Defining The Discovery Stay Down

The PSLRA provides that “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss” unless the court determines “that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.” The exact meaning of “necessary to preserve evidence” and “prevent undue prejudice” has been the subject of frequent litigation.

As discussed in The 10b-5 Daily, two recurring issues are: (a) whether defendants should be required to produce documents that previously have been produced to governmental entities; and (b) whether the discovery stay should also apply to related federal cases that do not allege securities law claims. District courts have come to markedly different conclusions.

In In re Royal Ahold N.V. Sec. & ERISA Litig., 2004 WL 502558 (D. Md. March 12, 2004), the court addressed both issues at the same time. Advantage: the plaintiffs.

The court held that Royal Ahold must produce any documents it had previously given to governmental entities and the reports of various internal investigations conducted by the company. First, the court found that there was a need to preserve evidence because Royal Ahold’s corporate reorganization, including the divestiture of subsidiaries relevant to the case, added “urgency to the discovery timetable.” Although there was no risk that the documents requested by the plaintiffs would be destroyed, they “could help the plaintiffs identify other specific materials that may be at risk of loss.”

Second, the court found that the securities plaintiffs might suffer undue prejudice by being denied discovery that was available to other litigants. In particular, the court held that the discovery stay did not apply to the related ERISA litigation and, therefore, “the securities plaintiffs could suffer a severe disadvantage in formulating their litigation and settlement strategy — particularly if [all of] the parties proceed quickly to settlement negotiations, as the court has urged them to do.”

Holding: Partial lifting of discovery stay (although the court, at the request of the government, postponed production of the investigative reports).

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