The ruling came in a securities class action filed against EverQuote Inc.’s directors and officers, stemming from the online insurance marketplace’s 2018 IPO. The ruling came in a securities class action filed against EverQuote Inc. Photo: II.Studio via Shutterstock

A New York state Supreme Court judge has ruled that securities cases brought in state court are subject to an automatic stay of discovery, just as they are in federal court, highlighting a divide in New York amid an uptick in filings following the U.S. Supreme Court’s landmark 2018 ruling in Cyan.

Justice Andrew S. Borrok cited the “simple, plain and unambiguous” language of the Private Securities Litigation Reform Act of 1995 in holding that the statute’s automatic discovery stay applied to state court actions during a pending motion to dismiss.

Borrok’s ruling, issued Tuesday, appears to be at odds with another Manhattan Supreme Court justice, who held in a recent pair of rulings that the stays would undermine the U.S. Supreme Court’s holding in Cyan that state courts have jurisdiction to hear cases over allegedly false or misleading disclosures in connection with initial public offerings.

In a 17-page decision, Borrok said he disagreed with the “reasoning and conclusion” that automatic discovery stays should apply to federal actions but not those brought in state courts, saying that federal law did not distinguish between the two.

“Nowhere,” Borrok wrote,”does the statute indicate that it applies only to actions brought in federal court.”

“The statute simply does not say that the automatic stay is limited to claims brought pursuant to the [Securities and Exchange Act of 1933] in federal court,” he said.

The ruling came in a securities class action filed against EverQuote Inc.’s directors and officers, stemming from the online insurance marketplace’s 2018 IPO. The defendants moved to dismiss the case and asked for a stay of discovery pending a ruling on their motion.

Plaintiff Mark Townsend opposed the motion and pointed to Justice Saliann Scarpulla’s rulings that nixed the automatic waiting period for discovery.

Borrok, however, came down on the side of EverQuote’s brass. In his ruling, Barrok said Congress enacted the stays to prevent plaintiffs from using otherwise meritless lawsuits to make significant discovery in the hope of leveraging an early settlement.

There was “simply no basis,” he said, to think the same reasoning wouldn’t apply to the same types of cases brought in state court.

“At the risk of gilding the lily, the court notes that a divergence in the application of the Reform Act discovery stay in state and federal court would create the undesirable … and absurd incentive for lawsuits brought under the 1933 Act to be brought in state court as opposed to federal court to avoid the very protection supporting the enactment of the Reform Act and necessarily confounding Congress’ acknowledged intention that the lion’s share of securities litigation would occur in the federal courts,” Borrok wrote.

Attorneys from both sides were not immediately available comment on the ruling.

Townsend is represented by Samuel Rudman of Robbins Geller Rudman & Dowd.

The defendants are represented by Daniel Halston and Timothy Perla of Wilmer Cutler Pickering Hale and Dorr and Sharon Nelles and Andrew Finn of Sullivan & Cromwell.

 

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