§ 4.1.9.11.5 Discovery Stays
As an adjunct of the statutory pleading requirements added in 1996, the legislature included a provision staying all discovery during the pendency of a motion to dismiss.1115 The federal counterpart of the Arizona statute has been called a "sledge-hammer" that goes too far.1116 The stay allows defendants to force plaintiffs to meet elevated pleading standards without discovery. Because the details of fraud are often obscured in information to which only the defendant has access, a complete discovery blackout carries a high risk of injustice.1117
Arizona's appellate courts have yet to interpret the discovery stay. But at least one district-court judge has expressed the view that Arizona's statutory stay is a procedural rule that does not apply in federal court and may unconstitutionally encroach on the Arizona Supreme Court's rule-making authority.1118
Section 44-2082(C)(2) permits the court to order "particularized discovery" on two grounds: (1) when needed "to preserve evidence" or (2) "to prevent undue prejudice."1119 The statute's reference to "particularized discovery" requires the plaintiff to identify the specific documents or information that is needed.1120
Needless to say, undue prejudice is not a concrete standard. In practice, its application is influenced not only by the facts but the trial judge's beliefs and attitudes. What is the judge's preliminary view of the merits? What is the judge's view of discovery? More generally, what is the judge's attitude toward securities litigation and class actions? Federal cases show that these things matter.1121
Some of the developments in federal decisions interpreting the discovery stay follow.
Undue prejudice. Delay in obtaining documents or other information is not undue prejudice.1122 Nor is it usually enough to show that the burden to the defendant is slight because the defendant has already produced the documents to a third party.1123 Similarly, showing that Congress's purposes will not be frustrated cannot be used to bypass the undue-prejudice standard.1124 Some federal courts define undue prejudice to require "exceptional circumstances."1125 Some do not.1126 A frequently quoted description of undue prejudice in the Southern District of New York is that it means "improper or unfair treatment amounting to something less than irreparable harm."1127
Documents produced for government agencies. Some federal cases have construed the undue-prejudice exception to permit discovery of documents already produced by defendants in response to government and regulatory investigations.1128 The trend, though, is to strictly interpret the stay and deny access to these documents.1129
Amending to rename previously dismissed defendants. After the stay is lifted, discovery may provide new information that enables the plaintiff to plead a claim against a previously dismissed defendant that will survive dismissal. The federal courts are divided on whether the statutory stay bars an amendment.1130 The Ninth Circuit takes the position that district courts have discretion to permit such amendments.1131
Document preservation. Even when the showing needed to lift the stay cannot be made, federal courts will often allow plaintiffs to serve document subpoenas requiring nonparties to preserve evidence.1132
Intent to file a motion. Most federal courts hold that notice that a defendant intends to file a motion to dismiss is enough to trigger a stay.1133
Successive motions to dismiss. Motions to dismiss are frequently granted in whole or part with leave to file an amended complaint. A second motion to dismiss is then invariably filed after the amended complaint is filed.1134 Most federal courts have concluded that the stay continues in place when the second motion is filed even when the first motion was partially granted.1135
Discovery versus investigation. "Discovery" is not a synonym for investigation.1136 Interviewing witnesses, researching newspapers or SEC filings; studying judicial and administrative records; and searching for information through the internet are investigatory techniques but not what is normally thought of as discovery.1137 These techniques are therefore not subject to a discovery stay.1138 Similarly, a request for public records is not discovery that is prevented by the statutory stay.1139 This is true whether the records' request is made before or after suit is filed.1140
Motions to dismiss by less than all defendants. In complex cases, some defendants may file motions to dismiss while others do not. The majority of federal courts hold that the discovery stay applies to the entire case while any dismissal motion is pending.1141 The minority rule is that discovery is stayed only regarding the defendant whose motion is pending.1142 The majority rule is better reasoned. Professor Couture explains the reasons:
I agree with the majority rule that the statute unambiguously stays "all discovery," even if only one defendant has a pending motion. Indeed, even those courts following the minority rule have generally distinguished between depositions and document discovery, refusing to allow the former to proceed during the pendency of a motion to dismiss because of prejudice to the defendant protected by the stay of discovery. This distinction between depositions and document discovery has no basis in the statutory text, reinforcing that the statute means "all" when it says "all."1143
A different situation exists when discovery is initiated during the gap between denial of an initial motion to dismiss and a later dismissal motion. In that situation, the Ninth Circuit has held that the plaintiff may properly use documents subpoenaed during the gap even if they are produced after a second motion to dismiss is filed.1144
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Notes:
[1115] See A.R.S. § 44-2082(C)(2) (2013), which provides:
All discovery and other proceedings shall be stayed during the pendency of any motion to dismiss pursuant to rule 12 of the Arizona rules of civil procedure, unless the court finds on the motion of any party that particularized discovery is necessary to preserve evidence or to prevent undue prejudice to that party.
See generally Medhekar v. U.S. Dist. Court for the N. Dist. Of Cal., 99 F.3d 325 (9th Cir. 1996) (construing the federal counterparts of § 44-2082(C)(2) in § 27(b) of 1933 Act and § 21D(b)(3) of the 1934 Act and holding that (a) mandatory disclosures are discovery for purposes of the statute; and (b) the statute stays only...
