Bernstein Shur Business and Commercial Litigation Newsletter #45

October 2014 | Issue 45

By Paul McDonald and Dan Murphy

We are pleased to present the 45^th edition of the Bernstein Shur Business and Commercial Litigation Newsletter. This month, we highlight recent cases that address the stay of discovery in securities litigation, the failure to respond to requests for admission, and other news that will have an impact on business and litigation. We hope you enjoy the newsletter.

In the News:

A federal court has held that a plaintiff cannot make an “end run” around a stay of discovery under the Private Securities Litigation Reform Act by making document requests under state laws providing for inspection of corporate documents. The PSLRA was  a Congressional effort to curb securities litigation practices that were perceived to be abusive, including the plaintiff’s tactic of utilizing discovery as a “fishing expedition” to find a claim not alleged in the complaint or to impose high discovery costs in an effort to bludgeon the defendant into settling the case. See In re WorldCom Sec. Litig., 234 F.Supp.2d 301, 305 (S.D. N.Y. 2002). Thus, the PSLRA contains an automatic stay provision which prohibits “all discovery” during the “pendency of any motion to dismiss.” See 15 U.S.C. § 78u4(b)(3)(B). An exception to the automatic stay provisions exists if the plaintiffs can show that “exceptional circumstances” exist and that “particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.” Id.

In Spina v. Refrigeration, Service and Engineering, Inc., 2014 WL 4996200 (E.D. Pa. Oct. 7, 2014), the plaintiff commenced an action against a corporation and several of its shareholders, asserting federal and state securities claims arising out of a corporate merger. The plaintiff also sent a demand to inspect documents in accordance with the state business corporation law. The corporate defendant refused to comply with the inspection demand, citing the PSLRA’s discovery stay provisions, and then moved to dismiss the complaint. Senior Judge Robert F. Kelly sided with the defendant on the discovery dispute, rejecting the plaintiff’s argument that none of the documents sought related to the federal securities claims. On the contrary, the court determined that “the interrelatedness of the federal and pendant state claims evidence that any discovery sought on the state claims would most likely be relevant to the federal securities claims.” Id. at *5. The court also rejected the plaintiffs’ claims that cutting off his state-law shareholder rights of inspection would constitute exceptional circumstances and undue prejudice that would trigger the exception to the PSLRA’s automatic stay provisions.

Access the case here.

Purdue Pharma, the maker of OxyContin, faces a legal quandary after it failed to respond to requests for admission in an enforcement action commenced by the State of Kentucky. State regulators in Kentucky seek significant penalties and fines against the drug maker, alleging that it used deceptive practices to promote OxyContin as being less addictive than other narcotics. In the litigation, the State served requests for admission, seeking binding admission of facts. Among those admissions was the statement that Purdue caused OxyContin to be overprescribed and engaged in other wrongful conduct. Purdue failed to timely respond to such requests, resulting in its admission by default of these statements. The trial court judge rejected Purdue’s request to attempt to cure its failure to respond. Under Kentucky’s analogue to Fed. R. Civ. P. 36, all matters set forth in a request for admission are deemed admitted unless denied within 30 days of service of the request. Purdue’s appeal to an intermediate court was rejected and it has indicated that it will appeal to the Kentucky Supreme Court. At oral argument at the intermediate appeal level, Purdue disclosed that it faced potential exposure of $1 billion if the trial court’s determination is allowed to stand.

Read more about this development here. 

Former interns of NBC Universal have settled their class-action lawsuit seeking damages for unpaid wages. In the suit, plaintiffs asserted that the entertainment conglomerate violated the Fair Labor Standards Act and state law by improperly classifying plaintiffs as non-employee interns. Under the $6.4 million settlement, the former interns will receive an average payout of $505. The settlement was reached in the shadow of a 2013 decision by Judge William Pauley of the U.S. District Court for the District of Southern New York in which he held that unpaid internships at Fox Searchlight did not qualify for exemption under trainee status under the FLSA. In that case, Judge Pauley held that plaintiffs did not qualify as trainees because they essentially performed the work of paid employees, providing immediate advantage to their employer and performing low-level tasks that did not require any specialized training. Analysts believe that the NBC Universal case settled to avoid the uncertainty created by the Fox Searchlight decision.

Read more about this development here and access the Fox Searchlight decision here.