market crash of 1929, the Securities Act sought to restore investor confidence by requiring issuers to provide significant public disclosures concerning their offerings. The statute also allowed local courts to share jurisdiction over suits arising from false or misleading registration statements with the federal courts (as compared to the Exchange Act, which placed jurisdiction exclusively in the federal courts).

This system of concurrent jurisdiction over Securities Act claims worked well until the late 1990s. In 1995, Congress passed (over a presidential veto) the Private Securities Litigation Reform Act (PSLRA). The PSLRA, designed to limit frivolous securities lawsuits, imposed heightened pleading standards on private fraud actions and added other procedural restrictions, including procedures for selecting lead plaintiffs and counsel. Perhaps the most significant change to the course of private securities litigation was the PSLRA’s automatic stay of discovery pending any motion to dismiss. The discovery stay is incredibly significant because it is not uncommon for a class action to take at least two years to wend its way through the Rule 12(b)(6) stage. Discovery during this period could be a major financial burden on issuer defendants. The PSLRA also requires courts to include findings regarding compliance with Rule 11 under the Federal Rules of Civil Procedure and issue sanctions for any violation.

Not to be deterred, however, clever plaintiffs’ lawyers began to circumvent the PSLRA by recasting their federal securities law actions as state law suits. Congress caught up by passing the Securities Litigation Uniform Standards Act. The draftsmanship of the statute certainly could have used a firmer editorial hand, a good proofreader, and perhaps a review by a skilled puzzlemaker.

The review begins back at §22(a), which provides that the federal district courts shall have jurisdiction of actions “concurrent with State and Territorial courts, except as provided in [§16] of this title with respect to covered class actions.” [SLUSA added the bolded language.]

The problem comes in interpreting the subsections of §16. Section 16(b) seems rather clear, as it acts to bar state courts from hearing class action claims based on state law that could have been brought in federal court under the federal securities statutes. That clarity disappears when you move to §16(c):

Any covered class action brought in any State court involving a covered security, as set forth in subsection (b) of this section, shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b) of this section.

It appears on its face to this writer that the “as set forth in subsection (b)” language modifies the “Any covered class action” and limits the phrase, and removability, to suits based on state law. The petition for certiorari, and an amicus brief filed by several law professors definitely disagree with me, as they see §16(c) as effectively stripping state courts of jurisdiction over all securities claims whether based on state law or the Securities Act.

The impact is significant. Even though Congress added the PSLRA, with its heightened pleading standards and procedural restrictions to both the Securities Act and the Exchange Act, the provisions apply only to claims “brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.” State law claims would have no automatic discovery stay, and local rules would govern matters such as class certification and the selection of lead plaintiffs. As cited by the respondent in their brief, however, quoting a Supreme Court decision in Tafflin v. Levitt, 493 U.S. 455, 466 (1990), “there is nothing unusual about recognizing ‘concurrent state court jurisdiction even where federal law provided for special procedural mechanisms’ in federal court.”

The justices did not appear to be particularly convinced by any of the positions advanced at oral argument. Cyan urged the justices to find a lack of state court jurisdiction. In response, Justice Kagan stated that this reading “really does seem at odds with the statutory text” and Justice Ginsburg described the approach as an obtuse way for Congress to reach this result if that was the intent.

Allon Kedem, an assistant solicitor general representing the government as an amicus, and Thomas Goldstein, counsel for the plaintiffs below, didn't fare much better with the justices. Goldstein argued that California state courts could hear Securities Act cases, prompting Justice Gorsuch to ask “aren't we stuck with gibberish your way too?” In response to Kedem's middle ground assertion that state courts maintained jurisdiction but that such claims were subject to removal, a frustrated Justice Alito asked “do you really think that whoever wrote this removal provision thought about all this stuff that you're telling us now?” The justice added that “if they set out to do what you say this does, and they decided this is the way we're going to do it, I think it's so far from reality that it really strains credulity.”

Justice Alito summed up the frustrations of the Court, and many a practitioner, who have tried to decode the confusing statutory language when he stated:

I'm serious. Is there a certain point at which we say this means nothing, we can't figure out what it means, and, therefore, it has no effect, it means nothing? Can we not, do we have to say it means something?

The Court is expected to muddle its way out of the morass later this year.