Section 11 of the Securities Act of 1933 gives investors a cause of action against issuers, directors, underwriters, and other professionals for making or omitting an untrue statement of material fact in a registration statement. 15 U.S.C. § 77k(a). The Securities Act also provides that both federal and state courts have jurisdiction over lawsuits alleging violations of the Securities Act. 15 U.S.C. § 77v(a). In 2018, the Supreme Court decided in Cyan, Inc. v. Beaver County Employees Retirement Fund that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of jurisdiction over class actions alleging violations of the Securities Act and does not permit defendants to remove such actions to federal court. 138 S. Ct. 1061, 1066 (2018).
Since the Supreme Court’s Cyan decision, at least two class actions asserting Section 11 claims have been brought in Texas state court. Macomb County Employee’s Retirement Sys. v. Venator Materials PLC, No. DC-19-02030, is currently pending in the 134th District Court in Dallas County, and Curti v. McDermott International, Inc., No. 2019-15473, is currently pending in the 113th District Court in Harris County. These cases were filled in February and March 2019, respectively. Two additional lawsuits were brought prior to the Supreme Court’s ruling in Cyan, were removed to federal court, stayed pending the outcome of Cyan, and then remanded back to Texas state court following Cyan. Those two cases are Rezko v. XBiotech, No. D-1-GN-17-003063, which was brought in the 200th District Court in Travis County, and St. Lucie County Fire District FF Fund v. Southwestern Energy Co., No. 2016-70, which was brought in the 61st District Court in Harris County. These cases illustrate a couple of early procedural measures available to defendants who are forced to defend these Section 11 cases in Texas state court.
First, in three of the four cases, the lawsuit was brought in the county where the issuer was headquartered. If the corporate defendant, however, is not incorporated in Texas and does not have its principal place of business in Texas, then a challenge to personal jurisdiction may be appropriate. That was the case in Venator Materials, where the issuer, underwriters, and individual defendants filed special appearances, which is the mechanism to challenge personal jurisdiction in Texas state court. TEX. R. CIV. P. 120a. While the Securities Act provides for nationwide service of process, which effectively provides for any federal district court to exercise personal jurisdiction over a defendant, multiple cases conclude that the nationwide service of process provision does not apply in state court. See, e.g., Niitsoo v. Alpha Nat’l Res., 2015 WL 356970, at *4 (W. Va. Cir. Ct. Jan. 8, 2015); Kelly v. McKesson HBOC, Inc., 2002 WL 88939, at *19 (Del. Super. Ct. Jan. 17, 2002). It remains to be seen how a Texas court will interpret this provision.
Second, in cases where the defendant is unable or unwilling to challenge personal jurisdiction, defendants should consider bringing a motion to dismiss under Texas Rule of Civil Procedure 91a. This rule permits a defendant to move to dismiss a cause of action on the ground that “it has no basis in law or fact.” TEX. R. CIV. P. 91a.1. A cause of action has no basis in law “if the allegations, taken as true, together with inferences reasonably drawn from them do not entitle the claimant to the relief sought.” Id. A cause of action has no basis in fact “if no reasonable person could believe the facts pleaded.” Many Texas intermediate appellate courts have likened Texas Rule of Civil Procedure 91a to Federal Rule of Civil Procedure 12(b)(6). See, e.g., In re Butt, 495 S.W.3d 455, 461 (Tex. App. 2016, no pet.) But there is one crucial difference. The party that loses a 91a motion to dismiss must pay to the prevailing party “all costs and reasonable and necessary attorney fees incurred” in asserting or responding to the motion. TEX. R. CIV. P. 91a.7. The defendants in McDermott International, XBiotech, and Southwestern Energy Co. filed Rule 91a motions to dismiss, and in XBiotech, the trial court granted the defendants’ Rule 91a motion to dismiss.
Barring dismissal, the next major steps in the Section 11 cases would be class certification under Texas Rule of Civil Procedure 42 and summary judgment under Rule 166a. None of these cases have progressed that far. In light of the Supreme Court’s ruling in Cyan, we can expect additional class actions asserting claims exclusively under the Securities Act will be brought in Texas state court. Defendants, however, should not forget that federal courts have exclusive jurisdiction for claims brought under the Securities Exchange Act of 1934. 15 U.S.C. § 78aa(a). Accordingly, lawsuits brought in Texas state court that assert Exchange Act claims (even in combination with Securities Act claims) are still removable to federal court, even after Cyan.
Since the Supreme Court’s Cyan decision, at least two class actions asserting Section 11 claims have been brought in Texas state court. Macomb County Employee’s Retirement Sys. v. Venator Materials PLC, No. DC-19-02030, is currently pending in the 134th District Court in Dallas County, and Curti v. McDermott International, Inc., No. 2019-15473, is currently pending in the 113th District Court in Harris County. These cases were filled in February and March 2019, respectively. Two additional lawsuits were brought prior to the Supreme Court’s ruling in Cyan, were removed to federal court, stayed pending the outcome of Cyan, and then remanded back to Texas state court following Cyan. Those two cases are Rezko v. XBiotech, No. D-1-GN-17-003063, which was brought in the 200th District Court in Travis County, and St. Lucie County Fire District FF Fund v. Southwestern Energy Co., No. 2016-70, which was brought in the 61st District Court in Harris County. These cases illustrate a couple of early procedural measures available to defendants who are forced to defend these Section 11 cases in Texas state court.
First, in three of the four cases, the lawsuit was brought in the county where the issuer was headquartered. If the corporate defendant, however, is not incorporated in Texas and does not have its principal place of business in Texas, then a challenge to personal jurisdiction may be appropriate. That was the case in Venator Materials, where the issuer, underwriters, and individual defendants filed special appearances, which is the mechanism to challenge personal jurisdiction in Texas state court. TEX. R. CIV. P. 120a. While the Securities Act provides for nationwide service of process, which effectively provides for any federal district court to exercise personal jurisdiction over a defendant, multiple cases conclude that the nationwide service of process provision does not apply in state court. See, e.g., Niitsoo v. Alpha Nat’l Res., 2015 WL 356970, at *4 (W. Va. Cir. Ct. Jan. 8, 2015); Kelly v. McKesson HBOC, Inc., 2002 WL 88939, at *19 (Del. Super. Ct. Jan. 17, 2002). It remains to be seen how a Texas court will interpret this provision.
Second, in cases where the defendant is unable or unwilling to challenge personal jurisdiction, defendants should consider bringing a motion to dismiss under Texas Rule of Civil Procedure 91a. This rule permits a defendant to move to dismiss a cause of action on the ground that “it has no basis in law or fact.” TEX. R. CIV. P. 91a.1. A cause of action has no basis in law “if the allegations, taken as true, together with inferences reasonably drawn from them do not entitle the claimant to the relief sought.” Id. A cause of action has no basis in fact “if no reasonable person could believe the facts pleaded.” Many Texas intermediate appellate courts have likened Texas Rule of Civil Procedure 91a to Federal Rule of Civil Procedure 12(b)(6). See, e.g., In re Butt, 495 S.W.3d 455, 461 (Tex. App. 2016, no pet.) But there is one crucial difference. The party that loses a 91a motion to dismiss must pay to the prevailing party “all costs and reasonable and necessary attorney fees incurred” in asserting or responding to the motion. TEX. R. CIV. P. 91a.7. The defendants in McDermott International, XBiotech, and Southwestern Energy Co. filed Rule 91a motions to dismiss, and in XBiotech, the trial court granted the defendants’ Rule 91a motion to dismiss.
Barring dismissal, the next major steps in the Section 11 cases would be class certification under Texas Rule of Civil Procedure 42 and summary judgment under Rule 166a. None of these cases have progressed that far. In light of the Supreme Court’s ruling in Cyan, we can expect additional class actions asserting claims exclusively under the Securities Act will be brought in Texas state court. Defendants, however, should not forget that federal courts have exclusive jurisdiction for claims brought under the Securities Exchange Act of 1934. 15 U.S.C. § 78aa(a). Accordingly, lawsuits brought in Texas state court that assert Exchange Act claims (even in combination with Securities Act claims) are still removable to federal court, even after Cyan.
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