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 27, 1999 |
I. INTRODUCTION
II. ARGUMENT
A. This Court May Stay The Litigation Of Plaintiffs' Section 10(b) Claims
B. This Case Is Not Governed By Colorado River
C. A Stay Works No Prejudice To Wagner
D. Alternatively, The Time For Filing The Amended Complaint Should Be Extended, And Plaintiffs Ought To Be Permitted To Use State Court Discovery In Complying With This Court's January 19 Order
III. CONCLUSION
Defendants(1) say this Court lacks authority to stay litigation of Securities Exchange Act of 1934 ("Exchange Act") §10(b) claims because federal courts have exclusive jurisdiction over them. But the Ninth Circuit held in Weiner v. Shearson, Hammill & Co., 521 F.2d 817, 821-22 (9th Cir. 1975), that a federal district court may stay a federal action asserting §10(b) claims, because resolution of state-law claims in a related state-court action "may or may not resolve the 1934 Act issues." Weiner, 521 F.2d at 822; see Classen v. Weller, 516 F. Supp. 1243, 1244-45 (N.D. Cal. 1981). Moreover, the Supreme Court recently held, in Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 116 S. Ct. 873 (1996), that state-court actions can indeed dispose of §10(b) claims. Arguing the contrary, defendants ignore these controlling authorities.
Good cause exists for a stay. The state action was filed a year before the federal complaint and has proceeded much farther than the federal action. The state court complaint has recently been upheld in its entirety, and all defendants have filed answers. Moreover, although defendants have brought three motions to stay discovery, discovery has proceeded. Documents have been obtained from defendants, Ernst & Young LLP, United Parcel Service and other third parties. Plaintiffs initiated the filing of a parallel action in federal court to preserve the rights of the class. With the California Supreme Court's decision in Diamond Multimedia Sys. v. Super. Ct., 19 Cal. 4th 1036 (1999), nationwide relief is now available for Cal. Corp. Code §§25400/25500 violations. Furthermore, since defendants have objected both in this Court and in state court to proceeding simultaneously in the two forums, by staying this action, they will only have to respond in one.
Alternatively, even if the Court is not inclined to stay the case, plaintiffs' time to amend the complaint should be extended, and plaintiffs should be permitted to use the state court discovery in order to comply with this Court's January 19, 1999 Order Granting Defendants' Motions to Dismiss ("January 19 Order").(2) Every federal court in this district has held that the use of state court discovery is not precluded by the Private Securities Litigation Reform Act of 1995 ("PSLRA") and has allowed plaintiffs to use it in order to comply with the pleading requirements. Given the stay of discovery under the PSLRA, there is no prejudice to defendants. Discovery is very far along in the state action, and an extension to allow plaintiffs to use the discovery in order to amend the federal complaint will allow plaintiffs to best respond to this Court's January 19 Order.
In Weiner, 521 F.2d 817, the Ninth Circuit held that a federal district court may stay litigation of §10(b) claims pending determination of a related state-court action, even though Exchange Act §27 vests federal courts with exclusive jurisdiction over the §10(b) claims. Weiner, 521 F.2d at 821-22. The Ninth Circuit held that "even if the state court finds itself precluded [by Exchange Act §27] from giving affirmative relief under the 1934 Act . . . a stay would not necessarily be inappropriate." Id. at 822 (emphasis added). Indeed, a stay could issue because "[t]he state court does have power to grant the parties relief under the 1933 Act [claim asserted in state court] or the state law counterclaim, and in doing so, it also may or may not resolve the 1934 Act issues." Id. at 822 (emphasis added); see Classen, 516 F. Supp. at 1244-45 (following Weiner). Other courts have similarly stayed federal litigation of §10(b) claims pending resolution of related state-court proceedings. See, e.g., Klein v. Walston & Co., 432 F.2d 936 (2d Cir. 1970); Lorentzen v. Levolor Corp., 754 F. Supp. 987, 993-94 (S.D.N.Y. 1990); Saltzman v. Kirshner, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶96,482, at 93,777-78 (S.D.N.Y. 1978).
In Matsushita, 116 S. Ct. at 881-83, the Supreme Court removed any doubt that state-court proceedings can dispose of exclusively-federal claims. "Though the statute plainly mandates that suits alleging violations of the Exchange Act may be maintained only in federal court, nothing in the language of §27 'remotely expresses any congressional intent to contravene the common-law rules of preclusion or to repeal the express statutory requirements of . . . 28 U.S.C. §1738,'" which requires federal courts to give full faith and credit to state-court judgments. Id. at 881 (citation omitted). According to Matsushita, "even when exclusively federal claims are at stake, there is no 'universal right to litigate a federal claim in a federal district court.'" Id. at 883 (citation omitted).
State court judgments may legitimately dispose of exclusively-federal claims because "state-court findings of fact [are] issue preclusive" in subsequent federal litigation. Id. at 882-83. Settlement of state-law claims by a state court can similarly dispose of §10(b) claims over which federal courts possess exclusive jurisdiction: "While §27 prohibits state courts from adjudicating claims arising under the Exchange Act, it does not prohibit state courts from approving the release of Exchange Act claims in the settlement of suits over which they have properly exercised jurisdiction, i.e., suits arising under state law . . . ." Matsushita, 116 S. Ct. at 881 (emphasis added).
"Congress plainly contemplated the possibility of dual litigation in state and federal courts relating to securities transactions." Id. at 882 (citing Exchange Act §28(a), 15 U.S.C. §78bb(a)). Indeed, with §28(a) Congress expressly provided for state-court judgments to extinguish federal claims if full relief is had in state court: "[T]he rights and remedies provided by this title shall be in addition to any and all other rights and remedies that may exist at law or in equity; but no person permitted to maintain a suit for damages under the provisions of this title shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages on account of the act complained of." 15 U.S.C. §78bb(a).
Together, Weiner, Matsushita and Exchange Act §28 compel the conclusion that a federal court may stay a §10(b) action when a state-court action "may or may not resolve the 1934 Act issues." Weiner, 521 F.2d at 822. Weiner is a binding precedent that must be followed unless it is overruled by the Supreme Court or an en banc panel of the Ninth Circuit. See Branch v. Tunnell, 14 F.3d 449, 456 (9th Cir. 1994) ("one three-judge panel of this court cannot reconsider or overrule the decision of a prior panel").
None of the three-judge panel opinions defendants cite even purports to overrule Weiner. Moreover, Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976), did not address a motion by a plaintiff. And after Matsushita, it is inconceivable that an en banc panel would do so. Moreover, defendants' citations are distinguishable on many grounds.
Legal Economic Evaluations, Inc. v. Metropolitan Life Ins. Co., 39 F.3d 951, 956 (9th Cir. 1994), was an antitrust case. Intel Corp. v. Advanced Micro Devices, 12 F.3d 908, 913-14 (9th Cir. 1993), and Minucci v. Agrama, 868 F.2d 1113, 1115 (9th Cir. 1989), were copyright actions. After Matsushita, there is virtually no likelihood that even an en banc panel would consider extending these decisions to overrule Weiner -- particularly in light of the strong criticism they have received. As Judge Vaughn R. Walker wrote in City & County of San Francisco v. United States, 930 F. Supp. 1348, 1354-55 (N.D. Cal. 1996):
[T]he per se Minucci rule prevents the court from even considering whether its discretion to stay this action should be exercised. . . . The concerns of maintaining comity between the federal and state systems and of preserving scarce judicial resources by avoiding repetitious or unnecessary litigation are not so narrow as to support such a rigid doctrinal approach to the abstention question.
Indeed, the Supreme Court itself has cautioned against the type of pigeonholing analysis furthered by the Minucci rule. When discussing the manner in which the Colorado River factors are to be applied, it noted that "the decision whether to dismiss a federal action because of parallel state-court litigation does not rest on a mechanical checklist, but on a careful balance of the important factors as they apply in a given case, with the balance weighted heavily in favor of the exercise of jurisdiction. The weight to be given to any one factor may vary greatly from case to case, depending on the particular setting of the case." Moses Cone, 460 U.S. 1, 16, 74 L. Ed. 2d 765, 103 S. Ct. 927, 937. By divesting courts of all discretion in cases brought under exclusive federal jurisdiction, Minucci seems to mandate precisely the type of mechanical analysis decried by the Supreme Court in the above passage.
* * *
It should be clear enough from the above that the court feels that the Minucci rule reflects an exaggerated view of the need for federal court adjudications in cases brought under exclusive federal jurisdiction which nonetheless contain substantial questions of state law and substantial overlap with contemporaneous state proceedings in which those state law questions are being adjudicated.
For these reasons Minucci and Legal Economic are distinguishable and this Court should grant the requested stay.
Contrary to defendants' assertions, plaintiffs do not seek a stay under the doctrine articulated by Colorado River. Rather, plaintiffs' motion to stay was based on this Court's "inherent power to control its own docket and calendar." Mediterranean Enterprises, Inc. v. Ssangyong Corp., 708 F.2d 1458, 1465 (9th Cir. 1983); see Mahaffey v. Bechtel Associates Professional Corp., 699 F.2d 545, 547 (D.C. Cir. 1983) (Weiner stay appropriate even where Colorado River stay is not); Ollie v. Riggin, 848 F.2d 1016, 1017 (9th Cir. 1988) (following Mahaffey and Weiner); see also Landis v. North American Co., 299 U.S. 248, 249 (1936); Will v. Calvert Fire Ins. Co., 437 U.S. 655, 665 (1978) ("No one can seriously contend that a busy federal trial judge . . . is not entrusted with a wide latitude in setting his own calendar."); Villarreal v. Chrysler Corp., No. C-95-4414 FMS, 1996 U.S. Dist. LEXIS 3159 (N.D. Cal. Mar. 12, 1996).(3)
In addition, cases following Colorado River involve situations where a defendant seeks a stay.(4) Of all the decisions cited, only Legal Economic dealt with plaintiffs who were seeking to stay their own action. Moreover, none of the cases cited by defendants except Legal Economic, 39 F.3d at 955, involved situations where the plaintiffs sought to stay the federal action in favor of a state court proceeding. In Minucci, 868 F.2d at 1114, defendants sought to stay a federal action in favor of a state-court proceeding over the objection of plaintiffs. While Legal Economic did involve a request by plaintiffs to stay the federal action, that case did not involve class claims. Minucci and the other two cases cited by defendants are also factually distinguishable because those cases, which were not class actions, involved private plaintiffs, not representative plaintiffs with fiduciary obligations to a putative class. Here, lead plaintiffs represent the claims of thousands of investors similarly situated and initially sought to vindicate those rights in state court nearly a year before this case was filed. Lead plaintiffs have an obligation to protect the rights of absent class members and accordingly filed this action, inter alia, to prevent the statute of limitations from running on the one class claim that is within the exclusive jurisdiction of the federal court. Accordingly, having filed in both state and federal court, plaintiffs have merely sought to protect the rights of the class. Staying the later-filed federal case, where complete relief is available in state court and discovery is proceeding, is both prudent and appropriate. Cf. Attwood v. Mendocino Coast Dist. Hospital, 886 F.2d 241, 245 (9th Cir. 1989) (it may be that the state proceedings will provide complete resolution of plaintiff's claims and it will be unnecessary to proceed further in federal court).
Defendants also argue that plaintiffs' motion should be denied to avoid piecemeal litigation. In fact, piecemeal litigation will be avoided if this action is stayed and the state court action, which is far further along, is allowed to proceed to a final resolution. See Travelers, 914 F.2d at 1369 ("[P]iecemeal litigation is a factor that can support a stay under the exceptional circumstances test.").
Staying this action will enable the parties to focus their energies in a single forum. Wagner alone asserts that he will "endure hardship" because there is a "probability of exorbitant delay" in resolving the state action.(5) This makes no sense. Wagner has answered plaintiffs' complaint, discovery is in progress and the superior court is certainly capable of resolving the matter in a timely fashion. Moreover, Wagner has moved (unsuccessfully) to stay the state action three times so far -- evincing no concern about expediting the progress of the state action.
Nor can Wagner credibly contend that a stay will prejudice his defense "to the extent evidence is lost and/or key witnesses suffer memory losses or illness." Wagner Mem. at 5. Progress in the state action protects against the loss of evidence. Indeed, discovery is proceeding in state court despite Wagner's repeated efforts to stop it.
Finally, Wagner asserts that if plaintiffs "achieve success in the State Action, they will attempt to capitalize on this success" in settlement negotiations. This, too, is absurd. If and when plaintiffs reach a favorable judgment in state court, there may be no need to return to the federal forum for settlement or otherwise. The Exchange Act expressly contemplates this possibility. 15 U.S.C. §78bb(a) ("[N]o person permitted to maintain a suit for damages under the provisions of this title shall recover, through satisfaction of judgment in one or more actions, a total amount in excess of his actual damages . . . .")
Wagner's claims of supposed prejudice, therefore, do not outweigh the many benefits of staying this action pending resolution of the state action.
As plaintiffs stated in their initial motion, despite defendants' repeated assertions to the contrary, every judge in this district has held that the PSLRA does not preclude the use of state court discovery in federal securities actions and has authorized its use in amending a federal complaint.(6) Indeed, since the initial filing of this motion, Judge Charles A. Legge has also reached the same conclusion.(7)
Faced with this unbroken string of adverse decisions, defendants seek to distinguish this case by mischaracterizing the state court decision on discovery(8) and claiming that it has considered and rejected plaintiffs' use of state court discovery in the federal case. Defs' Mem. at 10-11. Rather, the state court expressly noted that, other than its order in that case, any use of discovery in the federal case would have to be decided by the federal court, stating: "Any restriction on the use of the fruits of state discovery in the federal action is for the federal court to determine." See Copperstone, et al. v. TCSI Corp., et al., CASE NO. 775199-2, Report and Recommendation Re Motion to Stay Discovery and Motion to Compel the Production of Documents From Third Party Ernst & Young LLP and Order Thereon (Alameda Super. Ct. Jan. 22, 1998), adopting Judge Schwartz's Report and Recommendation dated November 17, 1997, Second Stickney Decl., Ex. G.
In fact, the parties recognized this in the confidentiality order drafted by defendants. In that order, the parties acknowledged that plaintiffs could seek to modify the state court order under certain conditions, but, in any event, if the federal court allowed the discovery to be used, the state court order would be modified accordingly. The provision reads:
(b) Plaintiffs shall not be permitted to use any information obtained by them through discovery in this case in Copperstone v. TCSI Corporation, No. C-97-3495(SBA) (N.D. Cal. filed Sept. 24, 1997), currently pending before Judge Saundra Brown Armstrong in the United States District Court for the Northern District of California (the "Copperstone Federal Action"), until the stay of discovery in the Copperstone Federal Action, mandated by §21D(b)(3)(B) of the Private Securities Litigation Reform Act of 1995, is lifted. If plaintiffs in this action discover any documents with respect to which the probative value is so great that it would be unjust not to allow it to be used in the Copperstone Federal Action, then plaintiffs may seek an exception to this provision of this stipulation. However, if the federal court determines that any or all discovery produced in this action may be used for the purpose of amending plaintiffs' pleadings in the Copperstone Federal Action, prior to the hearing on defendants' motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the provisions of this Paragraph 3(b) shall be vacated or modified accordingly.
Stipulation and [Proposed] Order Concerning the Treatment of Confidential Information at ¶3(b), Second Stickney Decl., Ex. F (emphasis added).
Thus, this case stands in precisely the same posture as Informix, Vanstar and EFII, Second Stickney Decl., Exs. C, D & E, and this Court can and should permit plaintiffs to use the discovery to amend their complaint.
Based upon the foregoing, plaintiffs respectfully request that this Court grant their request for a stay of these proceedings. Alternatively, plaintiffs request that they be allowed to use state court discovery in amending the complaint and that their time for amendment be extended.
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DATED: April 13, 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\DRD02275.BRF
1. All defendants have joined in the opposition. Defendant Harvey Wagner has filed an additional opposition; however, he raises few points in addition to those raised by TCSI Corp. ("TCSI"). Accordingly, plaintiffs hereby submit reply to Wagner's opposition as if fully set forth and, where applicable, have addressed his arguments here.
2. Contrary to Wagner's contention that this Court ordered plaintiffs to amend their complaint by February 23, 1999 and do nothing other than amend the complaint (defendant Wagner's Opposition to Motion to Stay ("Wagner Mem.") at 3-4), the Stipulation and Order of February 5, 1999 ("Stipulated Order") expressly affords plaintiffs the discretion to amend or otherwise respond. As fully set forth in Plaintiffs' Memorandum of Points and Authorities in Opposition to Defendant Harvey Wagner's Counter-Motion for Involuntary Dismissal, Wagner has literally misread the Stipulated Order. Plaintiffs have acted properly, and Wagner's claims of supposed "misconduct" should be rejected.
3. Defendants seek to distinguish plaintiffs' authorities by asserting that these cases are limited to stays sought in favor of arbitration proceedings. See TCSI Defendants' Memorandum of Points and Authorities in Opposition to Plaintiffs' Motion to Stay or for Extension of Time to File Amended Complaint ("Defs' Mem.") at 7. Not so. In Ssangyong, the court based its decision on the reasoning stated in Landis, 299 U.S. at 254-55 without qualification. Landis was not an arbitration proceeding. The court in Landis viewed "the problem as one of [inherent] power, and power only," of the court to "control . . . its docket," without regard to the statute under which suit was brought. Id. at 254.
4. The Colorado River doctrine applies where the defendant seeks to stay the federal action in favor of a concurrent state court action. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 7 (1983) (district court granted defendant's motion to stay federal-court suit pending resolution of state-court suit); Intel, 12 F.3d at 912 (district court granted defendant's motion to stay under Colorado River); Travelers Indem. Co. v. Madonna, 914 F.2d 1364, 1366-67 (9th Cir. 1990)(same); Minucci, 868 F.2d at 1114 (same).
5. Wagner cites Landis, 299 U.S. 248, but that case supports plaintiffs' position. Landis explained that "the 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. . . ." Id. at 254.
6. Wagner's reliance on In re Rational Software Sec. Litig., 28 F. Supp. 2d 562 (N.D. Cal. 1998), which Wagner characterizes as "identical" to this case, is woefully misplaced. Wagner Mem. at 10. To begin with, Rational did not have a parallel state court action. Therefore, Rational did not involve the use of discovery obtained in a parallel state action. Rather, the court granted plaintiffs' request for limited discovery in federal court after the court initially granted defendants' motion to dismiss. Id. at 568. To the extent that Rational has any bearing on this case, it allows discovery in federal court for the purpose of amendment. Also, contrary to Wagner's contentions, Rational is not in tension with the well reasoned decisions of Judges Breyer, Jenkins and Legge, which allow the use of state court discovery to plead a federal cause of action. Informix, Vanstar and EFII are on point, and Rational is irrelevant.
7. See Exhibits C, D and E attached to the Second Declaration of David R. Stickney in Further Support of Motion for Order Staying This Action and Opposition to Defendant Harvey Wagner's Counter-Motion for Involuntary Dismissal ("Second Stickney Decl."), filed concurrently herewith.
8. That decision was entered a year before all of the district judges ruled that the PSLRA did not preclude the use of state discovery in federal cases. Since this was the underpinning of Judge Schwartz's ruling, it is unlikely that he would rule the same way today.
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 April 13, 1999, declarant served the PLAINTIFFS' MEMORANDUM OF POINTS AND AUTHORITIES IN REPLY TO DEFENDANTS' OPPOSITION TO MOTION FOR ORDER STAYING THIS ACTION 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 13th day of April, 1999, at San Francisco, California.
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Source: http://securities.milberg.com