by Catherine Willis*
The Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 77z-1(b)(1), provides that discovery should be automatically stayed in Securities Act actions at the motion to dismiss stage. Though Securities Act claims may be brought in either state or federal courts, courts are divided over whether the PSLRA discovery stay applies in both state and federal court or solely applies in federal court. This Contribution argues that the PSLRA discovery-stay provision should apply in any action under the Securities Act, regardless of venue.
In June 2021, the Supreme Court granted certiorari in Pivotal Software, Inc. v. Superior Court of California on the question of whether the Private Securities Litigation Reform Act’s (“PSLRA”) language “in any private action” refers to actions brought in state or federal court, or solely such actions brought in federal court.1 Subsequently, the case was removed from the argument calendar following a joint motion to hold proceedings in abeyance, and parties have agreed in principle to settle the case.2 Accordingly, the question of whether the Private Securities Litigation Reform Act’s discovery-stay provision (“the Provision”) refers to actions brought in state and federal court, or solely actions in federal court, remains an open question.
As Securities Act claims may be brought in state or federal courts,3 the Provision should apply in “any private action” arising under the Securities Act, regardless of venue.4 In order to accomplish the Provision’s purpose of combatting the use of discovery to force settlements of unmeritorious securities claims, its scope must include all such actions wherever they are filed. Accordingly, finding a broad state-court exception to the applicability of the discovery stay would significantly frustrate this purpose. The plain meaning of “any” also requires the scope of the discovery stay to be any court in which the action is appropriately brought.5 Applying the whole code canon of statutory interpretation further clarifies that there is no state-court exception to the discovery-stay provision.
As the Supremacy Clause preempts application of state procedural rules, the PSLRA’s automatic discovery stay appropriately preempts state discovery law in actions arising under the Securities Act, a federal statute.6 To read the Provision otherwise would impose an unnecessary burden on a federal right and disregard the lack of a historical basis for states to dictate procedure for a federal private right of action. State-court circumvention of the PLSRA discovery stay would also have negative public policy consequences. If discovery stays are not applied at the motion to dismiss stage, companies will be pressured to settle unmeritorious state-court actions, resulting in increased costs to companies, underwriters, and shareholders. And, as states may disparately impose discovery stays, unevenly enforcing the PSLRA’s discovery stay may encourage forum shopping and result in disparate application of a federal right.
The purpose of the PSLRA and its discovery-stay provision eliminates any ambiguity as to its scope. Congress enacted the PSLRA in 1995 in response to abuses of the Securities Act in the form of “frivolous lawsuits” brought to compel defendants to settle, or as fishing expeditions for potential claims.7 Congress imposed countermeasures to these tactics in the PSLRA, including a Safe Harbor statute for forward-looking statements,8 a heightened pleading standard,9 and the discovery-stay provision for all private actions arising under the Securities Act.10 Congress’s primary concern was that discovery during the pendency of a motion to dismiss put significant financial and time burdens on companies and pressured them to settle even unmeritorious suits that would not survive past that preliminary stage.11 Congress described this abuse as using “the discovery process to impose costs so burdensome that it is often economical for the victimized party to settle.”12 Congress accordingly included the Provision in the PSLRA to automatically stay discovery during the pendency of a motion to dismiss and remedy this specific problem.
Courts may look to this kind of legislative history and the purpose of a statute to clarify textual ambiguity.13 In addition to the text itself, “[i]n expounding a statute” a court should look to the law’s “object and policy”14 because “[t]he purpose of Congress is the ultimate touchstone” of statutory interpretation.15 If an interpretation is in conflict with Congress’s expressed purpose in enacting a given statute, that interpretation should be rejected.16 As the concern motivating Congress’s adoption of the statute is not unique to actions in federal courts, it should not be interpreted to be so limited. The objective of the Provision is to combat the use of discovery as a tool of “abusive securities class actions,” and reading it to continue to allow this practice in securities actions in state courts would leave alive and well the problem Congress legislated to solve.17 Therefore, this interpretation must be rejected as “[c]ontrary to the intent of Congress.”18
The opposition in Pivotal Software argued against applying the discovery stay in state courts by reasoning that the procedural nature of the Provision forecloses its application in state courts and that the presumption against preemption supports reading the stay to apply only in Securities Act actions in federal court.19 These arguments are individually flawed and do not support inserting a state-court exception into the PSLRA discovery stay.
First, no procedure versus substance distinction disallows the Provision’s application in state court. The Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund noted that certain PSLRA provisions contain procedural rules for Securities Act actions that apply “only when such a suit [is] brought in federal court.”20 However, the Court in Cyan referred specifically to provisions that include statutory language limiting their application to actions brought in federal court.21 The pertinent provision of the PSLRA, § 77z-1(a)(2)(A)(ii), places procedural rules on “a lead plaintiff in any class action brought under the Federal Rules of Civil Procedure [(“FRCP”)].”22 Through this example, the Court demonstrated that it was referring to provisions expressly limited to federal courts since the FRCP apply only in federal courts. Therefore, while some PSLRA procedures apply only in federal courts, not all PSLRA procedural provisions do, and the Provision is not limited in this way.
Second, the opposition in Pivotal Software invoked the constitutional avoidance canon and suggested that imposing federal procedural rules in state court in this context would violate state sovereignty.23 However, precedent establishes that states may only apply their “neutral procedural rules to federal claims” where not “pre-empted by federal law.”24 Additionally, federal law may leave state court rules in place “only insofar as those courts employ rules that do not impose unnecessary burdens” on federal rights.25 This premise is grounded in the Constitution’s Necessary and Proper Clause,26 which endows Congress with the authority to enact and govern federal rights and statutes, and the Supremacy Clause, which instructs that “the Judges in every State shall be bound [by federal law], any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”27 Accordingly, while “[f]ederal statutes enforceable in state courts do, in a sense, direct state judges to enforce them . . . this sort of federal ‘direction’ of state judges is mandated by the text of the Supremacy Clause.”28
Further, the PSLRA and the Securities Act are federal laws, and the Provision provides a federal right to not be burdened by discovery at the motion to dismiss stage in Securities Act suits.29 The automatic stay granted by the Provision protects this right, and contrary state discovery-stay rules are therefore preempted and may not be imposed.30 Furthermore, even if Congress had wished to leave the rules of procedure concerning this federal right to state courts, such a deferral would not be permissible, as the non-application of the discovery stay in state courts would unnecessarily burden the right protected by the Provision.31 Consequently, the federal preemption at issue is not a violation of state sovereignty, but rather a necessary exercise of constitutional authority to protect a federal right, rendering the application of constitutional avoidance inappropriate.
Statutory interpretation guidance from the plain meaning of the statute, the whole code canon, and analysis of the surrounding provisions further supports a broader interpretation of the Provision’s application.
The analysis of the Provision relies upon whether the phrase “[i]n any private action arising under [the Securities Act]” means what it says.32 In interpreting a phrase, one must first look to its plain meaning.33 In doing so, courts generally assume Congress “means . . . what it says.”34 Indeed, when applying the “fundamental canon” of plain meaning, a court shall interpret words “as taking their ordinary, contemporary, common meaning.”35 The common meaning of the operative term “any” is defined broadly as “one or some indiscriminately of whatever kind” and “every . . . one selected without restriction” and “all.”36 Accordingly, interpreting “any” to mean a more restrictive “some” or “certain” would fly in the face of its plain meaning. The Supreme Court has also observed that the word “any” has an “expansive meaning”37 and has repeatedly interpreted it expansively in similar statutory contexts.38 In choosing the term “any,” Congress broadly encompassed private actions under the Securities Act whether filed in state or federal court. Therefore, courts should assume that Congress meant what it said: that the Provision applies in any private action arising under the Securities Act, including those in state courts.
Reading the Provision in the context of the entirety of the PSLRA further clarifies that there is no state-court exception to the statute’s automatic discovery stay.39 In interpreting subsection 77z-1(b), its surrounding subsections provide further context. Section 77z-2 (the “Safe Harbor” provision) includes the exact language of the Provision, applying in “any private action arising under [the Securities Act],”40 and contains its own discovery stay, again applicable “[i]n any private action arising under [the Securities Act].”41 The Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund found that this provision “applie[s] even when a [Securities] Act suit [is] brought in state court.”42 It is well-established that when identical words or phrases are “used in different parts of the same statute” they are “presumed to have the same meaning.”43 Therefore, courts confronted with the Provision should, as with the Safe Harbor provision, find that the phrase “[i]n any private action arising under [the Securities Act]” refers to all actions, whether filed in state or federal courts.44
Similarly, where a qualifying phrase is present in one subsection but not another, it should be presumed that Congress used such language intentionally.45 Section 77z-1(a) of the PSLRA provides that “[t]he provisions of this subsection shall apply to each private action arising under this subchapter [(the Securities Act of 1933)] that is brought as a plaintiff class action pursuant to the Federal Rules of Civil Procedure.”46 Here, the phrase “this subsection” refers to subsection (a) “Private Class Actions,” not the subsection of the Provision, subsection (b) “Stay of discovery; preservation of evidence.”47 As this qualifying language is only present in subsection (a), the reference to the Federal Rules of Civil Procedure is only applicable to that subsection, and not to the entirety of section 77z-1. Indeed, “[w]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.”48 Had Congress intended the discovery stay to be limited to federal actions, “it presumably would have done so expressly as it did in the immediately [preceding] subsection.”49 However, “Congress did not write the statute that way.”50 Accordingly, the language of the statute clarifies that the PSLRA discovery stay does apply in state courts.
In addition to honoring statutory interpretation principles, it is important to keep in mind the significant negative public policy consequences that would result from inserting a state-court exception into the statute. Specifically, the circumvention of the Provision would harm businesses, shareholders, and underwriters, and encourage forum shopping by class action lawyers. Creating an exception to Congress’s protection of securities-litigation defendants goes against the design of the PSLRA to protect businesses and stockholders, and instead serves to benefit class action lawyers.51 The loophole that would result from a state-court exception “risks inviting the type of early, vexatious discovery requests that the PSLRA meant to eliminate.”52 Of substantial concern is that “[t]hese coercive tactics have significant downstream costs for companies that issue securities, and premiums for directors’ and officers’ liability insurance have skyrocketed.”53
Moreover, as different states apply varied discovery rules, further forum shopping will occur as plaintiffs’ lawyers seek out the most favorable procedural laws. Initiating extensive discovery at the motion to dismiss stage would be expensive for defendants as well as a distraction for company executives, resulting in the settlement of claims that would not have made it past the motion to dismiss stage on the merits. Ex ante, as parties involved in issuing securities are forced to build in the costs of inevitable securities actions, discovery, and settlements, the cost of Initial Public Offerings (“IPOs”) may increase. In some instances, this concern is now being baked into the share price at IPO through the strategy of underpricing.54 These significant downstream consequences negatively impact the securities market, companies, and shareholders alike. Indeed, reading a state-court exception into the PSLRA discovery stay would allow those bringing actions in state courts to return to pre-PSLRA discovery tactics that “injure ‘the entire U.S. economy.’”55
Considering the purpose of the PSLRA, such an impact on companies, shareholders, the market, and securities litigation practices cannot have been what Congress intended, and should be avoided. To promote “predictability, consistency, and fairness when it comes to litigating Securities Act cases in state courts,” the discovery stay should apply in any private action under the Securities Act, including those in state courts.56
Until the Supreme Court is presented with this issue again, lower courts will continue to disparately apply the PSLRA discovery stay and contribute to an inconsistent securities law regime.57 If and when the issue returns to the Supreme Court, the purpose of the PSLRA discovery stay, statutory interpretation principles, the Court’s own precedent in Cyan, and robust policy incentives demand that the Court adopts a broad reading: that the discovery stay applies “in any action” arising under the Securities Act, regardless of venue.
* Catherine Willis is a J.D. Candidate (2023) at New York University School of Law. This Contribution arose from the problem presented at the 2022 Irving R. Kaufman Memorial Securities Law Moot Court Competition hosted by Fordham Law School. The question presented asked whether the language “in any private action” of the Private Securities Litigation Reform Act’s discovery-stay provision refers to any action under the Securities Act of 1933 brought in state or federal court, or solely such actions brought in federal court. This Contribution presents a distillation of arguments made by the author in favor of Petitioners and does not necessarily represent the views of the author.
1. 141 S. Ct. 2884 (2021).
2. Joint Motion to Recalendar Argument and Hold Proceedings in Abeyance, Pivotal Software, Inc. v. Superior Ct. of Cal., 141 S. Ct. 2884 (2021), (No. 20-1541) (filed Aug. 27, 2021); Letter Regarding Settlement Proceedings, Pivotal Software, Inc. v. Superior Ct. of Cal., 141 S. Ct. 2884 (2021), (No. 20-1541) (filed July 8, 2022).
3. 15 U.S.C. § 77v(a); see also Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, 138 S. Ct. 1061, 1069 (2018) (holding that state courts may retain jurisdiction to decide class actions brought under the Securities Act).
4. 15 U.S.C. § 77z-1(b)(1).
5. Any, Webster’s Third New International Dictionary 97 (1976).
6. Howlett v. Rose, 496 U.S. 356, 367–75 (1990); see also Brown v. W. Ry. Of Ala., 338 U.S. 294, 296 (1949) (holding that a “federal right cannot be defeated by the forms of local practice”).
7. S. Rep. No. 104-98, at 114 (1995) (describing the prevalence of “abusive securities class actions”).
8. 15 U.S.C. § 77z-2.
9. 15 U.S.C. § 78u-4.
10. 15 U.S.C. § 77z-1(b)(1).
11. H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.) (noting the prevalence of this tactic, which “often forces innocent parties to settle frivolous securities class actions”).
13. See generally Church of Holy Trinity v. United States, 143 U.S. 457, 460 (1892) (considering Congress’s purpose in passing a bill in determining how to evaluate its text).
14. United States v. Heirs of Boisdoré, 49 U.S. 113, 122 (1850).
15. Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996).
16. F.T.C. v. Sun Oil Co., 371 U.S. 505, 521 (1963) (finding invalid an interpretation that would be “contrary to the intent of Congress”).
17. S. Rep. No. 104-98, at 114 (1995).
18. Sun Oil Co., 371 U.S. at 521.
19. Brief in Opposition, Pivotal Software, Inc. v. Superior Ct. of Cal., 2021 U.S. S. CT. BRIEFS LEXIS 1509, (No. 20-1541) (filed June 4, 2021).
20. 138 S. Ct. 1061, 1067 (2018).
22. 15 U.S.C. § 77z-1(a)(2)(A)(ii).
23. Brief in Opposition, Pivotal Software, Inc., 2021 U.S. S. CT. BRIEFS LEXIS 1509, (No. 20-1541) (filed June 4, 2021).
24. Howlett v. Rose, 496 U.S. 356, 372 (1990).
25. Felder v. Casey, 487 U.S. 131, 150 (1988) (internal quotation marks omitted).
26. U.S. Const., art. VI, cl. 2.
27. U.S. Const., art. I, § 8, cl. 18.
28. New York v. United States, 505 U.S. 144, 178–79 (1992).
29. 15 U.S.C. § 77z-1(b)(1).
30. Howlett, 496 U.S. 356; see also Adams v. Maryland, 347 U.S. 179, 183 (1954) (stating that “since Congress in the legitimate exercise of its powers enacts ‘the supreme Law of the Land,’ state courts are bound by [a federal statute] even though it affects their rules of practice”).
31. See Felder, 487 U.S. at 150 (describing that deferral to state procedure is allowed only when doing so would not impose an unnecessary burden (quoting Brown v. W. Ry. Co. of Ala., 338 U.S. 294 (1949))).
32. 15 U.S.C. § 77z-1(b)(1) (emphasis added).
33. Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253 (1992) (outlining that a court should always turn to the “cardinal canon” of plain meaning “before all others”).
34. Id. at 254.
35. Perrin. v. United States, 444 U.S. 37, 42 (1979).
36. Any, Webster’s Third New International Dictionary 97 (1976).
37. United States v. Gonzales, 520 U.S. 1, 5 (1997).
38. See, e.g., id. (concluding that since “Congress did not add any language limiting the breadth of [the] word [“any”] . . . we must read [the statute] as referring to all,” including state courts); Collector of Internal Revenue v. Hubbard, 79 U.S. 1, 15 (1870) (finding it “quite clear that [‘in any court’] includes the State courts as well as the Federal courts”), overruled on other grounds by Eisner v. Macomber, 252 U.S. 189 (1920); Stewart v. Kahn, 78 U.S. 493 (1870) (rejecting that the phrase “any action” is somehow exclusive of actions in state courts).
39. See United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 371 (1988) (describing statutory construction as “a holistic endeavor” through which provisions are “often clarified by the remainder of the statutory scheme”).
40. 15 U.S.C. § 77z-2(c)(1).
41. 15 U.S.C. § 77z-2(f).
42. 138 S. Ct. 1061, 1066, 1072 (2018).
43. Robers v. United States, 572 U.S. 639, 643 (2014) (finding that for statutory consistency, the word ‘property’ in the phrase “any part of the property . . . returned” appearing in 18 USCA § 3663A(b)(1) must refer to any property lost as a result of the crime); see also IBP, Inc. v. Alvarez, 546 U.S. 21, 34 (2005) (rejecting an argument that ran against this presumption of statutory consistency).
44. 15 U.S.C. § 77z-1(b)(1).
45. See Russello v. United States, 464 U.S. 16, 23 (1983) (finding that courts should not conclude that Congress’s inclusion of different language in two subsections is intended to mean the same thing, nor “ascribe [a] difference to a simple mistake in draftsmanship”).
46. 15 U.S.C. § 77z-1(a)(1) (emphasis added).
47. This reading is consistent with the Supreme Court’s guidance in Koons Buick Pontiac GMC, Inc. v. Nigh, in which it evaluated the respective House and Senate drafting manuals and concluded that Congress follows a hierarchical scheme with sections broken into subsections in this manner. 543 U.S. 50 (2004).
48. Russello, 464 U.S. at 23.
50. Id. (quoting United States v. Naftalin, 441 U.S. 768, 773 (1979)).
51. See Virginia Milstead, Why We Need a State-Level Private Securities Litigation Reform Act, Am. Bar Ass’n, Section of Litig., Class Actions & Derivative Suits Comm. (2019), https://www.skadden.com/-/media/files/publications/2019/12/whyweneedastatelevelprivatesecuritieslitigationref.pdf.
52. Id. at *3 (citing SG Cowen Sec. Corp v. U.S. District Court, 189 F.3d 909, 911 (9th Cir. 1999)).
53. Andrew Clubok et al., Supreme Court to Decide Whether PSLRA Discovery Stay Applies in State Court, Latham & Watkins Client Alert Commentary 2 (July 6, 2021), https://rg-www-prod-cd.azurewebsites.net/admin/upload/SiteAttachments/Alert%202885.v4.pdf.
54. See Kathleen W. Hanley & Gerard Hoberg, Litigation Risk, Strategic Disclosure and the Underpricing of Initial Public Offerings (FEDS Working Paper No. 2011-12, 2011), https://ssrn.com/abstract=1810084.
55. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 81 (2006) (quoting H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.)).
56. Milstead, supra note 51 at *5.
57. Compare Matter of PPDAI Grp. Sec. Litig., 116 N.Y.S.3d 865 (N.Y. Sup. Ct. 2019) (holding that the PSLRA discovery stay is not applicable in state court and refraining from applying the stay), with City of Livonia Retiree Health & Disability Benefits Plan v. Pitney Bowes, Inc., 2019 Conn. Super. LEXIS 1604 (Conn. Super. Ct. 2019) (holding that the PSLRA discovery stay is applicable in state court and applying the stay accordingly). Notably, following Matter of PPDAI Grp. Sec. Litig., the company settled the matter. See In re PPDAI Grp. Inc. Sec. Litig., 2022 U.S. Dist. LEXIS 11427 (E.D.N.Y. 2022).