In its 2018 landmark decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, the U.S. Supreme Court unanimously held that state courts have concurrent subject matter jurisdiction over class actions that exclusively allege claims under the Securities Act of 1933 (“Securities Act”), and such claims cannot be removed to federal court. Since then, plaintiffs have continued flooding state courts around the country with Securities Act lawsuits in an attempt to circumvent the federal procedural requirements of the Private Securities Litigation Reform Act (“PSLRA” or “Reform Act”), including, in particular, the automatic stay of discovery before a motion to dismiss is decided.
Recently, however, in City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes Inc., the Connecticut Superior Court held that the PSLRA’s automatic discovery stay applies to Securities Act claims filed in both state and federal courts. This decision should be helpful authority for defendants—including public companies, their officers and directors, and underwriters—when seeking to stay discovery during the pendency of a motion to dismiss Securities Act claims brought in state court.
The City of Livonia Decision
In City of Livonia, plaintiff filed a purported securities class action under the Securities Act on behalf of purchasers of two series of notes offered in connection with the initial public offering of Pitney Bowes Inc. Plaintiff alleged harm arising from misrepresentations and omissions contained in the relevant registration statement and prospectus. Although defendants informed plaintiffs of their intent to file motions to strike the complaint, plaintiff served a series of requests on defendants and non-parties seeking discovery. Defendants then moved for a protective order to enforce the PSLRA’s automatic stay of discovery, 15 U.S.C. § 77z-1(b)(1), during the pendency of their motions to strike.
The key question for the court was whether the PSLRA automatic stay of discovery—which plaintiff agreed would have applied to its case had it been filed in federal court—applied to plaintiff’s Securities Act case in Connecticut state court. The Court examined the relevant language of the PSLRA, Section 77z-1(b)(1), which provides:
[i]n 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.
Judge Charles T. Lee held that the plain meaning of the phrase “any private action arising under this subchapter” compels the conclusion that the PSLRA discovery stay applies to Securities Act claims brought in state court. The Court found that “this subchapter” refers to the Securities Act of 1933, which confers “concurrent jurisdiction on state and federal courts.” Judge Lee contrasted the above language with another provision of the PSLRA, which (unlike Section 77z-1(b)(1)) applies to each private action “arising under this subchapter that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure” and “makes clear” it applies only to actions commenced in federal court.
The Court also found its interpretation was supported by Cyan’s holding that the PSLRA’s safe harbor provision applies to both state and federal court proceedings. Specifically, Section 77z-2(c)(1) of the PSLRA provides a safe harbor for forward-looking statements in “any action arising under this subchapter” and directs a stay of discovery during the pendency of a summary judgment motion by a defendant. Because the Supreme Court in Cyan found this provision—which contains “identical” language to Section 77z-1(b)(1) and also provides for a stay of discovery—applies in state court, Judge Lee found there was a “strong” inference that the discovery stay provided for in Section 77z 1(b)(1) was also intended to apply in state court proceedings.
The City of Livonia decision represents a significant addition to the collection of developing case law regarding the applicability of the PSLRA’s automatic discovery stay to Securities Act lawsuits commenced in state court. Although other state courts have considered this issue, City of Livonia appears to be the only ruling that has grappled with the actual statutory language of the PSLRA and its interplay with the Cyan decision. As a result, the decision will be persuasive authority—both within Connecticut and, potentially, other jurisdictions—as the applicability of the PSLRA’s discovery stay is expected to remain a battleground in Securities Act lawsuits filed in state courts throughout the United States.