United States: Court Grants Post-Cyan Discovery Stay In State Court Securities Class Action

Last Updated: June 17 2019
Article by Vincent A. Sama and Brendan M. Gibbons

On May 15, 2019, a Connecticut Superior Court found that defendants in a claim under the Securities Act of 1933 (Securities Act) were entitled to the mandatory discovery stay pending a motion to dismiss under the Private Securities Litigation Reform Act of 1995 (PSLRA)—a significant ruling due to its reasoning and the possibility that other state courts may follow the decision.1

Background

The Securities Act states that suits brought under the Act may be filed in either state or federal courts and includes an anti-removal provision that prevents defendants from removing a case from state to federal court.2 The Securities Act also allows for class-action suits. In 1995, in order "to stem perceived abuses of the class-action vehicle,"3 Congress amended the Securities Act and the Securities Exchange Act of 1934 (the primary mechanism for bringing anti-fraud class action suits) and enacted the PSLRA. In its discovery stay subsection, the PSLRA states: "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."4

To avoid the PSLRA's procedural reforms, such as the discovery stay, plaintiffs began bringing Securities Act suits in state courts. To make federal court the "exclusive venue for most securities fraud class actions," Congress enacted the Securities Litigation Uniform Standards Act of 1998 (SLUSA), which precludes sizeable class actions based on state law in either state or federal courts, and provides for the removal of those cases to federal court.5 Following the passage of SLUSA, district courts issued conflicting decisions on the removability of suits alleging only violations of the Securities Act, and state courts were divided over whether they retain subject matter jurisdiction over such cases.6

On March 20, 2018, the Supreme Court unanimously decided Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., holding that SLUSA neither stripped state courts of jurisdiction over class actions alleging violations of only the Securities Act nor permitted defendants to remove those actions to federal court.7 The Court did not address the applicability of the discovery stay provision found in the PSLRA on state courts. At least two other state courts have declined to stay discovery under the PSLRA, but either did not elaborate on their reasoning or found an exception to the rule.8

The Connecticut Case

In Pitney Bowes, a securities class action under the Securities Act, the Connecticut Superior Court granted defendants' motion for a protective order staying discovery during the pendency of the defendants' motion to strike, which is similar to a 12(b)(6) motion to dismiss.9 The opinion is unique because, unlike the other state court decisions, it interprets Cyan to apply the PSLRA's discovery stay to Securities Act suits in state courts.

To reach that conclusion, the court first applied the "plain meaning rule" of statutory interpretation to the PSLRA. According to the court: "The meaning of a statute shall, in the first instance, be ascertained from the text of the statute itself and its relationship to other statutes. If, after examining such text and considering such relationship, the meaning of such text is plain and unambiguous and does not yield absurd or unworkable results, extratextual evidence of the meaning of the statute shall not be considered."10

The court then examined 15 USC 77z-1(a)(1), the subsection of the PSLRA preceding the discovery stay subsection, which applies to private class actions and states that "[t]he provisions of this subsection shall apply to each private action arising under this subchapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure."11 The Court found that "this language makes clear that [the preceding subsection] applies only to actions commenced in federal court."12 In contrast, 15 USC 77z-1(b)(1), the discovery stay subsection, states, "[a]ny private action arising under this subchapter."13 The court held that, because the discovery stay subsection does not have the same language as the private class actions subsection, it is not limited to actions commenced in federal court. In other words, the discovery stay subsection is applicable to actions commenced in state court.

The court also examined 15 USC 77z-2(c)(1), the provision following the discovery stay subsection, which provides a "safe harbor" for forward-looking statements "in any action arising under this subchapter," and uses identical language as the discovery stay subsection.14 The Supreme Court in Cyan found that "some of [PSLRA]'s provisions . . . applied even when a [Securities Act] suit was brought in state court," and expressly mentioned the safe harbor subsection as an example. The safe harbor subsection also provides a stay pending a decision on a motion.15 The Pitney Bowes court found that, because the language in the discovery stay and safe harbor subsections are identical, and because the Supreme Court "held that language identical to that at issue here applies to both state and federal actions commenced under the Securities Act," the discovery stay subsection applies to "actions pending in state court as well as in federal court."16

Implications

This decision may be persuasive to other state courts because of its logical approach to statutory interpretation, as well as its application of Supreme Court precedent to the discovery stay subsection of the PSLRA. Following this decision, we expect defendants in other state courts to seek stays of discovery pending a motion to dismiss in Securities Act suits; this could be a useful litigation tactic to potentially reduce defendants' litigation costs and change the perception that state courts are more-friendly to plaintiffs in Securities Act suits.

Footnotes

1. 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) ("Pitney Bowes").

2. See 15 U.S.C. § 77v.

3. Pitney Bowes, at 4.

4. Pitney Bowes, at 3 (citing PSLRA, 15 U.S.C. § 77z).

5. Arnold & Porter Advisory: The Supreme Court Unanimously Finds That SLUSA Did Not Strip State Courts of Jurisdiction Over Class Actions Asserting Violations of the Securities Act of 1933.

6. Id.

7. Id.; Cyan, Inc. v. Beaver County Employees Retirement Fund, et al., 138 S. Ct. 1061 (2018).

8. Pitney Bowes, at 9; Switzer v. W.R. Hambrecht & Co., LLC, 2018 WL 4704776 (Cal. Sup. Ct. 2018); In re Ally Fin. Sec. Litig., Case No. 2016-013616-CB, at *3-4 (Mich. Cir. Ct. 2018).

9. Pitney Bowes, at 1, 8.

10. Id., at 5.

11. Id., at 6.

12. Id.

13. Id.

14. Id.

15. Id.

16. Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions