Susan E. Engel and Matthew Rawlinson are partners and Peter Trombly is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Engle, Mr. Rawlinson, Mr. Trombly, Samir Deger-Sen, and Morgan E. Whitworth.
A recent decision, if widely adopted, could spare companies from unnecessary discovery costs in claims that may not survive a threshold pleadings challenge.
Key Points:
- State courts across the country have reached conflicting conclusions on whether the Private Securities Litigation Reform Act’s (PSLRA) automatic stay of discovery pending a ruling on a complaint’s legal sufficiency applies to cases filed in state court.
- Breaking from the majority approach among California courts, a San Mateo County Superior Court conducted a thorough statutory interpretation analysis and concluded that the PSLRA requires a stay of discovery in state court.
- If state courts were to reach consensus on this conclusion or if the US Supreme Court were to adopt it securities plaintiffs would possess less leverage to coerce settlements by filing in state court and forcing companies to engage in early discovery.
On July 25, 2022, a California state court held that the PSLRA imposes an automatic stay of discovery during the pendency of a motion to dismiss or its equivalent in state-court actions arising under the Securities Act of 1933. [1] Recognizing that this question has divided state courts across the country, the court urged the US Supreme Court to provide the “last word” on this important and recurring issue “as soon as possible.” [2]
Background
The Securities Act of 1933 imposes disclosure obligations on issuers seeking to sell securities to the public. In general, Section 5 of the Securities Act requires issuers to register securities offerings with the Securities and Exchange Commission. [3] Section 12(a)(1) imposes liability on any person who sells unregistered securities, [4] and “control persons” of a seller of unregistered securities may be held liable pursuant to Section 15. [5] Private plaintiffs may bring certain Securities Act claims including claims under Sections 12(a)(1) and 15in either federal or state court. [6]
