Here’s an interesting topic to take you into the Labor Day weekend.  If you’ve been keeping an eye on the case Pivotal Software, Inc v. Superior Court of California as a potential solution to address a current perceived imbalance in the discovery rules in state and federal shareholder class actions, it looks like you’ll have to wait for another case because this one has reached a tentative settlement and won’t be argued before the US Supreme Court (SCOTUS) after all.

According to Reuters, yesterday, SCOTUS 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.

SCOTUS ruled in 2018’s Cyan v. Beaver County Employees Retirement Fund case 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 (PSLRA), 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.

So, if you were a plaintiff’s lawyer in these cases, where would you file?  That’s right – in the state courts, where Section 11 class action filings have 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. 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 2021, according to Cornerstone.

Problem solved?  Not according to Pivotal’s amici filed last week, where the recent decline in state-court filings being attributed as much to an overall slowdown in IPOs as anything else.  Hence, defendants hoping to address the problem for good now have to hope either for another beleaguered state-court Securities Act defendant to bring a case to SCOTUS or for Congress to step in.  Good luck with that!

So, what do you think?  Do you think discovery should be allowed in these cases to commence before a motion to dismiss is heard?  Please share any comments you might have or if you’d like to know more about a particular topic.

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