New York State Court Holds PSLRA Bars Discovery In State Securities Act Cases Pending A Motion To Dismiss
On August 7, 2019, New York State Supreme Court Justice Andrew Borrok issued a stay of discovery, pending resolution of a motion to dismiss, in a putative class action asserting claims under the Securities Act of 1933. In re Everquote, Inc. Sec. Litig., Index No. 651177/2019, 2019 WL 3686065 (Sup. Ct. N.Y. Cnty. Aug. 7, 2019). Justice Borrok held that the automatic discovery stay under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) applied to Securities Act claims brought in state court.
This appears to be the first New York State Court decision, following the U.S. Supreme Court’s holding in Cyan Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), that applies a discovery stay under the PSLRA. While the U.S. Supreme Court’s Cyan decision made clear that Securities Act class actions can be heard in state courts, it did not address what rules of procedure would govern such actions. In determining that the discovery stay did apply, Justice Borrok reasoned that the plain text of the PSLRA “expressly provides that discovery is stayed during a pending motion to dismiss ‘[i]n any private action arising under this subchapter,’” and that nothing in the PSLRA suggested that the stay would only apply in federal court. Id. at *7.
Justice Borrok rejected arguments from plaintiffs that the PSLRA’s invocation of the Federal Rules of Civil Procedure in connection with discovery obligations implied that the PSLRA only governed in actions brought in federal court. Id. And Justice Borrok also rejected plaintiffs’ contention that if the discovery stay applied, state court procedures—such as preliminary conferences and mediation—could not occur during the stay. The Court noted that discovery can be stayed for a variety of reasons, and in the PSLRA, Congress was creating rules for both federal and state courts to follow in adjudicating claims under the Securities Act. Id. at *8.
In reaching this conclusion, Justice Borrok also recognized that this holding was in conflict with a decision issued by New York Supreme Court Justice Saliann Scarpulla, who had reasoned that applying the PSLRA discovery stay would undermine the U.S. Supreme Court’s decision in Cyan allowing Securities Act claims to be pursued in state courts, although Justice Scarpulla’s decision acknowledged that state courts are divided on this question. Id. at *2. Given the disagreement among the Justices of the New York City trial court, and among state courts more generally, it will be interesting to watch whether the New York Appellate Division will have an opportunity to address the applicability of the PSLRA’s automatic stay of discovery to state court Securities Act cases.