August 1, 2003

The Scope Of The Stay Of Discovery

The PSLRA provides that "all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss, unless the court finds upon the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party." With the passage of SLUSA, Congress attempted to strengthen the discovery stay by granting the power to federal court judges to quash discovery in state court actions if discovery in the state case conflicted with an order of the federal court.

In Newby v. Enron Corp., 2003 WL 21658666 (5th Cir. July 30, 2003), the underlying lawsuit was a state court action in Texas (Bullock), filed on behalf of thirteen individuals, against many of the same defendants as in the Enron federal securities class action litigation (Newby). The plaintiffs received permission from the state court to commence discovery, even though there was no dispute "that the discovery sought in Bullock would have fallen squarely within the discovery that may eventually take place in Newby if the plaintiffs survive a motion to dismiss." The defendants requested emergency injunctive relief from the U.S. District Judge presiding over the Newby case to stay discovery in the Bullock case. Pursuant to SLUSA, the discovery was enjoined until a ruling on the motion to dismiss in the Newby case. The Bullock plaintiffs appealed.

In Newby, the Fifth Circuit addressed whether the power granted to federal court judges to quash state court actions is only limited to state court actions brought on behalf of a class of investors. The plain language in SLUSA would appear to suggest otherwise, "a court may stay discovery in any private action in a State court . . . ." Appellants argued, however, that (1) the PSLRA and SLUSA were enacted to combat abuses in class action securities cases; and (2) other provisions of SLUSA refer specifically to state court class actions and control over the more general terminology in the operative provision.

Not surprisingly, the Fifth Circuit decided to stick with the plain language of the statute. "The title of [the SLUSA provision] reflects its purpose: to prevent the 'circumvention of stay of discovery' provided for in [the PSLRA]. The provision in [SLUSA] allows the federal court presiding over an action subject to the automatic stay of discovery to order a similar stay in a state court action. On its face [the SLUSA provision] applies to 'any private action in a State court.' The action stayed by the district court is plainly within the scope of this clause."

Holding: Stay of discovery affirmed (the panel also upheld additional injunctive relief granted by the district court).

Posted by Lyle Roberts at August 1, 2003 6:04 PM | TrackBack
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