11 Jun U.S. Supreme Court: Equitable Tolling Does Not Permit Follow-On Class Claims Beyond the Limitations Duration
In the latest of several recent high court decisions addressing the questions of statutes of limitations and related questions of tolling, on June 11, 2018, the U.S. Supreme Court unanimously held that equitable tolling principles do not apply to toll statutes of limitation to permit previously absent class members to bring a subsequent class action outside the applicable limitations period. This seemingly narrow ruling is consistent with the Court’s recent proclivity to provide sharper edges and cleaner lines to statutes of limitations issues and to reduce the likelihood that class securities claims may continue be filed after the end of the limitations period. The Supreme Court’s June 11, 2018 opinion in China Agritech, Inc. v. Resh can be found here.
In its 1974 decision in American Pipe & Construction Co. v. Utah, the U.S. Supreme Court held that the filing of a class action complaint tolls the running of the statute of limitations for other class members who might want to file their own individual action or intervene in the class action. In the Court’s last term in the case of CALPERS v. ANZ Securities, the Court held that while under the American Pipe doctrine that while the filing of a securities class action tolls statutes of limitations it does not toll the running of statutes of repose.
The China Agritech case involves a different question under the American Pipe tolling doctrine. The China Agritech case raises the question whether American Pipe tolling tolls statutes of limitation to permit previously absent class members to bring a subsequent class action outside the applicable limitations period. The procedural history of the China Agritech case itself help explain the meaning and significance of this seemingly obscure question.
The Procedural History of the China Agritech Case
China Agritech has been sued in a series of class action lawsuits arising out of allegations that the company’s financial statements different materially from the financial statements the company filed with regulators in China and that the company engaged in undisclosed related-party transactions.
The first of these lawsuits was filed in February 2011. The plaintiff in that first lawsuit purported to represent a class of shareholders who had purchased the company’s stock. After the court granted in part and denied in part the defendants’ motion to dismiss, the plaintiff filed a motion for class certification. In March 2011, the district court denied the motion for class certification on the grounds that the proposed class failed to satisfy the predominance requirement. The plaintiffs in this first action settled their individual claims in September 2011.
Within weeks of the settlement of the first action, a different plaintiff shareholder filed a new complaint. The court of appeals would later characterize the second complaint as “an almost identical class-action complaint on behalf of the same would-be class.” The plaintiffs in the second action filed a motion for class certification, which was again denied. In January 2014, the plaintiffs in the second action dismissed their claims without prejudice.
In January 2014, the plaintiff in the case now before the U.S. Supreme Court filed a complaint the Ninth Circuit later said was “based on the same facts and circumstances, and on behalf of the same would-be class” as in the two prior lawsuits. The plaintiff in this third lawsuit sought class certification, as had the plaintiffs in the prior two cases. The district court rejected the third claimant’s class claims as time-barred. Specifically, the district court held that American Pipe tolling permitted the plaintiff to bring his action as an individual action but the statute had run with respect to the plaintiff’s purported class action.
The plaintiff appealed the district court’s ruling to the Ninth Circuit. In a May 24, 2017 opinion (here), the appellate court revived the plaintiff’s purported class action, ruling that American Pipe tolling allows absent class members to bring not only their own individual actions after the statute of limitations lapses, but also class claims on behalf of other absent class members, even though the district court had twice previously found the identical class deficient.
China Agritech filed a petition for a writ of certiorari to the U.S. Supreme Court. In reliance on the existence of a split of authority among the federal circuits on the relevant class action lawsuit tolling issue, the U.S. Supreme Court granted the petition for the writ of certiorari. The Court heard oral argument in the case on March 26, 2018 (as discussed here).
The Court’s June 11, 2018 Opinion
In a June 11, 2018 opinion written by Justice Ginsburg for a unanimous court (with Justice Sotomayor separately concurring), the U.S. Supreme Court reversed the Ninth Circuit and remanded the case for further proceedings.
The opinion summarizes the Court’s ruling in a succinct summary in the opinion’s opening paragraph: “Upon denial of class classification, may a putative class member, in lieu of promptly joining an existing suit or promptly filing an individual action, commence a class action anew beyond the time allowed by the applicable statute of limitations? Our answer is no.” American Pipe, the court said, “does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.”
In rejecting the claimant’s reliance on American Pipe tolling to argue that his claim was timely, the Court said that the principles of “efficiency and economy of litigation” that permit the tolling of individual claims “do not support maintenance of untimely successive class actions”; rather, with respect to class claims, efficiency favors early assertion of competing class representative claims, so that the most qualified representative can be considered. Class representatives who commence suit after expiration of the limitations period are unlikely to qualify as diligent in asserting claims and pursuing relief. Permitting tolling to allow these putative claimants to come forward would “allow extension of the statute of limitations time and again.” Endless tolling of the statute of limitations is not the result envisioned by American Pipe.
Finally, the Court rejected the argument that disallowing tolling would be inconsistent with Fed. R. Civ. Proc. 23 or interfere with the prospective class claimants’ substantive rights. Plaintiffs, the court said, have no substantive right to bring claims outside the statute of limitations. Nor, the court said, is the clarification that prospective claimants do not have this right likely to result in an increase in the number of protective class-action filings. The court noted that a number of circuits that previously disallowed these claims had not experienced a disproportionate number of protective class-action filings. The federal rules provide a number mechanisms to aid courts should multiple claims arise; “what the Rules do not offer is a reason to permit plaintiffs to exhume failed class actions by filing new, untimely class claims.”
The Court concluded by saying that “the watchwords of American Pipe are efficiency and economy of litigation”; extending American Pipe tolling to successive class actions “does not serve that purpose.” The contrary rule, disallowing out-of-time class actions, “will propel putative class representatives to file suit well within the limitation period and seek certification promptly.”
Justice Sotomayor concurred separately to say that while she agreed for claims under the PSLRA that the filing of out-of-time class actions should not be permitted, she disagreed that the court’s conclusions should apply to class claims under federal statutes other than the PSLRA.
As I noted at the outset, the issues involving in the Court’s ruling on this statute of limitations issue may seem narrow or even obscure. The fact is that, even though the Court has shown a recently increased willingness to take up securities cases, Supreme Court’s rulings on securities laws issues are relatively rare, with one or two a year at most. These episodic Supreme Court utterances help illuminate the securities laws. In addition, in this case, the Supreme Court’s statements help ensure that the securities laws are administered uniformly among the federal circuits.
I can certainly understand that the plaintiffs’ securities bar may be disappointed by this ruling, as well as at the Supreme Court’s recent general propensity to restrict the protections afforded by American Pipe tolling. I have to say, however, that in this case, it sure does seem like the equities favor the defense side. You can almost hear the defense attorneys in this case saying, for crying out loud, we defeated class certification not once but twice during the limitations period, why on earth should we have to address class certification issues a third time outside of the limitations period? The Supreme Court’s opinion essentially represents an affirmation that at some point this process does have to come to an end.
Or to put it another way, the Supreme Court, in this case and other recent cases as well, seems inclined to want to give effect to principles of finality and Congressional purposes in promulgating statutes of limitation and repose
It is also important to note that the claimant’s own substantive rights are not impaired by this decision. He still retains his rights to bring his own individual claim (at least to the extent that he can show that his claim is within the limitations period as a result of American Pipe tolling). The Supreme Court’s ruling only affects his right to bring a class claim and then only because he filed his class claim after the limitations period. Moreover, prospective plaintiffs in future cases keen to have the claims of the class asserted and concerned that the nominal plaintiff who stepped forward to assert the class claims may not be the best situated to represent the class will always have the option of intervening in the putative class action in order to try to assure that the class claims are fully represented.
There is a part of the Court’s opinion that seems to be based on a factual determination (or rather a factual speculation) and that is the Court’s assertion that the ruling in this case will not encourage a propagation of preemptive or protective class action filings, in order to avert late possible statutes of limitations issues. The Court’s assurance that the risk of a proliferation of these kinds of filings seems conjectural to me. The Court arguably is on more solid ground when it says that a multiplicity of class action filing is “not necessarily needless,” as multiple filings “may aid a district court in determining early on whether class treatment is warranted, and if so, which of the contenders would be the best representative.”
One final note. While I noted above the value of the Court’s periodic utterances on securities law issues, the fact is that in this case and other securities law cases the Court has taken up, the Court is addressing issues “at the periphery of securities laws.” The Court’s determination of these issues is unlikely to have a significant impact on any but a very small number of securities lawsuits filed. The case is important because it involved the Supreme Court. But that does not mean the case will have a significant impact on many cases.