Resolving an issue that had split the trial courts in New York (and has also divided state courts across the country), the First Department ruled yesterday that the PSLRA discovery stay applies in state court. In Camelot Event Driven Fund et al. v. Morgan Stanley & Co. et al, Case No. 2023-03270, 2023 WL 7198938 (1st Dep’t Nov. 2, 2023), the court stated that “the plain language of the statute demonstrates” that the discovery stay provision applies to “any private action, whether brought in state or federal court.”
Unlike claims pursuant to the Securities Exchange Act of 1934, over which the federal courts have exclusive jurisdiction, claims under the Securities Act of 1933 may be filed in state or federal court. (As readers of this blog likely know, 1933 Act claims typically arise out of offerings of securities, rather than after-market trading, and require a plaintiff to establish a false or misleading statement in offering materials.) Since the U.S. Supreme Court decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), which precluded removal of 1933 Act claims from state court to federal court, plaintiffs have attempted to circumvent the procedural requirements of the PSLRA, particularly, the automatic stay of discovery while a motion to dismiss is pending.
Whether or not a company and its directors and officers facing a 1933 Act claim are subject to discovery while a motion to dismiss is pending has substantial practical effect. If the burden of discovery (which is largely one-sided in such cases) can be imposed before the validity of the complaint is tested, plaintiffs can impose costs and obligations that may generate nuisance settlements untethered to the merits of a claim. Indeed, as many courts have pointed out, avoiding that circumstance is the purpose of the PSLRA discovery stay. See Camelot, No. 2023-03270 (“The purpose of the statutory stay is to prevent abusive, expensive discovery in frivolous lawsuits by postponing discovery until after the Court has sustained the legal sufficiency of the complaint.” (quoting In re Salomon Analyst Litig., 373 F. Supp 2d 252, 254-255 (S.D.N.Y. 2005))).
Following Cyan, the New York state trial courts split on whether the PSLRA discovery stay applies in actions filed in state court. In Matter of PPDAI Group Securities Litigation, 64 Misc. 3d 1208(A) (Sup. Ct. N.Y. Cnty. July 1, 2019), the court concluded that the discovery stay did not apply to actions commenced in state court, because to find otherwise would “undermine Cyan’s holding that ’33 Act cases may be heard in state courts.” By contrast, in In re Everquote, Inc. Securities Litigation, 65 Misc. 3d 226 (Sup. Ct. N.Y. Cnty. Aug. 6, 2019), the court disagreed with PPDAI and instead held that, according to the “unambiguous language” of 15 U.S.C. § 77z-1(b), the discovery stay applies in “any private action,” including those filed in state courts.
This split extends beyond New York, and in 2021, the U.S. Supreme Court agreed to hear Pivotal Software, Inc. v. Superior Court of California, which would have resolved the issue. The parties settled before oral argument, however.
The practical effect of the New York decision may be limited, at least in the immediate term. Since December 30, 2021, by Administrative Order all actions pursuant to the 1933 Act filed in New York County (i.e., Manhattan) are assigned to Justice Andrew Borrok, the author of the Everquote decision that already applied the stay in state court. The Camelot ruling nevertheless removes uncertainty and provides helpful clarification and guidance to state courts across the country regarding the application of the PSLRA discovery stay.
This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.