U.S. Supreme Court

New York state court judges grappled in 2019 with the fallout from the U.S. Supreme Court's Cyan decision last year, which held that class actions under the Securities Act of 1933 may be brought in state court.

The unanimous March 2018 decision from the high court has touched off an influx of securities suits filings in state courts across the country, with New York getting the bulk of new cases. State Supreme Court justices, meanwhile have had to parse through several important issues in the post-Cyan landscape, often reaching conflicting decisions that have set up the need for guidance from appellate courts in the coming year.

Among the most vexing questions for judges has been whether the federal Private Securities Litigation Reform Act of 1995′s automatic stay of discovery pending motions to dismiss applies applies to state court claims, the same way it does in federal securities actions.

The first to address the issue, Justice Saliann Scarpulla ruled in July that it did not, saying that application of the stay would "would undermine Cyan's holding that '33 Act cases may be heard in state courts."

However, in a ruling hailed by defense attorneys, Justice Andrew Borrok reached the opposite conclusion. Borrock held that in the case In re Everquote Securities Litigation that the "simple, plain, and unambiguous language" of the PLSRA requires the automatic stay and that divergence from the federal statute would the "absurd incentive" to litigate 1933 Act lawsuits in state courts, as opposed to federal forums, as Congress had intended.

For companies defending against the claims, Cyan and the resulting uncertainty in New York has created the troubling possibility of having to defend parallel lawsuits in both state and federal court over essentially the same claims.

Firms like Skadden, Arps, Slate, Meagher & Flom have advocated for judges to adopt Borrok's reasoning. But an understaffed New York Supreme Court, Appellate Division, First Department has yet to hear arguments on the issue, setting up a potential ruling as one of the key developments to watch for in 2020.

In the new year, the First Department will also likely be asked to address whether to apply the state's heightened pleading standards for misrepresentation and fraud claims and whether state actions under the 1933 act should be halted pending the resolution of federal cases arising from the same facts.

New York courts have so far signaled a preference for staying state court actions in favor of first-filed federal claims. However, practitioners are still waiting for rulings on pleading standards, and a number of cases have been fully briefed.

The First Department, and other appeals courts, may look to precedent from the U.S. Court of Appeals, which has extensive experience in deciding securities case, but state courts are in now way bound to follow the federal case law.

Of course, Congress has the ability to amend federal statute to clarify, after Cyan, that securities cases can only be brought in federal court. Absent that, lawmakers in Albany could take up their own legislation to address the post-Cyan landscape.

However, there was little expectation that legislative bodies would act in the near future, and lawyers will be sure to keep a close watch on the First Department in the coming year.

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