Removing Securities Act Class Actions To Federal Court

In 1998, Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA)1 to establish national uniform standards for securities litigation. Designed to prevent evasion of the substantive and procedural safeguards imposed in the Private Securities Litigation Reform Act (PSLRA),2 SLUSA requires that certain securities-related class actions be brought only under federal law and, in some instances, in federal court. More than a decade later, the full impact of SLUSA on securities litigation is still not fully known. One unresolved issue that repeatedly arises under SLUSA is whether putative class actions filed in state court that assert claims only under the Securities Act of 1933 (the "Securities Act")3 may be removed to federal court. The United States District Courts that have addressed this issue are fairly evenly split for4 and against5 removability. The prohibition in 28 U.S.C. § 1447(d) against appeals of orders remanding cases to state court likely means that neither the Circuit Courts or the United States Supreme Court will resolve this issue any time soon. But, there are sound arguments that support the removability of Securities Act claims filed in state courts. Below, we discuss two of those arguments: (1) Section 16(c) of the Securities Act, as amended by SLUSA, allows the removal of Securities Act claims that are filed in state courts, and (2) SLUSA made federal courts the exclusive jurisdiction for certain class actions arising under the Securities Act.

Section 16(c) of the Securities Act Authorizes Removal of Securities Act Claims

Generally, federal claims are removable unless Congress expressly has stated otherwise.6 Before SLUSA, Section 22(a) of the Securities Act contained such a statement, limiting removal of federal claims with a wholesale bar on the removal of Securities Act cases filed in state courts of competent jurisdiction. SLUSA introduced an exception to Section 22(a)'s removal prohibitions; it now reads:

Except as provided in Section 16(c), no case arising under [the Securities] Act and brought in any State court of competent jurisdiction shall be removed to any court of the United States.7

The scope of the "[e]xcept as provided in Section 16(c)" exception to Section 22(a)'s ban on removal of Securities Act cases is hotly contested. Some courts have found that it applies only to state law securities class actions, while others have found that it applies to both state law and federal law securities class actions.8

Section 16(c) states that "[a]ny covered class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable . . . ."9 The clause "as set forth in subsection (b)" is the impetus for the competing interpretations of Section 16(c).

Section 16(b) of the Securities Act is a preclusion provision added by SLUSA; it states:

No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging €"

(1) an untrue statement or omission of a material fact in connection with the purchase or sale of a covered security; or

(2) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.10

Some courts have held that the "plain language" of Section 16(c) must mean that the cross reference to Section 16(b) imports that subsection in its entirety, meaning only state law claims precluded by Section 16(b) may be removed under Section 16(c).11 In our view, a more nuanced and natural reading of the statute recognizes that, "as set forth in subsection (b)" is an adverbial phrase modifying the verb in the...