On July 7, the Second Circuit affirmed in part and vacated in part an order by Judge Rakoff of the S.D.N.Y. certifying two classes in the In re Petrobras Securities litigation, — F.3d –, 2017 WL 2883874 (2d Cir., July 7, 2017). In doing so, the Second Circuit joined several other circuits in declining to adopt a “heightened” version of the implied class certification requirement of ascertainability, which arose in the Third Circuit. Having rejected defendants’ arguments on this point, however, the Second Circuit applied Morrison v. National Australia Bank, 561 U.S. 247 (2010), in assessing whether the plaintiffs had met the predominance standard for class certification, and held that they had failed to do so, because individual questions of transactional domesticity—which under Morrison must often be considered when the territorial scope of the securities laws is at issueprevailed over common ones.

Petrobras is a multinational oil and gas company based in Brazil and majority-owned by the Brazilian government. Plaintiffs in Petrobras were holders of Petrobras equity and debt securities, who alleged that value of these securities fell dramatically following the revelation of a long-term money-laundering and kickback scheme at the company. Defendants included Petrobras and a number of its executives. In re Petrobras, 2017 WL 28883874 at *1.

The district court certified two classes of plaintiffs, the first asserting claims under the Exchange Act, and the second asserting claims under the Securities Act. On appeal, defendants challenged class certification on the grounds that (1) these classes were not sufficiently “ascertainable”; and (2) plaintiffs had not met the Rule 23(b)(3) requirement “that questions of law or fact common to class members predominate over any questions affecting only individual members.” In an opinion written by Judge Garaufis of the E.D.N.Y. (sitting by designation), and joined by Judges Hall and Livingston, the Second Circuit rejected defendants’ acertainability argument, but sided with them on their predominance argument. Id. Specifically, the court of appeals found that the district court had “erred in conducting its predominance analysis without considering the need for individualized Morrison inquiries.” Id. at *6.

The ascertainability requirement for class certification does not appear in Rule 23 itself, but is instead an “implied” mandate that a class be “sufficiently definite so that it is administratively feasible for the court to determine whether a particular individual is a member.” Id. at *5 (quoting Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015)). In several opinions, including Byrd v. Aaron’s Inc., 784 F.3d 154 (3d Cir. 2015), the Third Circuit has interpreted the ascertainability requirement as requiring a showing of administrative feasibility at the class certification stage—that is, a showing by plaintiffs that there will be an administratively feasible means of determining whether class members fall within the class definition. Petrobras, 2017 WL 2883874 at *11.

In Petrobras, the Second Circuit joined the Sixth, Seventh, Eighth and Ninth Circuits in rejecting this “heightened” ascertainability standard, and clarified its own ruling in Brecher, holding that ascertainability should not be evaluated with reference to administrative feasibility, but rather whether the proposed class is “defined by objective criteria.” Id. at *10. In Petrobras, this “modest threshold requirement” was met, because the proposed classes were concretely defined to include “persons who acquired specific securities during a specific time period, as long as those acquisitions occurred in ‘domestic transactions.’” Id. at *12.

Having rejected defendants’ arguments regarding ascertainability, however, the Second Circuit nonetheless vacated the district court’s certification order on the ground that it did not adequately consider domestic territoriality as defined by Morrison in evaluating the Rule 23 predominance requirement.

In Morrison, the Supreme Court held that the US securities laws are presumed to apply only to (1) transactions in securities listed on domestic exchanges; and (2) “domestic transactions” in other securities. In a subsequent case, Absolute Activist v. Ficeto, 677 F.3d 60 (2d Cir. 2012), the Second Circuit elaborated on the second prong of Morrison, holding that transactions in securities not listed on domestic exchanges are “domestic” if “irrevocable liability is incurred or title passes within the United States”; and also ruled that transactional domesticity is a “merits” question of the kind that can considered in a Rule 12(b)(6) motion.

In Petrobras, there was no doubt that the equity transactions at issue fell within Morrison’s first prong, given that the Petrobras equity securities were traded on the NYSE. There was also no doubt that the debt transactions did not fall within the first prong, since the debt securities did not trade on any U.S. exchange, and were instead traded on various over-the-counter markets. The hard question in Petrobras was whether the over-the-counter debt securities transactions fell into the category of “domestic transactions” notwithstanding the fact that they were not conducted on domestic exchanges—a question rendered more difficult by the fact that these transactions differed in their particulars. Id. at 3.

The district court did consider Morrison-based challenges to plaintiffs’ claims before issuing its class certification order, dismissing two named plaintiffs from the case after finding that their over-the-counter debt securities transactions did not qualify as domestic under Morrison and Absolute Activist. Id. at *7-8. But the Second Circuit nonetheless found that the district court did not adequately address Morrison in the certification context. Id. at *14-16.

Generally speaking, a plaintiffs seeking to demonstrate that a particular over-the-counter transaction was domestic may offer “evidence ‘including, but not limited to, facts concerning the formation of the contracts, the placement or purchase orders, the passing of title, or the exchange of money.’” Id. at *14 (quoting Absolute Activist, 677 F.3d at 70). As the Second Circuit observed in Petrobras, “these transaction-specific facts are not obviously ‘susceptible to [ ] class-wide proof.’” Id. (quoting Tyson Foods v. Bouaphakeo, 136 S.Ct. 1036, 1045-46 (2016)).

The district court approved two class representatives with claims based on over-the-counter transactions in debt securities. For each of these two plaintiffs, domesticity was not seriously at issue, as they placed their purchase orders in the United States and procured their securities directly from U.S. underwriters. But the Second Circuit described these two class representatives as “the easy case,” and concluded that the district court’s certification order “offers no indication that [it] considered the ways in which evidence of domesticity might vary in nature or availability across the many permutations of transactions in Petrobras Securities.” Id. at *15.

According to the Second Circuit, these likely intra-class differences give rise to a predominance problem, because “the investigation of domesticity appears to be an ‘individual question’ requiring putative class members to ‘present evidence that varies from member to member.’” Id. at *14 (quoting Tyson Foods, 136 S.Ct. at 1045). In this case, the Second Circuit concluded, “it cannot be said that the class members’ Morrison inquiries will ‘prevail or fail in unison.’” Id. at *16. On this basis, the Second Circuit vacated the district court’s certification of the two classes insofar as they included all otherwise-eligible members who acquired their Petrobras securities in “domestic transactions”—allowing, however, that the district court might, on remand, properly certify one or more classes that would capture some or all of the members of the vacated classes. Id. at *16.

Finally, the Second Circuit also addressed a ruling by the district court, with respect to the Exchange Act class, that plaintiffs were entitled to a presumption of reliance under the “fraud on the market” theory established in Basic v. Levinson, 485 U.S. 224 (1998). While the defendants pointed to the fact that plaintiffs provided no empirical data showing that the price of the relevant Petrobras securities moved up and down predictably in response to news about the company, the Second Circuit noted that such data may suffice but is not necessary to show market efficiency, and held that the district court properly considered other forms of direct and indirect evidence in ruling that the Basic presumption applied for purposes of class certification. Id. at *20.

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.