New York Justices Reach Inconsistent Results Post-Cyan on Automatic Discovery Stay

New York courts have taken varying positions in three recent decisions addressing whether defendants in Securities Act of 1933 (Securities Act) suits brought in state court are entitled to an automatic stay of discovery pending the outcome of a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (the PSLRA), which suggests that this issue may soon receive the attention of the appellate courts.

Background

Congress passed the Securities Act to promote honest business practices in the securities markets by creating a private right of action against issuers, officers, directors, and underwriters involved in the securities offering process. The Securities Act provided for concurrent federal and state jurisdiction for claims brought under the Act and prohibited removal of cases from state to federal court. 15 U.S.C. § 77v(a).

In 1995, Congress amended the Securities Act as well as the Securities Exchange Act of 1934 (the primary mechanism for bringing anti-fraud class action suits) by enacting the PSLRA to address perceived abuses in securities litigation by, among other things, providing for an automatic stay of discovery pending the outcome of motions to dismiss. Specifically, the PSLRA provides that, "In any private action arising under this subchapter, all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds, upon the motion of any party, that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." 15 U.S.C. § 77z-1(b).

In order to avoid these procedural reforms, plaintiffs began bringing claims in state court. In response, Congress passed the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to "prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation" by making federal courts the "exclusive venue for most securities fraud actions." See H.R. Rep. No. 105-803, at 13, 15. SLUSA amended the Securities Act by barring "covered class action" state law securities claims and otherwise authorizing their removal to ensure dismissal. 15 U.S.C. § 77p(b). The language and scope of this amendment generated much confusion and litigation in both federal and state courts.

On March 20, 2018, the US Supreme Court unanimously held in Cyan, Inc. v. Beaver Cnty. Employees Ret. Fund, 138 S. Ct. 1061 (2018), that post-SLUSA, state courts maintained jurisdiction to adjudicate class actions alleging only Securities Act violations and that removal of these actions was prohibited.¹ In so holding, the Court did not address whether the PSLRA's stay of discovery applied to Securities Act suits brought in state court.

After the Supreme Court's decision in Cyan, state courts have inconsistently applied the PSLRA's discovery stay in state court Securities Act actions. Compare Switzer v Hambrecht & Co., L.L.C., No. CGC-18-564904, 2018 WL 4704776, at *1 (Cal. Super. Sep. 19, 2018) (declining to apply PSLRA stay of discovery because it "only applies to actions filed in federal court, not state court"), with City of Livonia Retiree Health and Disability Benefits Plan et al. v. Pitney Bowes Inc. et al., No. X08-FST-CV-18-6038160-S (Conn. Sup. Ct. May 17, 2019) (granting stay of discovery pending motion to dismiss under the PSLRA).²

New York Weighs In

In three recent cases filed after Cyan, New York state courts have addressed this issue and reached conflicting results. In two separate rulings in In re PPDAI Group Securities Litigation, Index No. 654482/2018, 2019 WL 2751278 (Sup. Ct. N.Y. Cnty. July 1, 2019) and In re Dentsply Sirona, Inc. v. XXX, Index No. 155393/2018, 2019 WL 3526142 (Sup. Ct. N.Y. Cnty. Aug. 2, 2019), Supreme Court Justice Saliann Scarpulla held that the PSLRA's automatic discovery stay is not applicable to state court actions, reasoning that to hold otherwise would "undermine Cyan's holding" that Securities Act cases can proceed in state courts. The defendants in the In re PPDAI Group Securities Litigation appealed the court's decision to the Appellate Division, First Department and moved for a stay pending appeal, though the parties subsequently stipulated to stay discovery pending the outcome of defendants' motion to dismiss and defendants agreed to withdraw their motion for a stay pending appeal. Defendants did not withdraw their appeal and reserved their rights to perfect.  Defendants have not yet appealed in In re Dentsply Sirona, Inc.

In a decision on August 7, 2019, Justice Andrew Borrok "respectfully disagree[d] with this reasoning and conclusion" of Justice Scarpulla and stayed discovery in In re Everquote, Inc. Securities Litigation, Index No. 651177/2019, 2019 WL 3686065 (Sup. Ct. N.Y. Cnty. Aug. 7, 2019). Justice Borrok reasoned that in Cyan, the Supreme Court only addressed the jurisdictional issue of whether SLUSA stripped state courts of concurrent jurisdiction to adjudicate Securities Act claims and whether removal of such claims is permitted and not the procedural issue regarding the stay of discovery pending a decision on a motion to dismiss. Justice Borrok concluded that Cyan does not control whether the PSLRA's automatic stay of discovery applies to pending motions to dismiss in state court.

Justice Borrok reasoned that the "simple, plain, and unambiguous" language of the PSLRA expressly provides that discovery is stayed pending a motion to dismiss "[i]n any private action arising under this subchapter." 15 U.S.C. § 77z-1(b). He further noted that "Congress did provide that discovery could go forward notwithstanding the [PSLRA'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" and that nowhere in this provision does the statute indicate that it only applies to actions brought in federal court. In re Everquote, 2019 WL 3686065, at *7; 15 U.S.C. § 77z-1(b). Justice Borrok concluded therefore that the PSLRA "does not say that the automatic stay is limited to claims brought pursuant to the [Securities Act] in federal court." In re Everquote, 2019 WL 3686065, at *7. Accordingly, Justice Borrok granted a stay of discovery pursuant to the PSLRA pending the outcome of a motion to dismiss. Plaintiffs have yet to appeal this decision.

Implications

We expect to see a continuing uptick in state court Securities Act cases following the Supreme Court's decision in Cyan which will likely highlight the divide over the application of the PSLRA's automatic stay of discovery.³ Because no appellate courts have yet to weigh in on this issue, the potential remains that more uniform decisions on the application of the automatic stay of discovery going forward could curb the increase in Securities Act suits filed in state courts.

*Stephanna Szotkowski also co-authored this Advisory. 

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.