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New York Commercial Division Imposes PSLRA Discovery Stay in Securities Act Class Action

A recent decision by the New York Commercial Division held that the Private Securities Litigation Reform Act's automatic stay of discovery pending a motion to dismiss applies to Securities Act claims pursued in state court, which diverges from two earlier New York Commercial Division decisions and creates a split that will likely need to be addressed by the New York Appellate Division.

In In re Everquote, Inc. Sec. Litig., New York County Commercial Division Justice Andrew Borrok held that the Private Securities Litigation Reform Act's ("PSLRA") automatic stay of discovery pending a motion to dismiss applies to Securities Act claims pursued in state court. No. 651177/2019, 2019 WL 3686065, at *1 (N.Y. Sup. Ct. Aug. 7, 2019) (Borrok, J.).

Everquote diverged from two earlier New York County Commercial Division decisions—In re PPDAI Grp. Sec. Litig., No. 654482/2018, 2019 WL 2751278, at *7 (N.Y. Sup. Ct. July 1, 2019) and In re Dentsply Sirona, Inc., No. 155393/2018, 2019 WL 3526142, at *6 (N.Y. Sup. Ct. Aug. 2, 2019)—holding that the PSLRA discovery stay does not apply in state court actions. PPDAI and Dentsply found that a stay would undermine the U.S. Supreme Court's decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1078 (2018), holding that Securities Act claims may be filed in state court and where only such federal claims are alleged, the complaint may not be removed to federal court.

Finding that Cyan did not address whether the PSLRA's discovery stay applies in state court, Justice Borrok focused on the text of the PSLRA automatic stay provision—15 U.S.C. § 77z-1(b)(1). He determined that "[t]he simple, plain, and unambiguous language expressly provides that discovery is stayed during a pending motion to dismiss '[i]n any privateaction arising under this subchapter,'" Everquote, 2019 WL 3686065, at *7 (emphasis in original), and that nothing in the statute said the automatic stay was limited to federal court Securities Act claims.

 

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The PSLRA was enacted to combat abuses in securities litigation, including defendants having to contend with expensive and burdensome discovery requests before determination of a motion to dismiss questionable claims. That policy goal is implicated regardless of whether Securities Act claims are pursued in state or federal court. Given the rift that has emerged in New York's Commercial Division, the applicability of the PSLRA discovery stay is likely headed to the Appellate Division. We will continue to monitor judicial developments on this issue.

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