On May 15, 2019, Judge Charles T. Lee of the Connecticut Superior Court at Stamford granted a protective order staying discovery pending a motion to strike in an action alleging violations of the Securities Act of 1933 (the “Securities Act”) against an issuer, certain officers and the underwriters (“Defendants”) in connection with an initial public offering. City of Livonia Retiree Health & Disability Benefits Plan v. Pitney Bowes Inc.
, No. X08 FST CV 18 6038160 S (Conn. Super. Ct. May 15, 2019). In Cyan Inc. v. Beaver Cty. Employees Ret. Fund
, 138 S. Ct. 1061 (2018) (“Cyan
”), the Supreme Court of the United States held that the substantive protections of the Private Securities Litigation Reform Act (“PSLRA”) necessarily apply “wherever” an action proceeds. Relying on this, the Connecticut court determined that 15 U.S.C. § 77z-1(b)(1) of the Securities Act, which provides for a stay of discovery during the pendency of a motion to dismiss, applies to actions filed in state court. Though there have been decisions going both ways on the issue of whether the PSLRA discovery stay applies in state court, this is the first opinion to analyze the issue thoroughly in the wake of Cyan
and should serve as persuasive authority in other jurisdictions.
The lawsuit was brought by purchasers of two series of notes offered in connection with an initial public offering. Defendants moved to strike the complaint under Connecticut Practice Book Section 10-39 (a), and moved for an automatic stay of discovery under Section 77z-1(b)(1), arguing that the motion to strike was equivalent to a motion to dismiss under Section 12(b)(6) of the Federal Rules of Civil Procedure (“FRCP”), and that, in any event, defendants had good cause for a protective order under Connecticut law. Plaintiff maintained that the PSLRA discovery stay only applies to lawsuits in federal court and that the provision did not apply because a motion to strike is not comparable to a motion to dismiss in federal court. Plaintiff also argued defendants lacked good cause.
In evaluating whether the PSLRA discovery stay applies in state court, the court interpreted the plain language of the statute, concluding that the statute was not ambiguous and that it applies in state court. The statute provides:
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)(1). The court reasoned as follows:
- The phrase “this subchapter” refers to the Securities Act and confers concurrent jurisdiction on state and federal courts.
- “[A]ny private action arising under this subchapter” is not limited to actions in federal court, and contrasts with the language of Section 77z-l(a) (Private Class Actions) (1), which explicitly applies to a “private action … brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.”
- In Cyan, the Supreme Court observed that similar language contained in Section 77z-2 (c)(l) of the PSLRA, which provides a “safe harbor” for forward-looking statements “in any action arising under this subchapter,” applied in both state and federal court. This gave rise to a strong inference that Section 77z-l(b)(l) also was meant to apply in state and federal court.
- Section 77z-2(f) (Stay pending decision on motion), which provides a discovery stay during the pendency of a summary judgment motion, also contains similar language, suggesting that there is a substantive interest in staying discovery pending a motion relevant to determining the merits of an action.
The court rejected plaintiff’s argument that a motion to strike was not equivalent to a motion to dismiss in federal court. It reasoned that the fact that the losing party may be allowed to re-plead its claims after a motion to strike does not undermine the point that the motion to strike challenges the merits of a claim based on the sufficiency of the pleading, which is the same purpose of a motion to dismiss in federal court. The court also disagreed that state law should govern whether a discovery stay should be granted because it is a procedural issue, holding that it was not free to depart from United States Supreme Court precedent governing the construction and application of the federal statute.
Finally, the court found that defendants in any event demonstrated good cause for a stay under Connecticut Practice Book Section 13-5, because the requested discovery was extensive and may be unnecessary given the pendency of the motion to strike, and because plaintiff failed to demonstrate any prejudice.