SCOTUS case on state-court shareholder class actions is off. Now what?

6 minute read

The United States Supreme Court in Washington, U.S. REUTERS/Evelyn Hockstein

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(Reuters) - If you had already ordered popcorn in anticipation of the Nov. 9 oral argument at the U.S. Supreme Court in Pivotal Software, Inc v. Superior Court of California, I have some bad news: The argument is off.

On Thursday, the Supreme Court removed the case from the calendar, in response to a motion filed last Friday by Pivotal and the shareholders who are suing the company over its 2018 IPO. Pivotal and the plaintiffs told the justices that they had reached a tentative settlement in the San Francisco Superior Court class action at issue before the Supreme Court.

Pivotal lawyer Deanne Maynard at Morrison & Foerster and shareholder counsel Thomas Goldstein at Goldstein & Russell jointly asked the court to drop the oral argument and delay additional briefing. The class action settlement must still be approved by the San Francisco state court. Maynard and Russell said they’ll move for dismissal of the Supreme Court case when that happens.

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Companies and underwriters were counting on the Supreme Court to use the Pivotal case to correct what they consider to be an unjustified imbalance in the discovery rules in state and federal shareholder class actions. So now what are they supposed to do?

Defendants, as I’ll explain, have a couple of different paths to their goal of eliminating early discovery for plaintiffs in state-court Securities Act class actions. But first, I want to step back to look at why defendants contend this early discovery is a problem.

As you know, the Supreme Court ruled in 2018’s Cyan v. Beaver County Employees Retirement Fund that shareholders can bring Securities Act class actions in both state and federal court. In federal court, shareholders have to meet the heightened pleading requirement for fraud. They’re also prohibited, under the Private Securities Litigation Reform Act, from obtaining discovery from defendants until they’ve survived a defense dismissal motion.

But some state courts, particularly in California, have said the PSLRA stay on early discovery does not apply to shareholder class actions in state court. In those cases, shareholders can assert extensive (and expensive) discovery before they’ve even established a cause of action. The very cost of this early-stage discovery gives state-court plaintiffs settlement leverage that they don’t have in federal court, where the PSLRA bars those early demands.

It’s little wonder that, after Cyan, shareholder lawyers flocked to state court, where Section 11 class action filings skyrocketed.

Defendants quickly responded with forum selection provisions requiring shareholders to bring Securities Act suits in federal court. The Delaware Supreme Court ruled in 2020’s Salzberg v. Sciabacucchi that Securities Act forum selection clauses were facially valid. Several state-court judges outside of Delaware have since enforced federal forum selection clauses and dismissed state-court Securities Act class actions. As I told you last month, forum selection clauses seem to be working as defendants intended: State-court Section 11 filings have been dropping dramatically for two years, according to Cornerstone Research, with only five new lawsuits initiated in the first half of 2012, according to Cornerstone.

I asked in that story whether federal forum selection clauses had already solved the problem that Pivotal’s case posed for the Supreme Court. Pivotal’s amici said no, quite emphatically, in briefs filed last week. The recent decline in state-court filings, said the Securities Industry and Financial Markets Association, could be due to an overall slowdown in IPOs. As long as shareholders perceive an edge in state court, where they can hit defendants with costly discovery demands, they’ll keep filing there, SIFMA said.

The Society for Corporate Governance’s amicus brief agreed that pandemic uncertainty may have led to a decline in state-court Securities Act filings. It also argued that federal forum selection provisions, which are still being tested in the state courts that must enforce them, are hardly ironclad. It’s not clear, for instance, whether underwriters are protected by the clauses, the Society for Corporate Governance said. “The ongoing litigation and divergent results highlight that Sciabacucchi is not a nationwide or even generally effective bulwark against the kind of abusive state court discovery burdens that [shareholders] seek to validate through this suit,” the brief said.

Pivotal offered some data on the scope of the purported problem in its merits brief, as I told you last month. It said that since 2018, the underwriter co-defendants in its case have been named as defendants in 287 individual state-court Securities Act suits or class actions.

Assuming that Pivotal and its amici are right, and early discovery in state-court Securities Act class actions remains a problem for defendants, they’ve lost their best chance for a quick fix as a result of Pivotal’s prospective settlement. So now they have to hope either for another beleaguered state-court Securities Act defendant to bring a case to the Supreme Court or for Congress to step in.

The Chamber’s Institute for Legal Reform is pushing for the latter. In a white paper released on Aug. 30, Institute lawyers at Mayer Brown called on Congress to close the Securities Act loophole that has allowed shareholders to evade the PSLRA’s strictures by bringing Securities Act class actions in state court. Lawmakers could either amend the Act to preclude state court jurisdiction, the Institute said, or they could change the law to allow defendants to remove state-court cases to federal court.

“Those reforms will not deprive any plaintiff of his or her day in court—or change the rules governing their claims,” the Institute insisted. “They will simply eliminate the possibility of unfair forum shopping.”

But Lyle Roberts of Shearman & Sterling, who wrote an amicus brief backing Pivotal for the Washington Legal Foundation, said by email that a closely divided Congress isn’t likely to get involved in rewriting securities laws. He’s instead counting on the justices. “Now that the Supreme Court has expressed an interest in resolving the issue, I think the likeliest route to change is another set of defendants seeking review,” Roberts said. “Hopefully that happens soon.”

Pivotal counsel Maynard and shareholder lawyer Goldstein did not respond to my emails.

Read more:

What do shareholders have to lose in new SCOTUS securities class action showdown?

New securities class action issue at SCOTUS: Does PSLRA discovery stay apply in state court?

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.