Last week, the U.S. Supreme Court granted the petition for a writ of certiorari in Pivotal Software v. Tran, a case that could have significant implications for Securities Act of 1933 (Securities Act) cases brought in state courts. The Court will consider whether the provision of the Private Securities Litigation Reform Act of 1995 (PSLRA) automatically staying discovery “[i]n any private action brought under [the Securities Act] ... during the pendency of any motion to dismiss ...” applies in cases brought in state courts, as opposed to only in those brought in federal court.
Congress enacted the automatic stay provision to address the concern that, without it, securities class action plaintiffs could use burdensome discovery requests to force early settlements of meritless claims, thereby encouraging the filing of meritless actions. State courts are split as to whether the PSLRA automatic stay applies in actions brought in state courts, and the issue has arisen with increasing frequency in the wake of the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018). In Cyan, the Court affirmed that federal and state courts have concurrent jurisdiction over Securities Act claims, and that a Securities Act claim brought in state court cannot be removed to federal court. After Cyan, plaintiffs have with greater frequency filed Securities Act cases in state courts, at least in part because plaintiffs may have the potential to seek costly and burdensome discovery before the legal sufficiency of their complaints has been upheld, and possibly forcing the settlement of claims whose sufficiency has not been tested.
Despite the statute’s plain language that the automatic stay applies in “any private action” brought under the Securities Act, some state courts have nonetheless held that the automatic stay provision does not apply in actions brought in state courts. These courts have reasoned that the stay is inapplicable because (i) it is a procedural rule that should not apply in state courts; (ii) its application would ostensibly undermine the Court’s holding in Cyan; or (iii) its application would arguably be inconsistent with certain provisions of the Securities Litigation Uniform Standards Act of 1998 (SLUSA).[1] Other state courts have disagreed, holding that “in any private action” means just that, and the automatic stay provision applies regardless of whether the case was brought in federal or state court, consistent with Congress’ intent to bar burdensome discovery in legally meritless securities cases.[2]
In its petition for certiorari, Pivotal Software noted that state trial courts were divided on the issue, but those courts’ decisions were unlikely ever to be reviewed on appeal, and therefore the issue presented consistently evades appellate review. Notably, the Court granted certiorari over plaintiffs’ argument that the issue was moot because plaintiffs had eventually agreed to voluntarily stay discovery in the action below pending the trial court’s decision on defendants’ motion for demurrer (the equivalent of a motion to dismiss). Pivotal Software, which will be argued in the Court’s 2021 – 2022 term, thus permits the Supreme Court to definitively resolve this split of authority.
[1] See, e.g., In re Dentsply Sirona, Inc., No. 155393/2018, 2019 WL 3526142, at *6 (N.Y. Sup. Ct. Aug. 2, 2019); In re PPDAI Group Sec. Litig., 116 N.Y.S.3d 865, at *6-*7 (N.Y. Sup. Ct. 2019); Switzer v. W.R. Hambrecht & Co., Nos. CGC-18-564904, CGC-18-565324, 2018 WL 4704776, at *1 (Cal. Super. Ct. Sept. 19, 2018); In re Pacific Biosciences of Cal. Inc., No. CIV509210, 2012 WL 1932469 (Cal. Super. Ct. May 25, 2012).
[2] See, e.g., In re Greensky, Inc. Sec. Litig., No. 655626/2018, 2019 WL 6310525 (N.Y. Sup. Ct. Nov. 25, 2019); City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes Inc., No. X08 FST CV 18 6038160 S, 2019 WL 2293924, *4 (Conn. Super. May 15, 2019); In re Everquote, Inc. Sec. Litig., 106 N.Y.S.3d 828, 828 (N.Y. Sup. Ct. 2019); Milano v. Auhll, No. SB 213 476, 1996 WL 33398997, *2 (Cal. Super. Ct. Oct. 2, 1996).
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