Court Denies Stay of Parallel State Court Action involving Similar, Though Not Identical, Securities Laws ViolationsPrint Article
- Posted on: Jul 1 2019
On March 20, 2018, the United States Supreme Court decided Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, 1069 (2018), in which it unanimously held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not strip state courts of subject-matter jurisdiction over class actions involving claims exclusively brought under the Securities Act of 1933 (the “1933 Act”), and does not allow for the removal of those cases to federal court.
This Blog wrote about the decision here. Among the issues we discussed that could arise in the wake of the decision was the possibility that defendants would be subject to parallel securities litigation in federal court:
Class action plaintiffs asserting claims only under the 1933 Act will most likely file their complaints exclusively in state court. After Cyan, such exclusivity could subject defendants to litigating 1933 Act cases in state court while at the same time litigating in federal court Exchange Act claims arising under substantially the same facts and circumstances as the 1933 Act claims.
At the time of the article, we noted that Cornerstone Research had found that this phenomenon had already been happening, albeit on a small scale. [Here (noting that there were seven 1933 Act actions pending in state court since 2014, all of which had parallel actions in federal court).]
One year later, parallel 1933 Act litigation has materially increased. According to a study by Stanford Securities Litigation Analytics, at the request of Professional Liability Underwriting Society, titled “State Section 11 Litigation in the Post-Cyan Environment” (the “White Paper”) (here), “[i]n the year since Cyan was decided, 26 Section 11 cases have been filed in state courts, compared to 10 cases filed in the prior year.” Of those cases, “48% … have been filed in both federal and state courts—meaning 48% of defendants have faced litigation for the same alleged violations in both state and federal court simultaneously.” Id. In the three years prior to Cyan, defendants only faced parallel litigation in 16% of the cases. Id.
Recently, Justice Barry R. Ostrager of the Supreme Court, New York, Commercial Division, was faced with a motion to stay an action arising under Section 11 of the 1933 Act “in favor of a subsequently filed and unquestionably more comprehensive federal action” involving “broader issues and multiple classes of shareholders.” Hoffman v. AT&T Inc., 2019 N.Y. Slip Op. 31811(U), at **1, 3 (Sup. Ct. N.Y. County, June 21, 2019) (here). As discussed below, the Court denied the motion.
Hoffman v. AT&T Inc.
Hoffman is a securities class action brought on behalf of the former shareholders of Time Warner Inc. (“Time Warner”), who alleged violations of the 1933 Act in connection with AT&T Inc.’s (“AT&T”) June 2018 acquisition of Time Warner (the “Acquisition”). Slip Op. at *1. In order to acquire Time Warner, AT&T issued the putative class 1.185 billion shares of new AT&T stock pursuant to a registration statement and prospectus (collectively, the ‘Registration Statement’) that, Plaintiff alleged, failed to disclose material deterioration in AT&T’s DirecTV and DirecTV Now business. Id.
On February 7, 2019, Plaintiff, Robert Hoffman (“Hoffman”), filed a complaint in New York Supreme Court asserting claims under Sections 11, 12(a)(2), and 15 of the 1933 Act “on behalf of all persons who acquired AT&T common stock pursuant or traceable to the [Registration Statement] issued in connection with” the Acquisition.
Plaintiff alleged that the “Registration Statement touted yearly and quarterly growth trends in AT&T’s Entertainment Group segment, particularly Video Entertainment, including quarterly subscriber gains in its DirecTV Now service sufficient to offset any decrease in traditional satellite DirecTV subscribers, such that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that, “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”. Plaintiff requested that the Court certify a class action, award damages and reasonable costs and expenses, and order “such other equitable or injunctive relief as deemed appropriate by the Court.”
On April 10, 2019, “the Court granted on consent a motion to designate” lead counsel “for the proposed class.” Slip Op. at *2. On May 7, 2019, lead counsel filed a First Amended Class Action Complaint, together with discovery requests. Id.
On April 1, 2019, plaintiff, Melvin Gross (“Gross”), filed a complaint in the United States District Court for the Southern District of New York, alleging violations of both the 1933 Act and the Securities Exchange Act of 1934 (the “1934 Act”), Gross v. AT&T Inc., No. 19 Civ. 2892 (S.D.N.Y.) (Caproni, J.) (the “Federal Action”). Like the Hoffman action, the Gross action asserted claims under Sections 11, 12(a)(2), and 15 of the 1933 Act against the same defendants, on behalf of the same putative class, based on the same allegations of wrongdoing (i.e., that the “Registration Statement touted . . . that AT&T was experiencing an ongoing trend of total video subscriber ‘Net Additions’”, but that “by the time of the Acquisition, AT&T’s reported ‘Net Additions’ growth trend was already reversing into a severe ‘Net Loss’”), and seeking the same relief (i.e., certification as a class action, an award of damages and reasonable costs and expenses, and “such other and further relief as th[e] Court may deem just and proper”). In addition, Gross asserted claims under Sections 10(b) and 20(a) of the 1934 Act on behalf of an additional class of persons who “purchased or acquired AT&T securities between October 22, 2016 and October 24, 2018”, and alleged additional misstatements and omissions not in the Registration Statement. Thus, the Federal Action asserted “broader claims on behalf of classes of variously situated Time Warner and AT&T shareholders.”
Pursuant to the Private Securities Litigation Reform Act (“PSLRA”), the federal court is considering motions by at least five sets of plaintiffs to be appointed lead or co-lead plaintiff.
The Court’s Decision
Justice Ostrager noted that prior to the establishment of the Commercial Division, courts evaluating a motion to stay securities litigation often placed great weight on the action that would provide the most comprehensive disposition – most generally the parallel federal action. Slip Op. at *2, citing Barron v. Bluhdorn, 68 A.D.2d 809 (1st Dept. 1979). The Court observed that this was so even when the first-filed action was in the Supreme Court. Id. Justice Ostrager explained that the rationale behind “Barron and its progeny is that where there is a substantial overlap between the parties and issues and relief sought in both state and federal courts, staying the state court case would avoid the waste of judicial resources, potential inconsistent rulings, and duplication of effort.” Id. This was especially so given the perception that the federal courts “have a greater familiarity with securities law.” Id.
That changed, held the Court, with the creation of the Commercial Division and the United States Supreme Court’s decision in Cyan. No longer should the reasoning of Barron and its progeny be “mechanically applied[,]” said the Court. Id. at *3.
[Ed. Note: CPLR § 2201 provides that, “[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just.” Despite its apparent broad scope, CPLR § 2201 “has been limited by decision.” Hope’s Windows v. Albro Metal Prods. Corp., 93 A.D.2d 711, 712 (1st Dept. 1983). Thus, “[it] is appropriate to stay an action in deference to another only where the determination in the other will resolve all of the issues in the stayed action and the judgment on one trial will dispose of the controversy in both actions. The possibility or actuality of two trials is of no importance.” Mt. McKinley Ins. Co. v. Corning Inc., 33 A.D.3d 51, 58-59 (1st Dept. 2006).
In considering a motion for a stay under CPLR § 2201, courts consider the following factors: (i) whether there is substantial overlap between the parties, issues, and relief requested; (ii) where a more complete disposition may be obtained; (iii) which court has greater familiarity with the issues; (iv) whether a stay will avoid waste of judicial resources, the potential for inconsistent rulings, and duplication of effort; (v) whether plaintiffs have demonstrated that they would be prejudiced by a stay; and (vi) which action was commenced first and whether discovery has been completed. Asher v. Abbot Labs., 307 A.D.2d 211, 211-12 (1st Dept. 2003).
In addition, New York courts consider whether to apply the first-filed rule – that is “the court which has first taken jurisdiction is the one in which the matter should be determined and it is a violation of the rules of comity to interfere.” In re Topps Co., Inc. S’holder Litig., 2007 WL 5018882, at *3 (Sup. Ct., N.Y. County June 8, 2007).]
Free of the mechanical application of Barron and its progeny, Justice Ostrager held that it was not appropriate to stay the Hoffman action in favor of the Gross action:
Here, a New York plaintiff has initiated discrete claims on behalf of Time Warner shareholders that can be well on the way to judicial resolution while five sets of plaintiffs lawyers jockey for control of a federal court action that includes claims on behalf of individuals who are not members of the state court class as well as the members of the state court class. The liability issues in a 1933 Act case are, if anything, less complex than issues the Commercial Division resolves every week. Defendants are free to test the merits of plaintiff[’]s claims before this Court, which is familiar with the issues in this case, and there is no reason to believe that the merits of plaintiff[’]s claims cannot be resolved as efficiently and, perhaps, more expeditiously than the 1933 Act claims asserted in the federal action because the likelihood is that more than one set of counsel will be appointed to represent differently situated shareholders in the federal action and the pleadings in the federal court may not be fixed for an extended period of time.
Slip Op. at *3.
The Court also floated the possibility that Judge Caproni could stay litigation of the 1933 Act claims in the Gross action under the Colorado River Abstention Doctrine: “because the federal action involve[d] broader issues and multiple classes of shareholders, the federal court may consider staying the 1933 Act claims in the federal action in favor of this earlier filed action.” Id., citing Krieger v. Atheros Communications, Inc., 776 F. Supp. 2d 1053, 1057-63 (N.D. Cal. 2011) (staying state law claims under the Colorado River Doctrine while allowing 1934 Act claims to proceed).
[Ed. Note: Under the Colorado River Abstention Doctrine, a federal court may abstain from exercising its jurisdiction in favor of parallel state proceedings where doing so would serve the interests of “[w]ise judicial administration, giving regard to the conservation of judicial resources and comprehensive disposition of litigation.” Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 818 (1976).
Colorado River and its progeny set forth seven factors, that, although not exclusive, are relevant to determining whether it is appropriate to stay proceedings: (1) whether the state court first assumed jurisdiction over property; (2) inconvenience of the federal forum; (3) the desirability of avoiding piecemeal litigation; (4) the order in which jurisdiction was obtained by the concurrent forums; (5) whether federal law or state law provides the rule of decision on the merits; (6) whether the state court proceedings are inadequate to protect the federal litigant’s rights; and (7) whether exercising jurisdiction would promote forum shopping. Id. at 870; Krieger, 776 F. Supp. 2d at 1057. “Exact parallelism” between the state and federal actions is not required; it is enough if the two actions are “substantially similar.” Krieger, 776 F. Supp. 2d at 1057, quoting Nakash v. Marciano, 882 F.2d 1411, 1416 (9th Cir. 1989). “These factors should be weighed in a ‘pragmatic, flexible manner with a view to the realities of the case at hand’ and ‘with the balance heavily weighted in favor of the exercise of jurisdiction.’” Id., quoting Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16, 21 (1983). Courts have cautioned that the existence of a substantial doubt as to whether the state proceedings will resolve the federal action generally precludes the granting of a stay pursuant to Colorado River. Krieger, 776 F. Supp. 2d at 1058, citing Intel Corp. v. Advanced Micro Devices, Inc., 12 F.3d 908, 913 (9th Cir.1993).]
“In short,” concluded the Court, “the ‘first filed’ rule must have some vitality in a post-Cyan world. Otherwise, 1933 Act cases could never proceed in state court whenever a subsequently filed federal court action asserts claims in addition to 1933 Act claims.”
In the wake of Cyan, there has been an uptick in the number of cases in which defendants face parallel actions involving the same or substantially the same subject matter and requested relief. In New York, motions to stay a state court securities action in favor of a substantially similar federal securities action have been met with mixed results. Compare Hoffman with Reaves v. Kessler, 2017 WL 2482948, at *5 (Sup. Ct., N.Y. County June 8, 2017) (in a pre-Cyan case, the court stayed the state action, holding “Because the federal court has exclusive jurisdiction over the … claims under the Exchange Act, the federal court will provide a more complete disposition of the claims. A stay avoids the risk of inconsistent rulings, duplication of effort, and waste of judicial resources.”), and In re Qudian Sec. Litig., 2018 WL 6067209, at *2 (Sup. Ct., N.Y. County 2018) (post Cyan, staying 1933 Act class action pending resolution of federal securities action).
In addition to a stay motion, defendants can seek to enjoin the state action in federal court under the All Writs Act and the Anti-Injunction Act. See White Paper at 15. However, the likelihood of success seems dubious. Two such motions were made prior to Cyan. Id. Both were denied. Id. and id. at n.30 (explaining the injunctive relief under both acts).
Defendants can also seek abstention under the Colorado River Abstention Doctrine, as suggested by Justice Ostrager, though it seems unlikely defendants would avail themselves of this option.
While Justice Ostrager left the door open to revisit the decision if developments in the federal action “provide sufficient cause”, it is unclear to what developments the Court is referring. Perhaps he is referring to the possibility that settlement discussions involving all claims could begin in the federal action, requiring a stay of the state action during such discussions. Or, that it becomes apparent the putative class in the state action will be prejudiced by having two sets of lead plaintiffs and lead counsel litigating their claims – e.g., the class representative in the state action is found to be conflicted or has some other disabling reason for not being able to adequately represent the putative class, plaintiffs in both actions incur excessive and duplicative fees that reduce any class recovery, and two sets of putative class representatives advancing materially inconsistent case strategies.
In any event, it remains to be seen whether “developments in the federal action [will] provide sufficient cause for [the] Court to revisit the disposition of [the] motion to stay proceedings in [the state court] action.…” Slip Op. at *4. This Blog will continue to monitor the developments in the Hoffman
Tagged with: 1933 Act, and Business Litigation, Colorado River Abstention Doctrine, Commercial Litigation, CPLR 2201, Cyan, First-Filed Rule, Parallel Litigation, Securities, Securities Act, Securities Class Actions