The PSLRA Discovery Stay in Complex Litigation

The following post comes to us from Wendy Gerwick Couture, Associate Professor at the University of Idaho College of Law.  It is based on her recent paper entitled “The PSLRA Discovery Stay Meets Complex Litigation: Five Questions Answered,” which is forthcoming in the Securities Regulation Law Journal and is available here.

Congress enacted the PSLRA discovery stay nearly 20 years ago in order to prevent fishing-expedition and extortive discovery.  The statute states that “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.”  The stay applies in a straightforward fashion in simple cases but raises myriad issues in complex cases with multiple defendants, multiple claims, and staggered briefing schedules.  Appellate courts rarely address the intricacies of the stay, and lower courts are in disarray.  Because the application of the stay is often outcome-determinative, I seek to answer how it applies in five complex scenarios.

I am not starting with a clean slate, as if I were charged with drafting a discovery stay.  Rather, I seek to remain true to the statute as written, as well as the policy rationales that inform the statute.  Thus, if the plain language of the statute unambiguously addresses an issue, the text governs unless it would lead to absurd results or defeat clearly expressed legislative intent.  If the text of the statute is ambiguous, however, I look to the policies underlying the statute, as expressed in the legislative history, for interpretive guidance.

When does the discovery stay begin?  Courts addressing this question are divided, with some imposing the stay when the case is filed, some imposing the stay upon the defendant’s indication that it intends to file a motion to dismiss, and some holding that the stay begins only upon the filing of the motion to dismiss.  I argue that, consistent with the legislative intent to prevent fishing-expedition and extortive discovery, the stay begins upon service of the complaint—when the defendant has the opportunity to file a motion to dismiss—and continues until the defendant answers (rather than moving to dismiss) or the motion to dismiss is denied.

Does the discovery stay apply to successive motions to dismiss, even if the first motion to dismiss was denied in part?  The majority of courts impose the discovery stay during successive motions to dismiss.  I agree with the weight of authority because, under the plain language of the statute, the stay applies to “any” motion to dismiss, and this reading is consistent with the legislative goals of preventing fishing-expedition and extortive discovery.

Does the discovery stay apply to motions for judgment on the pleadings under Federal Rule of Civil Procedure 12(c)?  Most courts apply the discovery stay during the pendency of a 12(c) motion, reasoning that the same standard applies when assessing the sufficiency of a complaint, regardless of whether the issue is raised via a pre-answer motion to dismiss under Rule 12(b)(6) or a post-answer motion for judgment on the pleadings under Rule 12(c).  Contrary to the weight of authority, I argue that the stay does not apply to 12(c) motions because, under the plain language of the statute, the stay applies only to motions to dismiss, and this reading neither contravenes legislative intent nor leads to absurd results.  Defendants have the opportunity to invoke the stay by filing a motion to dismiss, and that opportunity is all that the PSLRA affords.  Defendants may choose to forego the discovery stay, answer the complaint, and then file a motion for judgment on the pleadings, but this strategic choice does not merit expanding the stay beyond the statutory text.

Does the discovery stay apply to the entire case, even if only a subset of defendants have pending motions to dismiss?  The majority rule is that the discovery stay applies to the entire case.  The minority rule is that discovery is stayed only with respect to the defendant whose motion to dismiss is pending and can proceed against other defendants, whose motions to dismiss were denied or who answered rather than moving to dismiss.  Consistent with the majority rule, I argue that the stay applies to the entire case because, under the plain language of the statute, “all” discovery is stayed, and this reading at least partially furthers the legislative goals of preventing fishing-expedition and extortive discovery.

After the discovery stay has been lifted, does the PSLRA prevent the plaintiff from relying on discovered materials to assert additional claims against existing, new, or previously dismissed defendants?  Courts are divided on the question of whether the PSLRA imposes restrictions, in addition to those already imposed by the Federal Rules of Civil Procedure, on a plaintiff’s ability to amend the complaint to assert additional claims after discovery has begun.  At one extreme, some courts, when dismissing claims for failure to meet the PSLRA’s pleading standards, explicitly invite plaintiffs to seek leave to amend to re-assert the dismissed claims if they uncover additional evidence during discovery.  Other courts, without going so far as to invite such amendment at the outset, permit plaintiffs to use legitimately obtained discovery to amend their complaints.  At the other extreme, a number of courts view a plaintiff’s attempt to amend the complaint after discovery has begun as an impermissible run-around the stay.  I argue that the PSLRA does not impose constraints on amendment in addition to those already included in Rule 15(a)(2) (which states that the “court should freely give leave [to amend] when justice so requires”), Rule 16(b)(4) (which states that a scheduling order’s amendment deadline “may be modified only for good cause and with the judge’s consent”), Rule 54(b) (which affords the court discretion to allow a plaintiff to re-assert a claim that was previously dismissed with prejudice but without entry of a final judgment), and the “law of the case” doctrine (which limits the court’s discretion to allow a plaintiff to re-assert a previously dismissed claim).  The PSLRA’s text does not include any additional constraints, and this reading neither contravenes legislative intent nor leads to absurd results.

I hope that this essay will help guide litigants and courts as they seek to apply the PSLRA discovery stay in complex litigation and will encourage other scholars and commentators to delve into this messy and unsettled, yet frequently outcome-determinative, area of securities litigation.