The Private Securities Litigation Reform Act of 1995 (PSLRA), at 15 U.S.C. 78u-4(b)(3)(B), provides for a mandatory stay of "all discovery and other proceedings" in private securities actions:
In any private action arising under this chapter, 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.
The Securities Litigation Uniform Standards Act of 1998 (SLUSA) added a provision to the PSLRA, at 15 U.S.C. 78u-4(b)(3)(D), entitled "Circumvention of Stay of Discovery" which reads, in its entirety:
Upon a proper showing, a court may stay discovery proceedings in any private action in a State court, as necessary in aid of its jurisdiction, or to protect or effectuate its judgments, in an action subject to a stay of discovery pursuant to this paragraph.
The difficulty arises when two lawsuits are pending at the same time -- one in federal court asserting federal securities claims and another in state court alleging different claims -- against the same defendant arising out of common or related facts or issues. The defendant may contend that discovery in the state action should also be stayed because permitting discovery on those facts or issues the two cases have in common would "circumvent" the discovery stay in the federal case.
Thus, when a discovery stay is automatically imposed pending resolution of a defendant's motion to dismiss in a federal securities case, the PSLRA also explicitly authorizes the defendant, upon a "proper showing" to the court in that case, to seek an order staying discovery in pending state litigation "as necessary in aid of [the federal court's] jurisdiction, or to protect or effectuate [the federal court's] judgments."
But should this congressional language be construed as broadly as it may appear at first blush? And if so, does this provision exceed the limits, rooted in the Supreme Court's well-entrenched principles of federalism and comity, on Congress' power to authorize federal courts to intrude so expansively on the prerogatives of state judges?
As the prerequisite for a federal court's exercise of the power to stay discovery in a state court case, SLUSA's circumvention provision adopts in identical language two of the three exceptions to the broad prohibition on enjoining state court proceedings found in the Anti-Injunction Act, 28 U.S.C. 2283. By so doing, Congress was obviously trying to clothe federal discovery-stay orders in the traditional trappings of permissible federal court interference with state court litigation.
The "protect or effectuate its judgments" language has been interpreted in connection with the identical Anti-Injunction Act provision to authorize a stay or injunction when necessary to promote or effectuate an earlier judgment by a federal court. It is usually referred to as the "relitigation exception" because it permits federal courts to issue injunction or stay orders only to ensure the preclusive effect of an earlier federal court judgment. The relitigation exception thus applies only in situations where a state court should not hear a case because of res judicata principles but is proceeding to do so anyway. Moreover, the exception only applies to federal court judgments on the merits, in which case the merits decision can be upheld by injunction if necessary. If, on the other hand, the federal court dismissed a case on procedural grounds, or otherwise issued a ruling not on the merits, a state court is free to hear the matter. See Atlantic Coast Line Railroad v. Brotherhood of Locomotive Engineers, 398 U.S. 281 (1970).
Therefore, this language authorizes federal intrusion in state court litigation only if a judgment on the merits has already been entered in the federal case that is in need of being "protect[ed] or effectuate[d]" by barring relitigation in state court. But how does this operative context justify resorting to a federal stay of state discovery? How can discovery in a state court lawsuit ever threaten the primacy or efficacy of a prior federal judgment on the merits? And when would there even be a prior federal court judgment on the merits while a discovery stay in the federal action is still pending? It would seem that the basis Congress chose for authorizing a federal stay of state discovery makes its use a logical and practical impossibility.
The second statutory justification for staying discovery requests in separate state court actions is if a stay is "necessary in aid of [the federal court's] jurisdiction. Once again, the identical term "necessary in aid of jurisdiction" in the Anti-Injunction Act has been narrowly construed. It applies in only two circumstances: where a case is removed from state court to federal court, and where a federal court first acquires jurisdiction over a case involving the disposition of real property.
With respect to the first circumstance, if a case is removed from state court to federal court and the state court does not properly relinquish jurisdiction, the federal court may enjoin further state court proceedings. See Reviser's Note to the 1948 revision to Section 2283 (the purpose of this exception is "to make clear the recognized power of the Federal courts to stay proceedings in State cases removed to the district courts"); Mitchum v. Foster, 407 U.S. 225, 234-37 (1972). As to the second circumstance, it has long been established that whatever court initially acquires in rem or quasi-in-rem jurisdiction over a matter involving real property can enjoin all other courts from hearing the matter. In fact, the only instance in which the Supreme Court has authorized the reverse situation, where a state court may enjoin parties from litigating in federal court, is where the state court first acquired jurisdiction over real property. In other words, the general rule is that whichever court first gains jurisdiction in a case concerning the disposition of real property has exclusive jurisdiction to decide claims to that property and may enforce its jurisdiction with stays or injunctions if necessary. See Donovan v. City of Dallas, 377 U.S. 408, 412 (1964); Princess Lida v. Thompson, 305 U.S. 456, 465-68 (1939). The Supreme Court has been firm in ruling that the "in aid of jurisdiction" exception applies only in real property situations and not in in-personam cases. Atlantic Coast Line Railroad v. Brotherhood of Locomotive Engineers, 398 U.S. 281, 295-96 (1970) ("the state and federal courts had concurrent jurisdiction . . . and neither court was free to prevent either party from simultaneously pursuing claims in both courts . . . Therefore the state court's assumption of jurisdiction . . . did not hinder the federal court's jurisdiction so as to make an injunction necessary to aid that jurisdiction").
There are few if any conceivable respects in which staying discovery requests in state litigation would be necessary to aid a federal district court in exercising or maintaining its jurisdiction over a federal securities action, especially in the limited sense in which the term-of-art has been consistently interpreted for decades by authoritative Supreme Court decisions.
Moreover, in the context of discovery in multiple federal court cases (which avoids to added complication of federal-state federalism and comity concerns), federal courts have allowed discovery to proceed notwithstanding the PSLRA automatic stay regarding non-securities claims pending between the same parties in separate actions in the same court, or even in the same action. For example, in In re FirstEnergy Shareholder Derivative Litigation, 219 F.R.D. 584 (N.D. Ohio 2004), the court observed that "[t]he PSLRA, by its terms, is limited to actions filed under the federal securities laws and does not apply outside this context." The court specifically held that even though "the securities fraud claims [in one case] and the shareholder derivative claims [in other cases] include similar facts, this is insufficient to bring the state law derivative claims within the ambit of [the discovery stay of] the PSLRA. . . . These claims fall outside the PSLRA's discovery stay."
Another district court has also rejected this same argument that Congress intended a PSLRA stay also to stay discovery in related litigation involving the same or similar parties. In Tobias Holdings, Inc. v. Bank United Corp., 177 F. Supp.2d 162, 167 (S.D.N.Y. 2001), the court found no congressional intent to prevent discovery in non-securities-fraud cases simply because the cases share facts in common with securities fraud cases. In that case the non-securities-fraud claims were combined with federal securities claims in the one action, and the court held that "permitting discovery [in connection with the state law claims] to proceed here would not represent an impermissible 'end run' around the PSLRA's automatic stay provisions."
The federal stay of state court discovery permitted by 15 U.S.C. 78u-4(b)(3)(D) requires an application and "proper showing" to the federal court. Based on the statutory language requiring a stay to be "necessary in aid of [the federal court's] jurisdiction" or needed "to protect or effectuate its judgments," It would seem that there are few circumstances in which a party could make such a showing that it was entitled to a stay of otherwise proper state court discovery merely because of the pendency of a discovery stay in the related federal securities litigation.