On November 2, 2023, the New York Appellate Division, First Department, held that the automatic discovery stay in the Private Securities Litigation Reform Act ("PSLRA") applies to actions brought in New York state court during the pendency of a motion to dismiss, although not during any interlocutory appeal from the denial of such a motion. Camelot Event Driven Fund v. Morgan Stanley & Co., —N.Y.S.3d—, 2023 WL 7198938 (1st Dep't Nov. 2, 2023). Prior to this ruling, New York state trial courts had divided on the question of whether the PSLRA stay applies only to actions filed in federal court or also to actions filed in state court. This decision resolves that split within the First Department, which includes New York County.
In holding that the automatic discovery stay applies, the First Department held that the plain language of the PSLRA's discovery stay provision—which refers to "any private action arising under this subchapter"—meant that the stay "applies to any private action, whether brought in state or federal court." Id. at *1. The First Department contrasted that language to a different subsection of the PSLRA which referred to actions brought "pursuant to the Federal Rules of Civil Procedure," which the Court explained encompassed only actions brought in federal court. Id.
The First Department further held that the PSLRA's discovery stay does not apply after a motion to dismiss is denied, regardless of any interlocutory appeal. Id. The Court explained that the text of the statute imposes a stay "during the pendency of any motion to dismiss," which the Court interpreted as meaning only "while a motion to dismiss is awaiting disposition." Id. In addition, the Court observed that federal courts have held that "[t]he 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," which purpose is satisfied after a court has denied a motion to dismiss. Id. at *2. The Court also emphasized that, because interlocutory appeals are not permitted in federal courts, ending the discovery stay after the denial of a motion to dismiss in New York state court "maintain[s] uniformity between the federal and state systems, preventing an incentive for forum shopping." Id.
Originally published November 07, 2023.
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