Cyan, Reverse-Erie, and the PSLRA Discovery Stay in State Court

Abstract

In this essay, I analyze an issue that is currently dividing courts and commentators: does the Private Securities Litigation Reform Act (“PSLRA”) discovery stay apply when Securities Act claims proceed in state courts? Last year, in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061 (2018), the Supreme Court held that state courts have concurrent jurisdiction over Securities Act claims, whether asserted individually or as class actions, and that defendants do not have a right to remove these claims to federal court. In the wake of Cyan, there has been an influx of Securities Act class actions filed in state courts, raising the question of whether the PSLRA discovery stay, which stays all discovery during the pendency of a motion to dismiss and which conflicts with many states’ permissive discovery rules, applies in state court. I seek to answer this question by applying the so-called “reverse-Erie” doctrine. First, I contend that the PSLRA does not expressly preempt states’ permissive discovery rules. Second, drawing from Supreme Court case law and scholarly commentary on the reverse-Erie doctrine, I identify the following considerations, which must be weighed to analyze whether federal law displaces a state procedure under an implied preemption or judicial choice-of-law analysis: (1) the state’s interest in applying its own procedure; (2) whether the state procedure applies to all like claims or singles out the federal claim; (3) whether the state procedure applies to both parties or singles out one party; (4) the degree to which the state procedure undercuts federal policy; (5) whether the federal procedure is internally-sourced or externally-sourced; (6) the degree to which the choice of procedure is potentially outcome-determinative; (7) if outcome-determinative, the risk of forum-shopping; and (8) if outcome-determinative, the risk of treating similarly situated parties differently based on access to different fora. Although these considerations are mixed as applied to the PSRLA discovery stay, I contend that that they weigh against applying the PSLRA discovery stay in state court, especially in light of the presumption against preemption and the general rule that federal law takes state courts as it finds them.

Note: Copyright 2019 by Thomson Reuters. All rights reserved. Reprinted by permission of Thomson Reuters/West from Securities Regulation Law Journal.

Keywords: Securities Litigation, PSLRA, Discovery Stay, Preemption, Reverse-Erie