Dfinity Defendants Win Motion to Stay Pursuant to PSLRA in Purported Securities Class Action, Addressing Application in State Court

On July 25, 2022, Judge Danny Y. Chou of the Superior Court of the State of California, County of San Mateo, issued a decision holding that the automatic discovery stay pursuant to Section 77z‑1(b)(1) of the Private Securities Litigation Reform Act (the “PSLRA Stay”) applies not only in federal court, but also in state court. Judge Chou therefore granted Cravath clients Dfinity Foundation and Dfinity USA Research, LLC’s (together, the “Dfinity Defendants”) motion to stay discovery pending resolution of the Dfinity Defendants’ demurrer.

In July 2021, Plaintiff Daniel Ocampo filed a purported class action complaint against the Dfinity Defendants and others, alleging that the Dfinity Defendants had sold unregistered securities in violation of Sections 5, 12(a)(1) and 15 of the Securities Act of 1933. The Dfinity Defendants demurred (i.e., moved to dismiss), and separately moved to stay all discovery pursuant to the PSLRA Stay. The Dfinity Defendants argued that, under the plain text and structure of the statute, the PSLRA Stay applies not only in federal court, but also in state court. The Dfinity Defendants further argued that Congress enacted the PSLRA Stay in order to prevent securities plaintiffs from coercing settlements through high discovery costs, even in cases that turn out to be legally insufficient, and that this purpose applies with as much force in state court as it does in federal court. Trial courts across the country have struggled with the question of whether the PSLRA Stay applies in state court for over a decade and have reached opposite conclusions; although the U.S. Supreme Court appeared poised to resolve the question when it granted certiorari in In re Pivotal Software, Inc. Securities Litigation in 2021, the parties settled before the high court could provide much‑needed clarity.

Argument on the Dfinity Defendants’ motion was heard in June, at which time Judge Chou requested supplemental briefing. On July 25, the Court granted the Dfinity Defendants’ motion, explaining that even though “most California trial courts appear to have concluded that the PSLRA’s automatic stay provision does not apply in state court actions,” the plain language, structure and purpose of the PSLRA Stay and surrounding provisions all support its application to state court actions. The Court emphasized that the cost of discovery “often forces innocent parties to settle frivolous securities class actions,” that by “staying discovery until the pleadings have been settled, Congress sought to prevent such vexatious discovery requests,” and that applying the PSLRA Stay in federal court but not in state court would “create the undesirable (and unsupported by the text of the statute or its purpose) and absurd incentive” to bring Securities Act lawsuits in state court in order to avoid the protections of the PSLRA. The Court also “urge[d] the high court to provide [the] last word as soon as possible so it, like numerous other state trial courts in California and throughout the country, no longer have to struggle with this vexing question.”

The Cravath team included partners Kevin J. Orsini, who argued the motion, Antony L. Ryan and Lauren M. Rosenberg, and associates Evan D. Siegel and Caitlin J. Bailey.

The case is Daniel Ocampo v. Dfinity USA Research, LLC, et al., No. 21‑Civ‑03843 (San Mateo Cal. Super. Ct. 2021).