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New York Commercial Division Justices Provide Dueling Approaches to Discovery Stays in State Court Securities Litigation

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. SeeEverquote, 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. See2019 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.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Kate Ross, Corporate Attorney, Sheppard Mullin Law Firm
Associate

Kate Ross is an associate in the Government Contracts, Investigations & International Trade practice Group in the firm's New York office.

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