The case pending before the U.S. Supreme Court in which the Court was to consider the applicability of the PSLRA’s discovery stay in state court ’33 Act actions has been suspended by the Court at the parties’ request. The parties apparently have reached a tentative settlement of the underlying matter and jointly requested that the Court hold the matter in abeyance, pending the parties’ efforts to complete settlement documentation.
As discussed here, the U.S. Supreme Court had granted the petition of Pivotal Software for the Court to take up the case, in which the company had asked the Court to address the question of whether the PSLRA’s stay of discovery while a motion to dismiss is pending applied to state court securities class actions asserting claims of liability under the Securities Act of 1933. The parties briefing of the Supreme Court case was well underway and oral argument in the matter was scheduled for November 9, 2021.
On August 27, 2021, the parties to the case jointly filed a Joint Motion to Recalendar Argument and Hold Proceedings in Abeyance (here). The joint motion advised the court that on August 26, 2021, the parties had “reached an agreement in principle to settle the case” and that “the parties are now preparing the settlement documentation.” The parties further noted that because the case is a putative class action “the settlement will be subject to approval by the Superior Court of California.”
The joint motion, “in the interest of conserving judicial resources,” requested that the Court “remove the case from the oral argument calendar, suspend all upcoming briefing deadlines, and hold in abeyance any further proceedings” while the parties “take steps to obtain settlement approval.” The parties advised the court of their intent to provide the Court with a joint status report every 45 days.
If the settlement becomes final, then the parties will jointly move the Court for voluntary dismissal; otherwise the parties will propose a resumed briefing schedule and ask the Court to restore the case to the argument calendar.
In a September 2, 2021 entry to the U.S. Supreme Court’s docket, the Court removed the case from the November 9 argument calendar, directed that the briefing schedule is in abeyance, and directed the parties to provide the court with updates concerning the settlement proceedings.
The upshot of all of this is that it looks as if the Court will now not be addressing a vexing question that has dogged defendants in state court ’33 Act liability actions. Under the PSLRA, discovery in securities act liability actions is stayed pending resolution of the defendant’s motion to dismiss. Plaintiffs’ lawyers have argued that this stay is inapplicable in state court ’33 Act actions, in part based on the argument that the PSLRA applies only to proceedings to which the Federal Rules of Civil Procedure apply. The state courts have split on whether the discover stay applies; in the Pivotal Software, the California trial court held that the stay did not apply, and the California appellate court refused to overturn the trial court’s decision.
Though this issue has been a problem for defendants in state court proceedings, a ruling on this issue may mean less than it might have a short time ago. Immediately after the U.S. Supreme Court’s March 2018 ruling in the Cyan case, which affirmed that state courts retain concurrent jurisdiction for ’33 Act liability actions, there was a surge in state court filings of these kinds of suits. In response, many companies adopted charter provisions specifying a federal forum for ’33 Act liability actions. These kinds of provisions have been held to be facially valid by the Delaware Supreme Court, and several California state court rulings have enforced federal forum provisions. The result is that the plaintiffs’ lawyers are now filing fewer state court ’33 Act liability actions than they were in the immediate aftermath of the Cyan decision.
A clarification from the Court whether or not the discovery stay applies in state court would have been provided useful guidance. It certainly would have been important for cases involving defendant companies that have not adopted federal forum provisions. However, most IPO companies these days adopt federal forum provisions as part of the process of going public. So in the end, while it would have been helpful for the Court to rule whether or not the discovery stay applies in state court, it likely would have affected only a relatively small number of cases going forward.