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(Article from Securities Law Alert, August/September 2019) 

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In Cyan v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018), the Supreme Court held that SLUSA did not “strip state courts of jurisdiction over class actions alleging violations of only the Securities Act of 1933” (the “1933 Act” or “’33 Act”).[1] However, the Court did not address whether all of the procedural rules governing 1933 Act claims brought in federal court also apply when plaintiffs bring such claims in state court. New York state courts have since reached differing conclusions on whether the PSLRA’s stay of discovery during a pending motion to dismiss applies in state court actions asserting 1933 Act claims.[2] Compare Matter of PPDAI Grp. Sec. Litig., 2019 WL 2751278 (N.Y. Sup. Ct. July 1, 2019) (Scarpulla, J.) (PSLRA’s discovery stay inapplicable in state court actions), and In re Dentsply Sirona, Inc. S’holders Litig., 2019 WL 3526142 (N.Y. Sup. Ct. Aug. 2, 2019) (Scarpulla, J.) (same), with In re Everquote, Inc. Sec. Litig., 2019 WL 3686065 (N.Y. Sup. Ct. Aug. 7, 2019) (Borrok, J.) (PSLRA’s discovery stay applies in state court actions). These rulings have furthered a growing division of authority on this question.[3] 

In Matter of PPDAI, 2019 WL 2751278, the court found that “[a]pplication of the federal PSLRA automatic discovery stay would undermine Cyan’s holding that ’33 Act cases may be heard in state courts.” The court therefore concluded that “the PSLRA’s automatic discovery stay is not applicable to an action brought in New York State court.” In reaching this conclusion, the court noted that “in the Commercial Division discovery generally continues during motion practice.” In In re Denstply Sirona, 2019 WL 3526142, a decision issued by the same judge, the court reached the same conclusion.

But in In re Everquote, 2019 WL 3686065, a different New York state court judge applied the PSLRA’s discovery stay during a pending motion to dismiss an action alleging 1933 Act claims. The court found that Cyan “does not control the outcome of” whether PSLRA’s discovery stay applies in state court actions. But the court found Cyan “helpful” insofar as it “underscores the most basic and fundamental rule in statutory interpretation—the court must start with the express language of the statute and presume that it means what it says.” The Everquote court explained that “[t]he simple, plain and unambiguous language” [of the PSLRA] “expressly provides that discovery is stayed during a pending motion to dismiss ‘in any private action arising under this subchapter.’” Id. (quoting 15 U.S.C. § 77z-1(b)(1)). The court observed that “[t]he statute simply does not say that the automatic stay is limited to claims brought pursuant to the 1933 Act in federal court.” Quoting Cyan, the court found that Section 77z-1(b)(1) “says what it says—or perhaps better put here, does not say what it does not say.”

The Everquote court rejected plaintiffs’ contention that “state court practices and procedures would be constrained” if the PSLRA’s discovery stay were to apply in state court actions. The court explained that “[t]his is not an issue of federal common law being applied to supply a rule of decision.” Rather, “[i]t was Congress that created the specific rights covered by the 1933 Act including affording concurrent jurisdiction to state courts to adjudicate claims brought under the 1933 Act.” The court found that “the critical issue is not how a stay of discovery squares in the abstract with either Commercial Division Rule 11 or CPLR 3214 or case assignment.” Instead, “the controlling issue is how this court implements the congressional mandate regarding how it is to manage 1933 Act claims that find their way into state courts.” The court held that this “mandate requires a stay” during a pending motion to dismiss when plaintiffs bring 1933 Act claims in state courts.

The Everquote court reasoned that holding otherwise would “run afoul of the well-recognized purpose of [the PSLRA] and SLUSA.” The court explained that the “specific abuses that Congress decided to curtail in enacting the [PSLRA] . . . includ[ed] the filing of lawsuits and making significant discovery requests in otherwise meritless lawsuits (i.e., lawsuits that will not survive a motion to dismiss) in the hope of encouraging early settlement.” The court found that “Congress enacted the automatic stay of discovery during a pending motion to dismiss to address this concern.” The court determined that there “simply is no basis to find that Congress intended for this provision to only apply to actions brought in federal court.” The court observed that “a divergence in the application of the [PSLRA] discovery stay in state and federal court would create the undesirable . . .  and absurd incentive for lawsuits brought under the 1933 Act to be brought in state court as opposed to federal court to avoid the very protection supporting the enactment of the [PSLRA].” The court found that this would “confound[] Congress’ acknowledged intention that the lion’s share of securities litigation would occur in the federal courts.”