On July 2, 2021, the Supreme Court granted certiorari in Pivotal Software, Inc. v. Superior Court of California to decide whether the automatic discovery stay provided for in the Private Securities Litigation Reform Act (PSLRA) applies in state court actions.
This decision could have a significant impact on the future litigation of securities class actions, particularly at the pleading stage. For instance, should the Supreme Court hold that the discovery stay does apply in state court actions, similarly situated plaintiffs will be bound by the same set of discovery rules while a motion to dismiss is pending – namely, no discovery will take place. As for defendants, they will have certainty, irrespective of venue, that they will not be compelled to engage in costly pre-answer discovery while a motion to dismiss is pending, thus neutralizing plaintiffs from leveraging discovery into lucrative settlements before the underlying claims have been deemed viable by the trial court.
The PSLRA
The PSLRA was created by Congress to prevent abuses of the federal securities laws, and among other things, the act mandates sanctions for frivolous litigation, imposes a heightened pleading standard for certain claims, and prohibits discovery until after the complaint has survived a motion to dismiss. Specifically, Section 77z-1(b)(1) provides that “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.”[1]
Some state courts, including in New York and California, have held that, despite the plain language of the statute that it applies “in any private action,” the automatic stay provision does not apply in actions brought in state court. This divide among state courts has only been magnified following the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), in which the Court affirmed that cases alleging violations of the Securities Act of 1933 could be brought in both state and federal court.
The Aptly Named Pivotal Case
Pivotal, a cloud software development and services company based in San Francisco, launched its IPO in April 2018. In June 2019, the company lowered its going-forward guidance, and its stock price dropped. Numerous securities class action lawsuits were filed in state and federal court against the company, its directors, and underwriters of the IPO. The lawsuits allege claims under the Securities Act of 1933, which provides private rights of action for materially false or misleading statements in securities registration statements and provides that certain private actions under the Act may be brought in either federal or state court. The lawsuits against Pivotal thus allege misrepresentation in the IPO registration statement and failure by Pivotal to provide adequate disclosures in the IPO.
In federal court, the proceedings were consolidated in the Northern District of California and presiding Judge Charles R. Breyer ultimately dismissed the federal complaint for failure to state a claim. Plaintiffs also filed parallel class actions in the California Superior Court and asserted Securities Act claims similar to those in the federal court proceeding. While the state action was voluntarily stayed during the federal court proceeding, plaintiffs immediately sought discovery in the state court as soon as the federal action was dismissed.
Defendants argued that by its plain terms, the PSLRA discovery stay applied in both state and federal actions, and therefore discovery – where plaintiffs’ discovery requests were broad and burdensome – should stay when the plaintiffs’ complaint has not even survived a pleading challenge.
Plaintiffs argued that this provision did not apply to state court. The trial court found in favor of plaintiffs and denied defendants’ request for a discovery stay. Defendants’ subsequent attempts to petition for writ of mandate and request for immediate stay by the California Court of Appeal and the California Supreme Court were also denied. Defendants moved to file a petition for a writ of certiorari, arguing that the plain language of the discovery stay applies to any action which would include those in the state court. The Supreme Court granted the petition on July 2, 2021.
The Court’s ultimate decision may have a dramatic impact on the future of securities class action litigation, particularly in the early stages of state court litigation. Barton’s securities litigation team will continue to carefully monitor and report on this and related developments as they arise.
[1] 15 U.S.C. § 77z-1(b)(1).
