On August 6, 2019, New York Commercial Division Justice Andrew Borrok held that the discovery stay under the Private Securities Litigation Reform Act (PSLRA) applies to Securities Act claims filed in state court, and entered an order staying discovery pending his ruling on defendants’ motion to dismiss a class action lawsuit asserting Securities Act claims. Justice Borrok’s 18-page decision represents a significant development in the law, and provides an important precedent to courts across the country addressing whether the PSLRA discovery stay applies in state court.
This issue has been hotly contested following the Supreme Court’s March 2018 ruling in Cyan, Inc. v. Beaver City Employees Retirement Fund, which confirmed that class actions brought under the Securities Act of 1933 may be filed in state court and may not be removed to federal court.1 Following Cyan, state court Securities Act filings increased dramatically. Between 2010 and 2018, plaintiffs filed only 11 class actions in state court asserting claims under the Securities Act.2 In contrast, in the first half of 2019 alone, plaintiffs filed 19 securities class actions in state courts, with more cases filed in New York (seven) than in any other state.3 In many instances, defendants now find themselves facing concurrent lawsuits asserting Securities Act claims in both state and federal court.4 Although defendants routinely move to stay the state court proceedings in favor of the federal court actions (which often contain a broader universe of claims), a recent spate of decisions from the New York Commercial Division indicate that at least some state courts are not inclined to yield to their federal counterparts.5
This has increased the importance of a critical threshold question: does the PSLRA’s automatic discovery stay apply to state court Securities Act litigation? Prior to Cyan, the handful of state courts that addressed this issue were divided on the question.6 While courts remain divided, two recent opinions from New York and Connecticut suggest that the tide may be turning toward applying the PSLRA discovery stay in state court.
In May, a Connecticut Superior Court in the Complex Litigation Docket concluded that the PSLRA discovery stay applies in state court.7 The court based its decision on a plain text reading of the PSLRA.8 Specifically, the court concluded that the relevant provision of the PSLRA was “not ambiguous and . . . its plain meaning compels the conclusion that the statute, providing for a stay of discovery during the pendency of a motion to dismiss, applies to actions commenced in state court under the Securities Act . . . .”9
Last week, Justice Borrok reached the same conclusion.10 The court wrote:
The simple, plain, and unambiguous language [of the PSLRA] expressly provides that discovery is stayed during a pending motion to dismiss “[i]n any private action arising under [the Securities Act].” To be sure, Congress did provide that discovery could go forward notwithstanding the Reform Act’s automatic stay—i.e., “upon a motion of the parties that particularized discovery is necessary to preserve evidence or to prevent undue prejudice.” Period. Full stop. [. . . . ] The statute simply does not say that the automatic stay is limited to claims brought pursuant to the 1933 Act in federal court.11
Justice Borrok hewed closely to the text of the statute. While he stayed discovery in EverQuote, where the defendants had filed a motion to dismiss, he declined to stay discovery in another Securities Act matter in which defendants had not yet filed a motion to dismiss at the time of a hearing on their motion to stay.12 (The relevant statutory language provides for a discovery stay “during the pendency of any motion to dismiss.”) Notwithstanding federal case law to the contrary, Justice Borrok concluded that the text of the PSLRA requires a motion to dismiss to be pending for the discovery stay to apply.13
To be clear, state courts—including those in New York—remain divided on the question of whether the PSLRA discovery stay applies in state court. In two decisions that immediately preceded Justice Borrok’s ruling in EverQuote, his colleague on the Commercial Division bench, Justice Saliann Scarpulla, held that the PSLRA discovery stay does not apply in state court.14 But her analysis on this issue was limited, and it was not the primary question before her.15 Justice Borrok’s decision focuses squarely on the application of the discovery stay and engages in a careful textual analysis that should prove persuasive to other courts.
In practice, issuers, underwriters, and their counsel should be aware of the recent decisions regarding the application of the PSLRA discovery stay in state court. Being forced to engage in discovery during the pendency of the motion to dismiss can be costly and distracting to senior management. Defendants in state court Securities Act actions should also consider whether they should file a notice of motion or motion to dismiss before seeking a stay of discovery under the PSLRA to better improve their prospects on the stay motion. As the last two months have shown, these considerations may be especially important when defending state court Securities Act claims.