The SEC’s decision to change its policy on mandatory arbitration bylaws has received favorable reviews from public companies and their advisors, but this Mintz memo cautions companies considering such a bylaw that there are some advantages to litigating securities cases in federal court that they need to keep in mind. This excerpt discusses the PSLRA’s automatic stay provisions, which don’t apply to arbitration:

Congress designed the PSLRA in part to deny serial securities plaintiffs the opportunity to leverage strike suits and frivolous class claims to extract sometimes-handsome nuisance settlements from companies. One strategy a plaintiff may use to gain leverage in such negotiations is to exploit the significant time and expense that defendants must bear in responding to plaintiff’s discovery requests for documents, testimony and information at the outset of most lawsuits.

To correct that imbalance, the PSLRA, where applicable, imposes an automatic stay of discovery in all cases where defendants have filed a motion to dismiss, which ensures that cases that are not well-pled (i.e., that are likely frivolous) are thrown out before they cost the parties substantial sums. Arbitration, however, has no stated rule or mechanism for staying discovery. Defendants therefore may be required to pay to meet discovery obligations even when moving to dismiss a frivolous arbitration claim.

Other benefits of a federal forum noted in the memo include the PSLRA’s heightened pleading standards, the finality offered by the resolution of a class action lawsuit, the right to appeal an adverse ruling, and the possibility that in some cases, arbitration may prove to be a more expensive process than litigation.

– John Jenkins