Discovery is “both a tool for uncovering facts essential to accurate adjudication, and a weapon capable of imposing large and unjustifiable costs on one’s adversary.”1Frank Easterbrook, Discovery as Abuse, 69 B.U. L. Rev. 635, 636 (1989). Pivotal Software, Inc. v. Tran, to which the Supreme Court granted certiorari on July, 2, 2021, was a case about the use of discovery as a weapon by plaintiffs in securities fraud class actions.2See generally Brief for Petitioners, Pivotal Software, Inc. v. Superior Ct., No. 20–1541 (U.S. filed May 5, 2021), 2021 WL 3680084.
The question presented in Pivotal was “[w]hether the Reform Act’s discovery-stay provision applies to a private action under the Securities Act in state or federal court, or solely to a private action in federal court.”3Id. at *i. This question has broad consequences. Since the Securities Act expressly provides for concurrent jurisdiction in both state and federal court, a plaintiff may choose to bring a securities fraud class action claim in either jurisdiction.415 U.S.C. § 77v; see also Cyan v. Beaver Cnty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018). If the Reform Act’s discovery-stay applies only in federal court, state court litigants in securities fraud class actions may compel discovery during the pendency of a motion to dismiss.515 U.S.C. §§ 77a–77mm. Under this rule, given the substantial costs associated with discovery, litigants with weak cases would have every incentive to bring Securities Act claims in state rather than federal court, and defendants would often be incentivized to settle frivolous cases rather than comply with discovery demands more costly than the price of settlement.6Michael Klausner, et. al, State Section 11 Litigation in the Post-Cyan Environment (Despite Sciabacucchi), 75 Bus. Law. 1769 (2020). This perverse dynamic could impose a substantial and unnecessary burden on state court systems and defendants, especially if the Reform Act’s barriers to non-meritorious claims, like the discovery-stay, are operating as Congress intended.
Just two months before the Court could resolve the important issue raised in Pivotal, the parties settled the case.7Pivotal Software, Inc. v. Superior Court of CA, SCOTUSblog, https://perma.cc/5FWK-7RJ8 (last visited Oct. 9, 2021). Thus, the question presented in Pivotal is still unsettled in the law.
Congress enacted the Private Securities Litigation Reform Act8Pub. L. 104–67, 109 Stat. 737 (1995) (codified as amended at scattered sections of 15 U.S.C.). to address perceived abuses in securities fraud class actions,9Michael Perino, Did the Private Securities Litigation Reform Act Work?, 2003 U. Ill. L. Rev. 913, 914 (2003). and introduced a series of procedural hurdles that rendered the ability to bring a securities fraud class action more difficult.10Id. Among these procedural hurdles was the Reform Act’s discovery-stay.
The discovery-stay was included in the Reform Act specifically to “prevent unnecessary imposition of discovery costs on defendant[s].”11H.R. Rep. No. 104-369, at 31 (1995) (Conf. Rep.), as reprinted in 1995 U.S.C.C.A.N. 730, 730. Unnecessary costs associated with frivolous claims threaten not only public companies and their shareholders, but also capital markets more generally—and consequently, the public welfare. When threatened with non-meritirous yet costly claims, public companies are forced to reduce expenditures to increase budgets for legal fees, or convinced to refuse going public entirely.12Matteo Arena & Brandon Julio, The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy, 50 J. Fin. & Quantitative Analysis 251, 272–73 (2015). Since cases filed in recent years “threaten much higher … costs than cases filed in prior years—nearly three times larger than the average for 1997 to 2017,”13U.S. Chamber Inst. for Legal Reform, Containing the Contagion: Proposals to Reform the Broken Securities Class Action System 2 (Feb. 2019). the market welfare justification for the discovery-stay is even more compelling today than it was at the time of the Reform Act’s passage.
Of course, even without the protection of the Reform Act’s discovery-stay, public companies are not entirely defenseless. To avoid unnecessary and costly discovery for nonmeritorious claims, public companies may adopt forum selection provisions requiring shareholders to bring Securities Act claims in federal court. In 2020, the Delaware Supreme Court ruled in Salzberg v. Sciabacucchi14227 A.3d 102 (Del. 2020) that exactly this genre of forum selection provision was enforceable. However, it is still an open question whether other states will uphold this class of forum selection provision. Public companies still have a strong interest in Reform Act discovery-stays applying in state court. The trial court in Pivotal relied upon language throughout the Reform Act to conclude that the discovery-stay does not apply in state court.15Brief for Petitioners, supra note 2, at 10–11. The Reform Act provides in various sections that its provisions shall apply to actions “pursuant to the Federal Rules of Civil Procedure.”1615 U.S.C. § 77z(a).
Of course, state court actions are not pursuant to the Federal Rules. However, despite the scattered references to the Federal Rules throughout the Reform Act, the language of the discovery-stay itself refers to “any private action arising under this subchapter,”1715 U.S.C. § 77z-1(b)(1). making no reference to the Federal Rules at all. Given the plain language of the discovery-stay provision, as well as the purpose and historical context of the Reform Act, I predict the Supreme Court will eventually resolve this issue by holding that the discovery-stay applies in both state and federal court, and I would encourage lower courts to adopt this same rule. Establishing the rule that the discovery-stay applies in both state and federal court aligns with the plain language of the Reform Act’s discovery-stay provision, referring to any action, and with the express purpose of the Reform Act: to prevent frivolous litigation. Moreover, given the substantial and sustained increase in litigation costs throughout the past decade,18U.S. Chamber Inst. for Legal Reform, supra note 13, at 2. providing public companies with a strong defense against frivolous claims is practical: it allows companies to focus resources—both time and money—on the things that actually matter, like innovating to empower consumers.19See Arena & Julio, supra note 12, at 272–73.