In Hoffman v. AT&T Inc., Justice Ostrager of the Commercial Division recently denied a motion to stay a securities class action in favor of a subsequently filed and more comprehensive action brought in the Southern District of New York (SDNY).[1]  In doing so, he asserted the Commercial Division’s role in securities litigation following the U.S. Supreme Court’s decision in Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018). 

Robert Hoffman filed a class action complaint in N.Y. Supreme Court on February 7, 2019 on behalf of former shareholders of Time Warner Inc., alleging violations of the Securities Act of 1933 in connection with AT&T, Inc.’s acquisition of the company in June 2018.  The complaint alleges that in order to acquire Time Warner, AT&T issued 1.185 billion shares of new stock while failing to disclose troubles in its DirecTV and DirecTV Now business.  As the case is in the Commercial Division, discovery has not been stayed during motion practice.

On April 1, 2019, Melvin Gross filed a federal complaint in the SDNY alleging violations of both the Securities Act of 1933 and the Securities Exchange Act of 1934.  This complaint asserts broader claims on behalf of various classes of Time Warner and AT&T shareholders.  Judge Caproni in the SDNY is currently determining who of at least five sets of plaintiffs’ lawyers to designate lead or co-lead counsel. 

In ruling on defendants’ motion to stay the state action in favor of a federal action, Justice Ostrager noted that prior to the creation of the Commercial Division, and even for a period thereafter, the general rule was that securities actions filed in state court (that were less comprehensive than related federal actions) should be stayed in favor of the federal actions, even when the action was first filed in state court.[2]  The rationale was that the federal courts had a greater familiarity with securities litigation and staying the state action would avoid wasting judicial resources and potentially inconsistent decisions.

Justice Ostrager ruled that this rationale no longer holds in all cases after the creation of specialized state courts like the Commercial Division, and following the U.S. Supreme Court’s unanimous decision last year in Cyan, in which it affirmed that the Securities Litigation Uniform Standards Act of 1998 did not vitiate state courts’ jurisdiction over class actions alleging Securities Act of 1933 violations.  Justice Ostrager noted that the state court complaint could be “well on the way to judicial resolution while five sets of plaintiff’s 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.”[3]  Moreover, the liability issues involved in a 1933 Act case, Justice Ostrager pointed out, are less complex than issues the Commercial Division resolves week in and week out.  In fact, the federal court might want to stay the 1933 Act claims in its case to allow their swift resolution in the Commercial Division.

Justice Ostrager concluded by asserting that “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.”[4]  The motion was dismissed without prejudice, however, and Justice Ostrager stated that he is willing to entertain a subsequent motion to stay the action depending on developments in the federal action.