New York Litigation partner Jonathan Rotenberg and Securities Litigation partner Bruce Vanyo, Los Angeles Securities Litigation partner Richard Zelichov, and Chicago Securities Litigation partner Michael Lohnes published a recent article in D&O Diary about the impact and future developments resulting from the 2018 US Supreme Court Case, Cyan v. Beaver County Employees’ Retirement Fund.
In Cyan, the Supreme Court held that state courts retain concurrent jurisdiction for liability actions under the Securities Act of 1933 and, as such, defendants can face the prospect of parallel litigation in both federal and state court, with no way to consolidate proceedings. Cyan’s ruling has, since, resulted in an increase in case filings in state court related to the Securities Act, with 35 claims in 2018 and 49 in 2019, compared to 19 filings from 2015–2017.
Jonathan, Bruce, Richard and Michael discuss a recent ruling by the California Court of Appeals to uphold dismissal of a Securities Act case in City of Warren Police and Fire Retirement System v. Natera Inc., which became the first-ever published state appellate decision in a Section 11 case to affirm dismissal of Securities Act claims on the pleadings. The ruling demonstrates a shift among state courts in their attitudes towards Securities Act claims and provides an important precedent for issuers who argue to dismiss pleadings.
Our attorneys also discuss how in spite of the Reform Act discovery stay, which protects defendants against lawsuits in securities cases that are filed to obtain discovery, there is an increase among state courts to impose a discovery stay, regardless of the reason. The significance of this, they write, is “it will deter at least some of the forum shopping that resulted from Cyan and will prevent plaintiffs from quickly getting their hands on discovery that they can use in an amended complaint.”
Another significant recent development that our attorneys discuss is the Delaware Supreme Court’s decision to hold that articles of incorporation designating federal courts as the exclusive forum for Securities Act claims of 1933 are facially valid under Delaware law.
“In order to counteract the impact of Cyan, IPO companies began adopting exclusive Federal Forum Provisions (“FFPs”) expressly covering Securities Act claims as a way to steer the claims into federal court or provide for a means of dismissal if a plaintiff files such claims in state court,” Jonathan, Bruce, Richard and Michael write.
While the Delaware decision undercut plaintiffs’ efforts to take advantage through Cyan, it only addressed the facial validity of FFP, covering Securities Act claims generally, and does not help address FFPs on a case-by-case basis.
Jonathan, Bruce, Richard and Michael concluded that, since Cyan’s ruling, it is possible that the increased willingness among state courts to grant motions to dismiss and stay discovery in Securities Act cases will “…have an impact on both how many Securities Act cases are filed in state court and in the number of those cases that are dismissed at the pleading without discovery.”
Read, “Section 11: Cases in State Court Post-Cyan – Is the Tide Turning?” in its entirety.