Statute of Limitations

In a 5-4 decision split along traditional ideological lines, the U.S. Supreme Court held in CalPERS v. ANZ Securities, Inc., 582 U.S. ___ (2017), that the statute of repose in Section 13 of the Securities Act cannot be tolled under any circumstances. In particular, the Court held that the 3-year repose period—unlike the 2-year limitations period set forth in the same section of the Securities Act—is not tolled by the filing of a securities class action under the principles of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974).

Under American Pipe, the statute of limitations for a claim timely asserted in a putative class action is tolled for the period that the putative class claim is pending. Thus, if class certification is denied (or if a class member later decides to opt out of the class), individual putative class members can still pursue their separate claims, even if those claims would otherwise be untimely at the time they are filed. The question presented in CalPERS was whether that tolling principle likewise applied to Section 13’s 3-year statute of repose.

The CalPERS case arose out of the collapse of Lehman Brothers in 2008. Shortly after Lehman declared bankruptcy, a plaintiff filed a putative class action complaint alleging claims under Section 11 of the Securities Act against the underwriters of several of Lehman’s securities offerings from 2007 and early 2008. The complaint alleged that Lehman’s securities offered included material misstatements or omissions. CalPERS was not one of the named plaintiffs in that suit.

In 2011—more than three years after the last of those securities was first offered—CalPERS filed a separate complaint on its own behalf, alleging identical claims to those asserted in the putative class action. Shortly thereafter, the putative class action settled, and CalPERS opted out so it could continue to pursue its claims separately. However, the defendants then successfully moved to dismiss CalPERS’ separate lawsuit as untimely under Section 13, which provides, “In no event shall any [Section 11] action be brought…more than three years after the security was bona fide offered to the public….” The Second Circuit affirmed, and the Supreme Court granted certiorari.

Justice Kennedy delivered the opinion of the Court, joined by Chief Justice Roberts and Justices Thomas, Alito, and Gorsuch. The Court began by re-emphasizing the distinction between statutes of limitations and statutes of repose that the Court had described in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014). Statutes of limitations are intended to encourage diligence on the part of plaintiffs, and are therefore typically triggered by the accrual of a cause of action. (Slip op. at 4-5.) Statutes of repose, by contrast, reflect “a legislative judgment that a defendant should be free from liability after the legislatively determined period of time[,]” and usually begin to run from the date of the defendant’s last culpable act. (Id. at 5 (quoting CTS Corp.).) The Court observed that Section 13 of the Securities Act has both types of time limits: a 2-year limitations period that runs from when the actionable untrue statement or omission was or should have been discovered, and a 3-year repose period that runs from the date the security was first offered. (Id. at 5-7.)

The Court explained that the distinction between the purposes of a statute of repose and a statute of limitations was decisive in the CalPERS case. Because the purpose of a statute of repose is to create an “absolute bar” to the defendant’s liability after a period of time, such statutes are generally not subject to tolling in the absence of some legislatively-enacted exception. (Slip op. at 7-8.) In particular, unlike statutes of limitations, statutes of repose are not subject to tolling based on equitable principles. (Id. at 8.) American Pipe tolling is based on just such equitable considerations: it was intended to serve judicial economy by obviating the need for protective motions to intervene by individual putative class members, while still serving the purpose of the statute of limitations by ensuring that the defendants were on notice of the substantive claims against them and the “generic identities” of the claimants. (Id. at 8-11 (quoting American Pipe).) Those considerations could not serve to toll a statute of repose, whose purpose “to grant complete peace to defendants….” (Id. at 11.) The Court found that “the text, purpose, structure, and history of the [Section 13] statute [of repose] all disclose the congressional purpose to offer defendants full and final security after three years.” (Id.)

The Court then quickly dispensed with the four counterarguments CalPERS had raised. First, the Court found that American Pipe was readily distinguishable based on the distinction between statutes of limitation and statutes of repose: while the first may be tolled based on equitable considerations, the second may not. (Slip op. at 11-12.) Second, the Court found that the fact that the class action put the defendant on notice of the putative class members’ claims missed the point—“the purpose of a statute of repose is to give the defendant full protection after a certain time.” (Id. at 12.) Moreover, while the defendant might be on notice of the claims generally, it would not be on notice of the “number and identity of individual suits, where they may be filed, and the litigation strategies they will use[,]” which could significantly affect a defendant’s “practical burdens” and “financial liability[.]” (Id. at 12-13.) Third, the Court found that a putative class member’s right to opt out, while important, could not override the “mandatory time limits set by statute.” (Id. at 13.) Fourth, the Court rejected the argument that its ruling would “create inefficiencies,” noting that the Court was not free to ignore the plain terms of the statute, and observing that, in any event, the Second Circuit had not seen any “recent influx of protective filings” since its rule was announced in 2013. (Id. at 13-14.)

Finally, the Court rejected CalPERS’ alternative argument that it had timely “brought” its “action” within the meaning of Section 13 because it was a member of the putative class on whose behalf the original lawsuit was brought, and that its separate action was merely part of that same “action.” The Court found that argument did violence to the term “action,” which generally refers to a particular “proceeding” or “suit.” (Id. at 14-15.) Moreover, the Court observed that the argument proved too much: if it were correct, there would be no need for American Pipe tolling at all, and even an action commenced “decades after the original securities offering” would be timely as long as a class action had been commenced within the applicable limitations and repose periods. (Id. at 15.)

Justice Ginsburg dissented, joined by Justice Breyer, Sotomayor, and Kagan. Justice Ginsburg accepted CalPERS’ alternative argument that its filing date should relate back to the filing of the original class action complaint, and that by filings its separate action, CalPERS “simply took control of the piece of the action that had always belonged to it.” (Slip op. at 2-3.) She asserted that the majority’s rule would render the right to opt out “illusory[,]” because most securities class actions reach their “critical stages” years after the initial complaint is filed. (Slip op. at 1-2, 4.) Moreover, Justice Ginsburg contended, the “harshest consequences” were likely to fall on the “least sophisticated” class members, who would be unaware of their need to file a protective claim within the repose period. (Id. at 4.) Finally, she stated that the majority’s ruling was likely to “gum up the works of class litigation” by encouraging defendants to engage in dilatory tactics and encouraging the filing of protective claims. (Id. at 4-5.)

The CalPERS decision is likely to have repercussions far beyond Section 11 securities cases. The Court’s logic would also apply to the 5-year statute of repose governing class action claims under Section 10 of the Exchange Act, which are much more common. Indeed, any federal statute of repose without an express legislative tolling provision will now be fully applicable in any class action asserting a claim governed by that statute. It will be interesting to see whether the inefficiencies predicted by Justice Ginsberg come to fruition.

Overruling (or, at least, creatively re-characterizing) its own precedent, the Ninth Circuit held in Resh v. China Agritech, Inc., — F.3d —, 2017 WL 2261024 (9th Cir. May 24, 2017), that the pendency of an earlier uncertified class action tolls the statute of limitations not only for later-filed individual claims, but for subsequent class actions as well. The Ninth Circuit’s decision opens the door to the possibility of serial, successive attempts to certify a class in securities (and other) cases, potentially exposing defendants to an almost never-ending series of class action lawsuits.

Under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), the pendency of a putative class action tolls the statute of limitations applicable to the individual claims of the putative class members. Thus, if the putative class action is timely brought, but class certification is later denied after the statute of limitations would have otherwise expired, putative class members would still be able to bring individual claims on their own behalf. The question in Resh was whether American Pipe tolling should apply to subsequent class actions as well.

The facts of Resh are relatively straightforward. In February 2011, a market research company raised questions about the accuracy of China Agritech’s financial reporting. Its stock price fell substantially. A few days later, a China Agritech shareholder filed a putative securities fraud class action complaint against the company and several of its managers and directors in the Central District of California. The court denied class certification, finding that, because plaintiffs had failed to establish the fraud-on-the-market presumption of reliance, issues common to the proposed class did not predominate over individual issues. Five months after that denial, and one year and eight months after the initial adverse press report, another shareholder filed a second putative securities class action in the District of Delaware. The case was transferred to the same judge in the Central District of California, who again denied class certification, this time on grounds of typicality and adequacy of the named plaintiffs.

Nine months later — and more than three years after the initial adverse press report — plaintiff Michael Resh filed yet another putative class action complaint alleging securities fraud against China Agritech and several individual defendants. A claim for securities fraud under the Exchange Act is subject to a two-year statute of limitations. Thus, if American Pipe tolling applied, the putative class action would be timely — only about 14 months had passed since the initial press report during which a putative class action was not pending. But if American Pipe tolling did not apply, the class action complaint was plainly time-barred.

The Ninth Circuit began its analysis by discarding one of its prior precedents. In Robbin v. Fluor Corp., 835 F.2d 213 (9th Cir. 1987), the Ninth Circuit had held that American Pipe tolling did not apply to a subsequent class action following a definitive determination of the inappropriateness of class certification. The Ninth Circuit dismissed Robbin as “a short opinion published 30 years ago” that had been “modified” in Catholic Social Services, Inc. v. INS, 232 F.3d 1139 (9th Cir. 2000) (en banc). 2017 WL 2261024, at *6.

In Catholic Social Services, the district court had certified a class, but had lost subject matter jurisdiction due to an intervening change in the law. See id. The Ninth Circuit held that American Pipe tolling applied to a subsequent class action in those circumstances. See id. But it also stated, “If class action certification had been denied in [an earlier case], and if plaintiffs in this action were seeking to relitigate the correctness of that denial, we would not permit plaintiffs to bring a class action.” Id. (quoting Catholic Social Services, 232 F.3d at 1147).

The Resh court found that interpreting that statement as forbidding the application of American Pipe tolling to subsequent class actions when class certification had previously been denied would be a “misreading” of Catholic Social Services. Id. at *6-*7. The court explained that it was not talking about American Pipe tolling at all. What it was actually talking about was issue preclusion — all it meant was that, if the same plaintiffs sought to bring a subsequent class action after certification had previously been denied, issue preclusion would bar them from doing so. Id. at *7.

That is, to say the least, an odd reading of Catholic Social Services. Other than the reference to “relitigat[ion],” nothing in Catholic Social Services’ analysis suggests that the court was thinking of issue preclusion. In particular, nothing in the quoted sentence indicates that, to be barred from “relitigat[ing]” class certification, the plaintiffs in the subsequent class action had to be the same plaintiffs who unsuccessfully litigated the first class action — a critical requirement for issue preclusion. In fact, the court actually cited Robbin in support of its statement, which was plainly made in the context of a discussion of the applicability of American Pipe tolling to subsequent class actions. See Catholic Social Services, 232 F.3d at 1145-49. Indeed, the Ninth Circuit expressly dealt with issue preclusion on a different issue in a separate portion of its opinion. Id. at 1151-53.

In any event, having reinterpreted Catholic Social Services as applying American Pipe tolling to subsequent class actions — regardless of the reason for the dismissal of the earlier class action — the Ninth Circuit went on to find support for its position in three recent Supreme Court precedents:

  • In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559 U.S. 393 (2010), the Supreme Court held that Rule 23 empowers a federal court to certify a class in any type of case, not only those “made eligible for class treatment by some otherId. at 399 (emphasis in original). The Ninth Circuit concluded that to deny American Pipe tolling to subsequent class actions would essentially import “certification criteria” into Rule 23 from “some other law,” which Shady Grove forbids. 2017 WL 2261024, at *7.
  • In Smith v. Beyer Corp., 564 U.S. 299 (2011), the Supreme Court held that, after denying class certification, a federal court could not enjoin a state court from certifying a class under the “relitigation exception” to the Anti-Injunction Act because the state court action had different named plaintiffs who were not subject to claim or issue preclusion. The Court acknowledged the risk of “serial relitigation of class certification,” but found that risk was mitigated by principles of stare decisis and comity, as well as the possibility of removal under the Class Action Fairness Act (for state court actions) or MDL consolidation (for other federal actions). Id. at 316-18. The Ninth Circuit found that those considerations similarly ameliorated the unfairness of serial class certification litigation due to American Pipe 2017 WL 2261024, at *9.
  • Finally, in Tyson Foods, Inc. v. Bouaphakeo, 126 S.Ct. 1036 (2016), the Supreme Court noted that “use of the class device cannot ‘abridge…any substantive right.’” Id. at 1046 (quoting 28 U.S.C. 2072(b)). While acknowledging that Tyson Foods did not directly control, given that “statutes of limitation occupy a no-man’s land between substance and procedure,” the Ninth Circuit found that it “nonetheless reinforces our conclusion that the statute of limitations does not bar a class action brought by plaintiffs whose individual actions are not barred.” 2017 WL 2261024, at *8.

Despite the court’s insistence to the contrary, Resh represents a sharp break from prior law in the Ninth Circuit. Given that the court radically reinterpreted the en banc decision in Catholic Social Services, it will be interesting to see whether the Ninth Circuit elects to reconsider the Resh decision en banc.

In the meantime, Resh increases the pressure on defendants in putative class actions pending in the Ninth Circuit to settle, lest they be saddled with the costs of serially re-litigating class certification even after prevailing. The Resh court’s suggestion that plaintiffs’ counsel, whose fees are usually contingent on the outcome of the case, “at some point will be unwilling to assume the financial risk in bringing successive suits,” id. at *9, is sure to be cold comfort to class action defendants, for whom the cost of litigation is frequently the driving factor in deciding to settle a case.

Some relief may be forthcoming soon from the Supreme Court, however. The Court is currently considering whether American Pipe tolling applies to statutes of repose, in addition to statutes of limitations. See California Pub. Employees’ Retirement Sys. v. ANZ Securities, Inc., 137 S.Ct. 811 (2017) (granting writ of certiorari). If the Supreme Court affirms that American Pipe tolling does not apply to statutes of repose, that would at least put a hard backstop on serial re-litigation of class certification. And given that there is a clear circuit split on whether American Pipe tolling applies to subsequent class actions, see, e.g., Korwek v. Hunt, 827 F.2d 874, 879 (1987), the Supreme Court may eventually take up that issue as well.