July 15, 2021

PSLRA: SCOTUS to Decide If Automatic Stay Applies to State Court Section 11 Cases

Earlier this month, the SCOTUS granted cert in Pivotal Software v. Tran, which raises the issue of whether the Private Securities Litigation Reform Act’s discovery-stay provision applies to Securities Act lawsuits filed in state or federal court, or just to federal court filings. This excerpt from a recent Kramer Levin memo summarizes the potential significance of this case:

Congress enacted the automatic stay provision to address the concern that, without it, securities class action plaintiffs could use burdensome discovery requests to force early settlements of meritless claims, thereby encouraging the filing of meritless actions. State courts are split as to whether the PSLRA automatic stay applies in actions brought in state courts, and the issue has arisen with increasing frequency in the wake of the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018).

In Cyan, the Court affirmed that federal and state courts have concurrent jurisdiction over Securities Act claims, and that a Securities Act claim brought in state court cannot be removed to federal court. After Cyan, plaintiffs have with greater frequency filed Securities Act cases in state courts, at least in part because plaintiffs may have the potential to seek costly and burdensome discovery before the legal sufficiency of their complaints has been upheld, and possibly forcing the settlement of claims whose sufficiency has not been tested.

The statute says that the automatic stay applies to “any action,” but despite that language, state courts have split on whether it applies in state court proceedings. Some of the courts that have held the stay doesn’t apply have concluded that applying the stay to state court proceedings would undermine the ruling in Cyan, while others have said that its application is inconsistent with the Securities Litigation Uniform Standards Act.

John Jenkins