The Supreme Court’s grant of certiorari in Pivotal Software, Inc. v. Tran, No. 20-1541, may yield a decision on whether the automatic discovery stay established by the Private Securities Litigation Reform Act of 1995 (PSLRA) applies to cases brought in state court under the Securities Act of 1933 (Securities Act).
In 1995, prompted by concerns about abusive and meritless securities lawsuits, Congress enacted the PSLRA. Among its reforms, the PSLRA requires that “in any private action arising under” the Securities Act, “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.” The PSLRA’s automatic discovery stay is an important protection for Securities Act defendants against incurring the often substantial costs and burdens of discovery prior to a court determining the adequacy of the claims pleaded against them.
Whether the PSLRA’s automatic discovery stay applies to Securities Act cases brought in state court (and not just those brought in federal court) has taken on greater significance in the wake of the Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund (2018), which held that state courts retain concurrent jurisdiction over Securities Act claims. Once a plaintiff chooses to bring a Securities Act case in state court, a special statute generally prohibits the removal of the case to federal court. Since Cyan, the number of Securities Act claims filed in state court has increased and state courts remain deeply divided as to the applicability of the automatic discovery stay. In Pivotal, the California Superior Court denied the defendants’ motion to stay discovery and the California Court of Appeal and California Supreme Court refused to intervene.
The Supreme Court’s decision in the Pivotal case could have a significant impact on securities litigation. A ruling that the PSLRA’s automatic discovery stay applies to Securities Act cases brought in state court, just as in federal court, would help ensure that such cases are litigated under similar rules whether filed in state or federal court. A ruling that the PSLRA’s automatic discovery stay does not apply to Securities Act cases brought in state court, however, might result in a further shift of Securities Act cases to state court and increased litigation and litigation-related costs for defendants.
The Court will receive briefing over the summer, hear argument in the fall, and likely render a decision on this issue in early 2022. An amicus brief supporting the defendants’ side would be due September 22, 2021, on the current schedule, but that time may be extended.