Opinion
No. C 03-4999 MJJ.
November 18, 2004
ORDER DENYING DEFENDANTS' MOTION FOR STAY OF DISCOVERY IN FACTUALLY-RELATED STATE DERIVATIVE ACTION
INTRODUCTION
Before the Court is Defendants Gilead Sciences, Inc., John C. Martin, John F. Milligan, Mark L. Perry, Norbert W. Bishofberger, Anthony Carraciolo, and William A. Lee's ("Defendants") Motion for Stay of Discovery in Factually-Related State Derivative Action. This motion was heard prior to Defendants' motion to dismiss Plaintiffs' Consolidated Amended Class Action Complaint. Plaintiffs oppose both motions. Additionally, the plaintiffs in the related state court action oppose the motion for stay of discovery. For the following reasons, the Court DENIES this motion.
PROCEDURAL POSTURE
On November 10, 2003, the first of seven securities class actions was filed in this Court against Defendants, consisting of Gilead Sciences, Inc. ("Gilead") and its officers. (Defendants' Motion for Stay of Discovery ("Mot.") at 5.) On April 30, 2004, Plaintiffs filed their consolidated amended complaint, alleging a class period of July 14, 2003 through October 28, 2003. ( Id.) On June 21, 2004, Defendants filed a motion to dismiss the amended complaint. ( Id.) Discovery has been stayed in the federal action pursuant to section 21D(b)(3)(B) of the Securities Exchange Act of 1934. 15 U.S.C. § 78u-4(b)(3)(B).
On December 16, 2003, two shareholder derivative actions were filed in the Superior Court of the State of California, County of San Mateo, against Gilead and several of its officers and its entire board of directors ("State Defendants"). ( Id.) The state court plaintiffs ("State Plaintiffs"), represented by counsel not involved in the federal action, served interrogatories and request for production of documents on State Defendants on January 27, 2004. State Defendants objected. ( Id.) After State Plaintiffs amended their complaint on July 1, 2004, State Defendants demurred, which was denied by the superior court. ( Id. at 6.) State Defendants filed a motion in the state action to stay that matter pending determination of their petition for writ of mandate to the California Court of Appeal to overturn the state court's denial of demurrer.
On June 2, 2004, State Plaintiffs served a deposition notice on Gilead seeking testimony from Gilead's person most knowledgeable as to numerous topics, including Gilead's financial results for the second quarter and third quarters of 2003 and inventory levels of Viread. ( Id.) State Plaintiffs also seek documents relating to these same topics, as well as SEC filings, insurance coverage, the relationship between the State Defendants, and the public announcements at issue. ( Id.) On June 11, 2004, State Defendants objected and moved for a protective order. The superior court denied this motion. ( Id.)
On August 19, 2004, Defendants filed, in this Court, their motion for stay of discovery in the state court action "until the complaint in this federal securities class action . . . is either dismissed with prejudice or survives Defendants' motion to dismiss." ( Id. at 1.)
When this Court heard the motion to stay discovery on November 5, 2004, the parties noted that the California Court of Appeal issued a writ of mandate to the state superior court to grant State Defendants' demurrer. On October 20, 2004, the state court granted the demurrer. Moreover, the parties expressed that a stay of discovery regarding all matters had been granted, but that this stay was lifted on October 29, 2004. State Plaintiffs expressed that they would begin discovery to amend their complaint, pending the resolution of Defendant's motion to stay discovery.
LEGAL STANDARD
The Securities Litigation Uniform Standards Act of 1998 ("SLUSA") grants federal courts the discretionary authority to order that discovery in private actions in state courts be stayed. In particular, the applicable provision of the SLUSA states:
Circumvention of stay of discovery. 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.15 U.S.C. § 78u-4(b)(3)(D). As the relevant legislative history explains, federal courts were given this authority "to prevent plaintiffs from circumventing the stay of discovery under the [Private Securities Litigation] Reform Act by using State court discovery, which may not be subject to those limitations, in an action filed in State Court." H.R. Rep. No. 105-640 (1998). Additionally, because circumvention of the stay of discovery in federal actions was a key abuse that the legislation was designed to prevent, the United States House of Representatives Committee on Commerce intended "that courts use this provision liberally, so that the preservation of State court jurisdiction of limited individual securities fraud claims does not become a loophole through which the trial bar can engage in discovery not subject to the stay of the Reform Act." Id.
The Private Securities Litigation Reform Act ("PSLRA"), which preceded the SLUSA, provides for an automatic stay of discovery in federal securities actions where, as here, a defendant files a motion to dismiss a complaint. See 15 U.S.C. § 78u-4(b)(3)(B). Both relevant provisions of the PSLRA and the SLUSA are codified in 15 U.S.C. section 78u-4.
In interpreting section 78u-4(b)(3)(D), courts have identified two interests which the SLUSA was designed to protect: 1) to prevent the imposition of any unreasonable burden on a defendant before disposition of a motion to dismiss and 2) to avoid the situation in which a plaintiff sues without possessing the requisite information to meet the heightened pleading requirements of the PSLRA, then uses discovery to acquire that information and resuscitate a complaint that is otherwise subject to dismissal. Lapicola v. Alternative Dual Fuels, Inc., No. 3-02-CV-0299-G, 2002 U.S. Dist. LEXIS 5941 at *5 (N.D. Tex. April 5, 2002) (citation omitted).
ANALYSIS
The Court first takes issue with State Plaintiffs' interpretation of section 78u-4(b)(3)(D): "It is clear that, for a federal court to stay discovery, defendants must make a proper showing that the State Derivative Action was filed in an attempt to circumvent the discovery stay set forth by the PSLRA." Nowhere does the statute imply, let alone explicitly state, that Defendants must show that State Plaintiffs filed the state action with the intent to circumvent the PSLRA. Based on the text of and legislative intent behind section 78u-4(b)(3)(D), which seeks to close a loophole exploited by plaintiffs' attorneys, the Court finds that Defendants must show that the Court's jurisdiction to hear a securities class action will be affected if a stay of state court discovery is not granted.Since no federal circuit court has established a set of factors to guide a lower court's determination as to whether to grant a stay of discovery, the Court relies on those factors addressed in relevant district court decisions: specifically, 1) whether there is a risk of Plaintiffs obtaining State Plaintiffs' discovery, and to what extent a confidentiality agreement and/or protective order with Defendants can minimize this risk; 2) whether the state and federal actions contain overlapping legal claims and underlying facts; and 3) the scope of discovery needed to amend the state complaint, and the burden that this discovery will impose on Defendants.
A. Risk of Circumvention
In In re DPL Inc., Securities Litigation, 247 F.Supp. 2d 946 (S.D. Ohio 2003), the court recognized that it had the jurisdiction to decide whether the plaintiff's consolidated complaint set forth claims under the heightened pleading standards imposed by the PSLRA before any discovery had taken place. Id. at 949-950. The court granted the defendants' motion to stay discovery in the state actions because there was evidence that one attorney represented both state and federal plaintiffs, and anticipated sharing with the federal plaintiffs the discovery in the state court action. Id. at 950-951. The court noted that the stay would remain in effect until the court ruled on defendants' to-be-filed motion to dismiss. Id. at 951.
In another case cited by Defendants, the district court enjoined all discovery in the state court action because of the similarity of underlying facts and relief sought in both the state and federal actions, and because the state plaintiffs acknowledged that they were covered by the consolidated federal class action. Newby v. Enron Corporation, 2002 WL 1001056 at *3 (S.D. Tex. May 1, 2002); aff'd, 338 F.3d 467 (5th Cir. 2003). Additionally, the court noted that the state plaintiffs had already extensively undertaken discovery. The court ruled that the enjoinment would remain in effect until the court had ruled on defendants' motion to dismiss. Id. at *2-3.
The Court finds that there is insufficient evidence showing that Plaintiffs could obtain State Plaintiff's discovery to warrant a stay of discovery. First, unlike the cases relied upon by Defendants, there are separate attorneys representing each set of plaintiffs in the respective actions. (State Opp. at 7:13-15.) Moreover, there is no evidence of collusion between Plaintiffs and State Plaintiffs, nor is there a sharing agreement, as existed in In re DPL. On the contrary, both Defendants and State Plaintiffs acknowledge that a protective order and/or confidentiality agreement should prevent the sharing of discovery between the two actions. (State Opp. at 6-7; Mot. at 11 n. 9; Joint Declaration of David J. George and Lori G. Feldman in Support of Plaintiffs' Response to Defendants' Motion for Stay of Discovery.) The Court strongly recommends, as State Plaintiffs suggest, that such agreement contain a provision requiring the parties to file any publicly available documents under seal. (State Opp. 7:3-4.)
At the November 5, 2004 motion hearing, the parties noted the applicability of California Rule of Court 243.1, which gives state courts discretion in ordering that a record be filed under seal if certain facts are established. Cal. R. Ct. 243.1. The state court will consider, inter alia, whether an overriding interest overcomes the right to public access, whether a substantial probability exists that this interest will be prejudiced if the record is not sealed, and whether a less restrictive means exists to achieve this interest. Id. The statute does not define "overriding interest," thus it is solely within the province of the state court to define the scope of this term. Nevertheless, it is plausible that the state court will determine that Congress's interest in preventing the circumvention of the PSLRA overrides the right to public access of court filed documents. Additionally, the Court notes that its alternative to recommending a confidentiality agreement — staying discovery in the state court action — is a considerably more restrictive means to achieve the interest of the SLUSA. Whether there is a means that is less restrictive than a confidentiality agreement is again, a determination made by the state court.
B. Overlapping Claims
The Court next considers whether the underlying facts of both the state and federal actions are similar such that discovery in the state action would assist Plaintiffs in the federal action. See Newby, 2002 WL 1001056 at *3. State Plaintiffs, relying on Tobias Holdings, Inc. v. Bank United Corp., 117 F.Supp.2d 162 (S.D.N.Y. 2001), argue that since the state action only alleges state law claims, whereas the federal action alleges federal securities violations, a discovery stay for the state claims is not warranted. (State Opp. at 8-9.) The Court disagrees with State Plaintiffs' reliance on Tobias Holdings. First, that court's holding was limited to the plaintiff's federal securities claim and state common law claims brought under the district court's diversity jurisdiction. Tobias Holdings, 177 F.Supp. 2d at 164. Thus, the court's focus was limited to the stay provision of the PSLRA (staying discovery in federal actions), not the SLUSA (staying discovery in state actions), which is at issue before the Court. Second, the court merely speculated that federal courts would have no basis on which to stay discovery in a parallel state action involving non-fraud claims, because the non-fraud claims would not interfere with the jurisdiction of the federal court. Id. at 168-169. The court failed to consider how parallel state actions, even those involving non-fraud claims, could result in discovery that would assist the federal plaintiffs in meeting the heightened pleading standard under the PSLRA. The court likely denied the stay of discovery because there was little evidence "of the perceived abuses addressed by Congress" — using discovery to coerce a settlement. Id. at 165-166.
The court held that the stay provisions of the PSLRA ( 15 U.S.C. § 78u-4(b)(3)(B)) did not apply to state law non-fraud claims (breach of contract, conspiracy, and tortioius interference with contract) that are raised in federal court, and which are heard based on the court's diversity jurisdiction. Tobias Holdings, 177 F. Supp. 2d at 169.
Interestingly, the court was not concerned with the fact that the discovery for the plaintiff's breach of contract and tortious interference claims overlapped with discovery for the federal securities claims. Id. at 165 n. 3.
Instead, the Court reads section 78u-4(b)(3)(D) more broadly: "a court may stay discovery proceedings in any private action in a State Court, as necessary in aid of its jurisdiction." 15 U.S.C. 78u-4(b)(3)(D) (emphasis added). Hence, the focus should be on whether discovery in the state action will adversely affect a court's ability to decide a federal securities action, not whether the state claims mirror the federal claims. The Court recognizes that the underlying facts of the state and federal claims are relevant to this analysis. In the case at hand, the underlying facts of both claims are the same — both claims arise out of alleged misstatements made by Gilead and its officers. In fact, State Plaintiffs conceded in their Amended Complaint that "[t]he misstatements alleged in the class complaint are the same as those which are alleged in the instant action." (Declaration of Grant Fondo in Support of Defendants' Motion for Stay of Discovery, Ex. B at 20 n. 1.) The Court notes that discovery in the state action would be relevant and useful for Plaintiffs if they were to amend their complaint. However, the Court finds that a confidentiality agreement between Defendants and State Plaintiffs, which also requires public documents to be filed under seal, will be sufficient in preventing Plaintiffs' circumvention of the PSLRA.
C. Scope and Burden of Discovery
Another purpose of section 78u-4(b)(3)(D) is to prevent the imposition of any unreasonable burden on a defendant before disposition of a motion to dismiss. See Lapicola, 2002 U.S. Dist. LEXIS 5941 at *5. As stated above, both the state and federal actions are based on the same underlying facts. The Court agrees with Defendants' assertion that compliance with State Plaintiffs' and Plaintiffs' likely duplicative discovery requests will be burdensome. ( See Mot. at 12-13.) Discovery in both actions will, at a minimum, require the depositions of Gilead's senior officers and directors. Nevertheless, the burden on Defendants to comply with the discovery requests of State Plaintiffs, who must amend their state complaint, is not so unreasonable as to warrant this Court granting a stay of discovery.
The Court disagrees with State Plaintiffs' suggestion that their sharing of copies of discovery with Plaintiffs will alleviate Defendants' burden. ( See State Opp. at 4 n. 3.)
CONCLUSION
Because the risk that Plaintiffs may rely on discovery obtained by State Plaintiffs is relatively low compared with the few district court cases that have considered this issue, the Court finds that the stay of discovery in the state court proceedings is unnecessary. The Court believes that a confidentiality agreement between Defendants and State Plaintiffs will adequately prevent Plaintiffs from relying on discovery in the state action. For the foregoing reasons, Defendants' motion to stay discovery is DENIED.