United States: Commercial Division Justices Provide Dueling Approaches To Discovery Stays In State Court Securities Litigation

Last Updated: August 16 2019
Article by Kate Ross

In In re Everquote, Inc. Securities Litigation, 2019 N.Y. Slip Op. 29242, No. 651177/2019, 2019 WL 3686065 (Sup. Ct. N.Y. Cnty. Aug. 7, 2019), Justice Andrew Borrok of the New York County Commercial Division stayed discovery pending a motion to dismiss a federal securities class action pursuant to the Private Securities Litigation Reform Act of 1995 (the "PSLRA"), diverging from the handful of state courts that have grappled with that statute's application since the Supreme Court's ruling last year in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S.Ct. 1061 (2018) ("Cyan"). The PSLRA provides for an automatic discovery stay pending adjudication of motions to dismiss private securities actions, and has been interpreted to be a procedural mechanism meant to curb litigation abuses in securities cases. See 15 U.S.C. § 77z(b)(1). In his decision, Justice Borrok joined the ever-growing list of judges tasked with deciding whether such mechanisms apply to state court securities litigation in the wake of Cyan.

Cyan established that state and federal courts have concurrent jurisdiction over class actions brought under the Securities and Exchange Act of 1933 (the "1933 Act"), even though certain class actions brought under state securities law are barred by the Securities Litigation Uniform Standards Act of 1988 (the "SLUSA"). 138 S. Ct. at 1069. The SLUSA was created to ensure uniform application of the PSLRA to all securities actions, such that the PSLRA's procedural protections for defendants—including the automatic discovery stay—limit frivolous cases and "vexatious" discovery. See Everquote, 2019 WL 3686065 at *2. The Cyan court held that SLUSA's express language affords jurisdiction to both state and federal courts for federal securities class actions, and only strips state courts of jurisdiction as to "covered" class actions under state securities laws that are to be removed to federal court, and in turn, dismissed. 138 S.Ct. at 1069 ("[SLUSA's text] says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.") (emphasis in original).

Since Cyan, state courts hearing 1933 Act class actions have wrestled with the extent to which the PSLRA's provisions override conflicting state procedural rules that would otherwise control. In two cases earlier this summer, Justice Saliann Scarpulla held the PSLRA's automatic discovery stay inapplicable in New York court, reasoning that the stay would undermine Cyan's grant of jurisdiction to state courts, and long-established practice in the Commercial Division wherein discovery proceeds during motion practice. See, e.g., Matter of Dentsply Sirona, Inc., 2019 N.Y. Slip Op. 32297(U), No. 155393/2018, 2019 WL 3526142, at *6 (Sup. Ct. N.Y. Cnty. Aug. 2, 2019).

However, in Everquote, Justice Borrok took the opposite approach, finding the automatic stay applicable because the PSLRA governs private federal securities actions—even in state court. There, lead plaintiff Mark Townsend, an Everquote investor, brought suit under Sections 11, 12, and 15 of the 1933 Act alleging that Everquote made false statements and omissions in advance of its IPO. Everquote owns a website that compares insurance quotes. The defendants include the company, its executives, and underwriters of the IPO. After moving to dismiss, the defendants also moved for a stay of discovery pending resolution of the motion to dismiss pursuant to the PSLRA.

Unlike Justice Scarpulla, Justice Borrok found that Cyan "d[id] not control" the question before him, as Cyan "only addressed" the issue of state courts' jurisdiction to adjudicate 1933 Act claims and whether removal of such claims is permitted. See 2019 WL 3686065 at *5. Rather, Justice Borrok ruled, the plain language of the PSLRA makes clear that the automatic stay applies in state court—indeed, in "any private action" arising thereunder—because the statute never makes the distinction that the automatic stay is limited to 1933 Act claims brought in federal court. See 15 U.S.C. 77z-1(b)(1); see also id. at *7 ("The statute says what it says—or perhaps better put here, does not say what it does not say") (quoting Cyan, 138 S.Ct. at 1069) (internal quotation marks omitted).

Although the plaintiffs contended that such a ruling would contravene state procedural standards, Justice Borrok held that this "substance/procedure" argument "miss[ed] the point." Id. at *8. Because of Congress's power under the Supremacy Clause to direct how federal statutes are to be applied, state courts hearing 1933 Act cases must conform to the federal scheme provided by the PSLRA and SLUSA, which granted those very courts jurisdiction to hear 1933 Act claims in the first place. However, Justice Borrok noted, such requirements do not wipe out otherwise-applicable state procedural rules or "dictat[e] how state courts are to run their dockets." Id.

Justice Borrok also concluded that failure to apply the automatic stay would run afoul of the purpose of the PSLRA and SLUSA, to curtail costly discovery abuses in 1933 Act cases in both state and federal courts, and to discourage forum shopping. Without the stay's application, plaintiffs would have an "absurd incentive" to bring such actions in state court as opposed to federal court, to avoid the very protections that these statutes were meant to create. Id. at *9.

Although no New York State appellate court has ruled on this issue, Justice Borrok's divergence from Justice Scarpulla's approach in Everquote foreshadows a healthy debate and the possibility that defendants in federal securities class actions can avail themselves of the PSLRA even in New York state court.

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
Events from this Firm
23 Oct 2019, Other, Dallas, United States

Marketing Wants To Do What? Sweepstakes, Influencers, Loyalty, and Other Advertising and Promotional Fun

25 Oct 2019, Webinar, Los Angeles, United States

Matthew Bonovich will be a speaker at this webinar.

State and local governments continue to incentivize renewable energy and battery storage, causing an increase in mergers and acquisitions among producers and specialized renewables.

29 Oct 2019, Seminar, California, United States

Please join us for Sheppard Mullin's Labor & Employment Law Update & Happy Hour Seminar Series. There are many new developments in California labor and employment laws that will significantly affect the way you run your day-to-day business operations.

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