MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
- and -
JEFFREY W. LAWRENCE (166806)
DAVID R. STICKNEY (188574)
222 Kearny Street, 10th Floor
San Francisco, CA 94108
Telephone: 415/288-4545
LAW OFFICES OF JAMES V.
BASHIAN, P.C.
JAMES V. BASHIAN
500 Fifth Avenue
Suite 2700
New York, NY 10110
Telephone: 212/921-4110
WOLF POPPER LLP
STEPHEN D. OESTREICH
PATRICIA I. AVERY
ANDREW E. LENCYK
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600
Co-Lead Counsel for Plaintiffs and the Class
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
OAKLAND DIVISION
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ALBERT J. COPPERSTONE, et al., On Plaintiffs, vs. TCSI CORPORATION, et al.,
Defendants. |
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No. C-97-3495-SBA CLASS ACTION DATE: April 6, 1999 |
I. INTRODUCTION
II. ARGUMENT
A. This Action Should Be Stayed Because Plaintiffs Can Obtain Complete Relief In The More Advanced State Action
B. In The Alternative, The Court Should Extend Plaintiffs' Time To Amend The Complaint Until Completion Of Discovery In The State Action And Allow The Use Of That Discovery To Amend The Complaint
1. Federal Law Permits Plaintiffs To Use Information Obtained During Discovery To Prosecute Additional Claims
2. No Federal Policy Interest Is Circumvented By Plaintiffs' Use Of State Court Discovery To Plead A Federal Securities Cause Of Action In Federal Court
III. CONCLUSION
TO: ALL PARTIES AND THEIR ATTORNEYS OF RECORD
PLEASE TAKE NOTICE that, on April 6, 1999 at 11:30 a.m. in the Courtroom of the Honorable Saundra Brown Armstrong, United States District Court, 1301 Clay St., Suite 390-C, Oakland, CA 94612-5212, Lead Plaintiffs(1) will and hereby do move this Court for a stay of this action pending resolution of the related action, Copperstone, et al. v. TCSI Corporation, et al., Case No. CV775199-2 (Alameda Cty. Super. Ct.) (the "State Action").
This motion is made on the grounds that Lead Plaintiffs believe that in light of the California Supreme Court's decision in Diamond Multimedia Sys., Inc. v. Superior Court, 19 Cal. 4th 1036 (1999), allowing a nationwide plaintiff class, and the advanced stage of the State Action, it is in the best interest of the class to pursue the California law claims in the pending State Action, and to seek a stay of this action pending resolution of that case. Alternatively, plaintiffs move for an order extending the time to file their amended complaint until discovery in the State Action is completed and for an order allowing the use of that discovery to prepare the amended complaint. This motion is based upon this notice of motion and memorandum of points and authorities in support thereof, the complete files and records in each of these actions and such other evidence as the Court may consider at the hearing on this motion.
There are two actions currently pending in state and federal court asserting securities claims against TCSI Corporation ("TCSI") and certain of its officers and directors.
The first action, filed in Alameda County Superior Court on November 4, 1996, asserted claims under California Corporations Code §§25400/25500 and California Business & Professions Code §§17200/17500, et seq. As a result of a series of demurrers to the complaint over the last two years, plaintiffs are now proceeding under a unitary claim for relief under §§25400/25500. Discovery is, and has been, proceeding in the action.(2) On January 15, 1999, the Honorable Henry Needham overruled all defendants' demurrers and sustained the complaint. Defendants Harish S. Rao and Harvey E. Wagner have filed answers to the state complaint.
From the outset of this litigation, Lead Plaintiffs maintained that they could obtain complete relief for the class in the State Action;(3) however, it was not clear whether California would authorize a nationwide class of TCSI purchasers in connection with the §§25400/25500 claims. That issue was presented to the California Supreme Court in Diamond Multimedia and was pending in September 1997. Thus, because the California Supreme Court had not ruled on whether a nationwide class could be maintained under §§25400/25500, on September 24, 1997, in order to preserve the claims of non-California residents, plaintiffs commenced this action asserting a claim under §10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. On January 14, 1998, defendants moved to dismiss the action. The motion was fully briefed and submitted on September 28, 1998.
On January 4, 1999, the California Supreme Court issued its decision in Diamond Multimedia. The Court held that plaintiffs can seek a nationwide class for violations of the Cal. Corp. Code. 19 Cal. 4th at 1064.
On January 19, 1999, this Court dismissed plaintiffs' complaint as to all defendants and gave plaintiffs leave to amend. On February 4, 1999, the Court entered an Order, pursuant to a stipulation, allowing plaintiffs until February 23, 1999 to amend or otherwise respond to the Court's January 19, 1999 Order. In light of Diamond Multimedia and the advanced stage of the State Action, Lead Plaintiffs seek to stay this action pending resolution of the State Action. In the alternative, plaintiffs seek an order extending the time for plaintiffs to file an amended complaint in this action until after completion of discovery in the State Action.
When plaintiffs filed the State Action, the ability to seek redress under Cal. Corp. Code §§25400/25500 for a nationwide class remained uncertain. Thus, when the running of the limitations period was imminent for plaintiffs' Exchange Act claims, plaintiffs filed this action to protect the interests of the class. On January 14, 1998, defendants moved to dismiss this action. The motion was fully briefed and submitted on September 28, 1998. On January 4, 1999, the California Supreme Court issued its decision in Diamond Multimedia, 19 Cal. 4th at 1064. The California Supreme Court held that nationwide class action can properly be maintained for violations of the Cal. Corp. Code. Id. It is now clear that plaintiffs can obtain complete relief for the class in Alameda County Superior Court.(4)
Staying this action makes particular sense because the State Action is far more advanced than the present case. Plaintiffs filed their action in Alameda County Superior Court ten months before they commenced this action. For more than two years, the parties have actively litigated the State Action, including the adjudication and denial of defendants' demurrers. Defendants Wagner and Rao have answered the State Action complaint, and the parties are well into the discovery process -- including defendants' production of thousands of documents for plaintiffs' review. In addition, plaintiffs have received documents from non-parties United Parcel Service, Ernst & Young LLP and the underwriters, Smith Barney Inc., Alex. Brown & Sons Inc. and PaineWebber Inc. On February 23, 1999, the parties will appear before the Alameda County Superior Court to discuss a discovery schedule and setting a trial date.
By statute, Lead Plaintiffs are charged with the responsibility to "fairly and adequately protect the interests of the class." 15 U.S.C. §78u-4(a)(3)(B)(iii)(II)(aa). In light of Diamond Multimedia, Lead Plaintiffs have concluded that the California law claims afford broader relief, are more easily proven and permit freer discovery. Thus, Lead Plaintiffs believe that it is in the best interest of the class to pursue these claims first in state court.
This Court is clearly empowered to grant this motion. The Court's "power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants." Landis v. North Am. Co., 299 U.S 248, 254 (1936).(5)
The Ninth Circuit has specifically recognized that a district court may stay a federal action asserting §10(b) claims pending resolution of a related state court proceeding because the related state court action "may or may not resolve the 1934 [Exchange] Act issues." Weiner v. Shearson, Hammill & Co., 521 F.2d 817, 822 (9th Cir. 1975); see also Cheney, et al. v. Quality Sys., et al., No. SACV 97-549-LHM (EEx), Order (C.D. Cal. Aug. 13, 1997) (Stickney Decl., Ex. C).
Further, it is clear that in the exercise of its equitable powers,
A trial court may, with propriety, find it is efficient for its own docket and the fairest course for the parties to enter a stay of an action before it, pending resolution of independent proceedings which bear upon the case. This rule applies whether the separate proceedings are judicial, administrative, or arbitral in character, and does not require that the issues in such proceedings are necessarily controlling of the action before the court.
Leyva v. Certified Grocers of California, Ltd., 593 F.2d 857, 863-64 (9th Cir. 1979) (emphasis added) (citing Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180 (1952)). In fact, the Manual for Complex Litigation (3d ed. 1995) ("Manual"), indicates that a judge may order an action stayed pending resolution of a related case, and that the general policy is to stay later-filed litigation in favor of the first filed suit. Manual, §31.14, at 256-57, §33.63, at 362.
It makes common and legal sense for plaintiffs to litigate plaintiffs' primary claims (i.e., their state law claims) first, and only return to this Court later, if necessary, to litigate the remaining federal count. See Lerco Corp. v. Haley, 597 F. Supp. 517, 522 (W.D. Ky. 1983) (granting plaintiffs' motion to stay federal litigation on the grounds that resolution of the state court proceedings may moot the federal litigation).
On January 19, 1999, this Court dismissed plaintiffs' complaint with leave to amend. In preparing the [Proposed] First Amended Complaint for Violation of the Securities Exchange Act of 1934 ("[Proposed] Amended Complaint"), plaintiffs did not use the thousands of defendant TCSI's internal corporate documents that plaintiffs possess as a result of the ongoing discovery process in the State Action. This information relates directly to the wrongful conduct alleged in plaintiffs' federal complaint and, if used, would enable plaintiffs to further particularize their allegations.
Plaintiffs did not use any of this information because an agreement based upon the discovery referee's ruling,(6) and entered after extensive litigation, prevented plaintiffs from using discovery obtained in the State Action to amend their federal complaint. The agreement provided, however, that such discovery could be used if this Court "determines that any or all discovery produced in this [state] action may be used for the purpose of amending plaintiffs' pleadings in the Copperstone Federal Action." See Stickney Decl., Ex. D. Plaintiffs now move the Court for such a determination and for an extension of time to amend the complaint until after completion of discovery in the State Action.
The restriction on the use of information obtained through discovery in the State Action is inimical to a search for the truth and, as recent federal decisions in this District reflect, see §II.B.2., infra, lacks any legal or factual justification.
Federal courts addressing the use of discovery obtained in one action in other similar actions "have overwhelmingly and decisively endorsed the sharing of discovery information among different plaintiffs, in different cases, in different courts." Burlington City Bd. of Ed. v. United States Mineral Prod. Co., 115 F.R.D. 188, 190 (M.D.N.C. 1987). When asked to either condition the use of discovery, or to determine whether to admit or exclude evidence in another case, the courts are virtually unanimous in declining to do so.(7)
Indeed, the Ninth Circuit has expressly acknowledged that a plaintiff may use discovery obtained in one action to plead new causes of action in the same or different forum. Thus, in In re Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d 693 (9th Cir. 1993), the plaintiff in an antitrust case, Go-Video, Inc. ("Go-Video"), obtained information from discovery supporting allegations of new antitrust violations. Despite a protective order which provided that discovery was to be used "solely" in the original antitrust action, Go-Video sought to plead new claims based on the discovered information. When the court denied a motion for leave to amend, Go-Video filed a second lawsuit. Although Go-Video did not disclose confidential information through the filing of its second lawsuit, the district court in the original action held Go-Video in contempt for filing the second action in violation of the protective order. Id. at 695. The Ninth Circuit reversed, holding that immunity from suit was not the legitimate purpose of the protective order. Id. at 696.(8)
Thus, consistent with this judicial policy favoring the sharing of discovery, federal courts specifically recognize that discovery obtained in one case may be used to plead new claims in a second case. In Dove v. Atlantic Capital Corp., 963 F.2d 15 (2d Cir. 1992), a defendant in a New York federal action (Atlantic Capital Corp. ("Atlantic")) sought discovery from a third party (Dove) with whom Atlantic was currently involved in related litigation in the United Kingdom ("U.K."). The discovery was relevant to support an affirmative defense in the New York action, but Atlantic admitted that it planned to use the discovered information in the U.K. case as well. Dove objected on the ground that English law did not permit pretrial discovery, and that the evidence sought in the New York action would give Atlantic an unfair advantage in the U.K. litigation. Dove sought a protective order that the requested discovery could not be used in the U.K. case. Id. at 16-17. The Second Circuit rejected Dove's objections and affirmed the district court's finding of contempt for Dove's failure to produce the requested information.
Dove is particularly instructive because the objecting party relied on the unavailability of discovery in the other forum as a basis for claiming entitlement to a protective order. The court explained that the district court would have been justified in granting the requested protective order "had [it] found that the affirmative defense . . . was interposed for the sole purpose of obtaining information through discovery for use in the U.K. litigation." 963 F.2d at 19 (emphasis added). However, "the mere fact that [the discovery] may be used in other litigation does not mandate a protective order." Id.; see also, Johnson Foils, Inc. v. Huyck Corp., 61 F.R.D. 405, 410-11 (N.D.N.Y. 1973) ("[U]nless it can be shown that the discovering party is exploiting the instant litigation solely to assist in other litigation before a foreign forum, federal courts do allow full use of the information in other forums.").
Several years earlier, in Frymire v. Peat, Marwick, Mitchell & Co., No. 85 C 10460, 1987 U.S. Dist. LEXIS 6295, at **2-3 (N.D. Ill. June 16, 1987), the district court similarly rejected a defendant's attempt to prohibit plaintiffs' use of discovered information in other related cases between the parties. The court succinctly concluded:
If discovery here should turn up evidence supporting other claims . . . there would be nothing unusual about a plaintiff amending his complaint here to add counts or in bringing an action elsewhere if that were a more appropriate forum. Defendant's real complaint is that it believes that plaintiffs had no basis for bringing those other actions (as well as this one) in the first place, but those complaints he can raise there. If valid discovery here should disclose other claims, however, there is no basis for foreclosing the plaintiffs from pursuing them.
Id. (emphasis added).
Under the reasoning of these cases, there is no question that documents and discovery produced pursuant to a valid state action may be used to support plaintiffs' federal claims.
Federal courts in this District have uniformly rejected attempts to bar the use in Private Securities Litigation Reform Act of 1995, Pub L. No. 104-67, 109 Stat. 737 (1995) ("PSLRA"), actions of discovery obtained in state court. Recently, the Honorable Charles R. Breyer rejected such an attempt:
Ernst & Young's motion for an order precluding plaintiffs from using discovery they have obtained in the parallel state action to state a claim in this action is DENIED. The PSLRA, as it applies to this action, does not preempt state actions and does not prohibit the use in a PSLRA action of discovery obtained in a state action. Congress could have precluded the use of such discovery had it intended to do so at that time. Moreover, defendants have not produced any evidence that plaintiffs filed the state action solely for the purpose of obtaining discovery to use in the federal action.
In re Informix Corp. Sec. Litig., No. C 97-1289 CRB, Order at 10 (N.D. Cal. Nov. 6, 1998) (Stickney Decl., Ex. E).
The Honorable Martin J. Jenkins concurred with Judge Breyer's reasoning in David T. O'Neal Trust, Dated 4/1/77, et al. v. Vanstar Corp., et al., No. C-98-0216-MJJ, Order Denying Defendants' Motion to Preserve and Enforce the Mandatory Discovery Stay (N.D. Cal. Feb. 5, 1999) (Stickney Decl., Ex. F). Judge Jenkins also addressed contentions that the recently-enacted Securities Litigation Uniform Standards Act of 1998 ("SLUSA") cast doubt on Judge Breyer's decision in Informix. Judge Jenkins, however, concluded that the SLUSA, which amended the federal securities laws to preempt certain class actions commenced in state court, has no application to state actions commenced before the enactment of the SLUSA. The SLUSA expressly provides: "The amendments made by this section shall not affect or apply to any action commenced before and pending on the date of the enactment of this Act." Securities Litigation Uniform Standards Act of 1998, Pub. L. No. 105-353, §101(c), 112 Stat. 3227 (1998). Hence, Judge Jenkins denied defendants' motion: "[T]he Securities Litigation Uniform Standards Act of 1998 is prospective and no overriding policy otherwise exists to bar the use of discovery obtained in the state court action in a federal action." David T. O'Neal Trust, Dated 4/1/77, No. C-98-0216-MJJ, Order at 1 (Stickney Decl., Ex. F) (emphasis added).
In enacting the PSLRA's discovery stay provisions, Congress balanced a complex set of policy concerns. On one hand, it apparently gave credence to the rather dubious proposition advanced by the PSLRA's proponents that the discovery costs in securities fraud cases may be sufficiently burdensome that defendants might choose to settle a non-meritorious case cheaply rather than challenge the claims. Balanced against this concern was the recognition that meritorious cases might be dismissed because the federal pleading requirements could not be satisfied unless and until plaintiffs were afforded access to the information within defendants' exclusive control. For cases exclusively in federal court, Congress struck the balance in defendants' favor by enacting the mandatory federal discovery stay.
Here, plaintiffs are indisputably entitled to state court discovery to prove their state law claims, which have now been sustained. Thus, the costs of state court discovery will necessarily fall on defendants regardless of what happens in the federal proceedings. In fact, the discovery process in the State Action is ongoing.
Defendants have already produced certain categories of documents in connection with discovery in the State Action. Many of these documents, therefore, are already in plaintiffs' possession and, because the State Action is "at issue," additional discovery will become readily accessible. The policy interest underlying the PSLRA will not at all be frustrated by allowing the mere use of the already discovered information, as well as information gathered as the case proceeds, in pleading and prosecuting a federal securities action because no additional costs befall defendants.
The cost of state court discovery will thus necessarily fall on defendants regardless of any results in the federal action and cannot be eliminated by any provision of the PSLRA. The federal policy interests underlying the PSLRA will not be furthered by precluding the use of that discovery to further particularize plaintiffs' allegations to comply with this Court's January 19 Order.
Accordingly, plaintiffs respectfully request that their time for amending the complaint be extended to allow for completion of state court discovery and that plaintiffs be allowed to use that discovery in filing an amended complaint.
Based upon the foregoing, plaintiffs respectfully request that this Court enter an order staying this action pending resolution of the related action in Alameda County Superior Court or, alternatively, vacating the restriction on the use of discovery in the State Action and granting plaintiffs an extension of time, until completion of discovery in state court, to amend their complaint.(9)
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DATED: February 23, 1999 |
Respectfully submitted, MILBERG WEISS BERSHAD MILBERG WEISS BERSHAD ______________________________ 222 Kearny Street, 10th Floor LAW OFFICES OF JAMES V. WOLF POPPER LLP Co-Lead Counsel for Plaintiffs and the Class |
TCSI\BM000695.BRF
1. On March 5, 1998, the Court appointed named plaintiffs Albert J. Copperstone and Joseph Siciliano to serve as Lead Plaintiffs and approved the selection of Milberg Weiss Bershad Hynes & Lerach LLP, Wolf Popper LLP and The Law Offices of James V. Bashian, P.C., as Lead Counsel for the class.
2. According to defendants' Updated Case Management Conference Statement filed in the State Action, dated February 16, 1999 ("Defs' CMC"):
Defendants have produced over 50,000 pages of documents pursuant to Plaintiff's First Request for the Production of Documents, including printouts of electronic files. Third parties have produced approximately 26,000 pages of additional documents. For example: non-party United Parcel Service, a former TCSI customer, has produced documents to plaintiffs; PaineWebber, Inc., Smith Barney, Inc., and Alex. Brown & Sons, Inc., the former underwriter defendants, have produced documents to plaintiffs and have permitted plaintiffs to interview their employees; and Ernst & Young LLP, TCSI's independent accountants, has produced approximately 1,700 pages of documents.
Defs' CMC at 3, attached as Exhibit A to the Declaration of David R. Stickney ("Stickney Decl."), filed concurrently herewith.
3. In fact, given the extensive litigation and discovery that had gone on in the State Action, on December 23, 1997, plaintiffs offered to stipulate to a stay of the federal action. Stickney Decl., Ex. B. Defendants refused.
4. See Exchange Act §28(a), 15 U.S.C. §78bb(a) (providing for state court judgments to extinguish federal claims if full relief is obtained in state court); Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367 (1996) (authorizing state court to release plaintiffs' Exchange Act claims, over which the federal courts exercise exclusive jurisdiction).
5. See also Mediterranean Enter., Inc. v. Ssangyong Corp., 708 F.2d 1458, 1465 (9th Cir. 1983) (A district court may stay an action under its "inherent power to control its own docket and calendar.").
6. This agreement followed lengthy motion practice before the discovery referee in state court. Defendants had moved to stay all state court discovery or, alternatively, to create a so-called "ethical wall" between attorneys representing plaintiffs in the State Action and those representing plaintiffs in this action. The discovery referee denied defendants' motion to stay and their request for a so-called "ethical wall." He recommended, however, that the Superior Court order plaintiffs not to use state-obtained discovery in federal court. That recommendation was submitted to the Court but never acted upon. Because defendants refused to commence discovery without that order, plaintiffs agreed to the terms of the discovery referee's recommendation in order to obtain the discovery and prosecute the State Action.
7. See, e.g., Deford v. Schmid Prods. Co., 120 F.R.D. 648, 654 (D. Md. 1987) ("The plaintiffs' primary argument in favor of disclosure is their desire to share information with other litigants and their counsel. This is an appropriate goal under the Federal Rules of Civil Procedure . . . .") (emphasis added); Ward v. Ford Motor Co., 93 F.R.D. 579, 580 (D. Colo. 1982) ("Efficient administration of justice requires that courts encourage, not hamstring, information exchanges . . . ."); United States v. Hooker Chemicals & Plastics Corp., 90 F.R.D. 421, 426 (W.D.N.Y. 1981) (federal litigants permitted to share discovery with state litigants); Wauchop v. Domino's Pizza, Inc., 138 F.R.D. 539, 546 (N.D. Ind. 1991) ("Rule 1 of the Federal Rules of Civil Procedure requires that the Rules be construed so as to foster the just, speedy, and inexpensive determination of every civil action. Collaborative use of discovery fosters that purpose; the sharing of discovery materials ultimately may further the goals of Rule 1 by eliminating the time and expense involved in 'rediscovery.'") (citation omitted).
8. See also Epstein v. Haas Sec. Corp., 731 F. Supp. 1166, 1183 (S.D.N.Y. 1990) (information obtained from criminal proceeding may serve as a "proper factual foundation" for securities fraud claims); Deford, 120 F.R.D. at 654 ("The plaintiffs' primary argument in favor of disclosure is their desire to share information with other litigants and their counsel. This is an appropriate goal under the Federal Rules of Civil Procedure . . . ."); Ward, 93 F.R.D. at 580 ("Efficient administration of justice requires that courts encourage, not hamstring, information exchanges . . . .").
9. Plaintiffs proffer the [Proposed] Amended Complaint, attached as Stickney Decl., Ex. G. In the event that the Court denies the motion to stay or to extend the time to file the amended complaint, plaintiffs will file the [Proposed] Amended Complaint.
DECLARATION OF SERVICE BY MAIL
PURSUANT TO NORTHERN DISTRICT LOCAL RULE 23-2(c)(2)
I, the undersigned, declare:
1. That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Francisco, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 222 Kearny Street, 10th Floor, San Francisco, California 94108.
2. That on February 23, 1999, declarant served the NOTICE OF MOTION AND MOTION FOR ORDER STAYING THIS ACTION; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION by depositing a true copy thereof in a United States mailbox at San Francisco, California in a sealed envelope with postage thereon fully prepaid and addressed to the parties listed on the attached Service List and that this document was forwarded to the following designated Internet site at:
3. That there is a regular communication by mail between the place of mailing and the places so addressed.
I declare under penalty of perjury that the foregoing is true and correct. Executed this 23rd day of February, 1999, at San Francisco, California.
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Source: http://securities.milberg.com