As we have noted before, the tolling rule created by the Supreme Court in the American Pipe case–which tolls the statute of limitations for absent class members when a class action is filed–generates vigorous disputes over when stale or successive claims will be allowed. The Seventh Circuit recently considered one such dispute in Collins v. Village of Palatine, holding that the statute of limitations is not tolled during the pendency of an ultimately successful appeal from the dismissal of a putative class action that had not been certified.
Josh Yount, a litigation partner in Mayer Brown's Chicago office and a member of the firm's top-ranked Supreme Court and Appellate practice, focuses his practice on appellate litigation, class certification defense, and securities law. With experience successfully representing a wide variety of businesses, he offers clients sophisticated legal analysis, careful strategic thinking, and vigorous advocacy.
Today, in CalPERS v. ANZ Securities, Inc. (pdf), the Supreme Court recognized a crucial limitation on the doctrine that allows a class action to toll the deadline for absent class members to bring their own separate individual suits. We’ve been following this issue in the CalPERS appeal for some time. (See our previous reports on this appeal.)
In a 5-4 decision authored by Justice Kennedy, the Court held that the American Pipe tolling doctrine does not apply to statutes of repose. As a result, the three-year statute of repose in the Securities Act of 1933 barred a suit that CalPERS had filed against the underwriters for certain Lehman Brothers debt securities more than three years after the securities were issued, but while a timely class action bringing similar claims was pending.
Yesterday afternoon, the Supreme Court heard oral argument (pdf) in CalPERS v. ANZ Securities, a case that asks whether a plaintiff asserting violations of Section 11 of the Securities Act of 1933 can file suit after the three-year outer limit for such suits has passed, if a class action encompassing the plaintiff’s claims was timely filed and remained pending. The answer to that important question, which has divided the federal courts of appeals, will tell defendants facing suit over the issuance of securities whether the Securities Act’s three-year repose period is a real protection against belated lawsuits or simply a limited protection that dissolves once a timely class action is filed. Yesterday’s argument suggested the Court, too, may be divided about how to resolve this debate.
The securities class action industry was launched a quarter-century ago when the Supreme Court recognized the so-called “fraud-on-the-market” presumption of reliance in most putative securities class actions. The result has been that—despite Congressional efforts at securities litigation reform—most securities class actions that survive the pleadings stage are likely to achieve class certification, forcing defendants to settle. In the meantime, as explained in prior blog posts, the best economic thinking has shifted, calling the empirical assumptions underlying the fraud-on-the-market presumption into question.
In Halliburton Co. v. Erica P. John Fund, Inc. (pdf), decided today, the Supreme Court declined to abandon that presumption, instead largely maintaining the status quo. The Court did clarify one key aspect of how class certification works in the securities context, holding that defendants are now entitled to attempt to rebut the presumption by introducing evidence at the class certification stage that there was no “price impact”—i.e., that misrepresentation alleged in a particular lawsuit did not affect the stock’s price. This adjustment will make it possible for defendants to challenge class certification in a number of securities class actions, but is unlikely to alter the landscape of securities litigation significantly—a result that is troubling from a policy perspective because (for reasons we have previously stated) securities class actions generally benefit the lawyers who bring and defend them rather than the investors.
We provide more details about the decision below. Continue Reading Supreme Court Refuses To Overturn Fraud-On-The-Market Presumption, But Adjusts Presumption To Allow Evidence of Absence Of “Price Impact” At Class Certification Stage
A recent decision denying certification of a securities-fraud class action underscores that plaintiffs must prove with evidence that they satisfy the requirements of Federal Rule of Civil Procedure 23, not merely allege that they do so or promise that they can.
The decision in In re Kosmos Energy Limited Securities Litigation arose from a class action filed in the Northern District of Texas by plaintiffs challenging certain statements made in connection with the defendant’s initial public offering (“IPO”). The court denied the plaintiff’s motion to certify a putative class of stock purchasers.
In its opinion, the court provided a useful overview of class-certification law, explaining that courts have moved “away from the presumptively pro-plaintiff view” of class actions that had prevailed decades ago. The court explained that “[g]oing forward, the clear directive to plaintiffs seeking class certification—in any type of case—is that they will face a rigorous analysis by the federal courts, will not be afforded favorable presumptions from the pleadings or otherwise and must be prepared to prove with facts—and by a preponderance of the evidence—their compliance with the requirements of Rule 23” (emphases added)
The court concluded that the plaintiff had failed to provide evidence establishing that it would be an adequate class representative or that common issues of law or fact would predominate over individualized ones. The plaintiff had attempted to rest in large part on allegations in the complaint and broad statements in dicta in past decisions. The court didn’t buy it.
The court first explained that “adequacy is the plaintiff’s burden to prove—not the defendant’s burden to disprove.” The court also criticized the plaintiff’s declaration attesting in impossibly vague terms that she had “reviewed” the pleadings and “supervised” her lawyers. As the court put it, “this type of generic detail is really no detail at all, for it provides naught by which to assess [the plaintiff’s] credibility, her knowledge about the underlying facts of the case, or how much of what she has stated may have been prompted by counsel. Indeed, any potential class representative in any securities case could make almost identical assertions.”
With respect to predominance, the court concluded that the plaintiffs were effectively asking for an assumption that securities class actions are certifiable. That “assumption,” the court explained, was “ill-founded.” The court also emphasized that “[w]hile Defendants offered a 107-page Expert Report demonstrating the need for individual inquiries into investor knowledge, Lead Plaintiff offered no proof from which to draw an inference that individual inquiries may not be required if the Court were to certify this putative class . . . .”
This decision is good news for businesses—and not just in the context of securities-fraud class actions. True, those suits are subject to heightened pleading requirements set forth in the Private Securities Litigation Reform Act (“PSLRA”). But the court’s denial of class certification rested on fundamental principles arising from Rule 23 itself, which applies to all class actions in federal court.
Last year, we reported on the Second Circuit’s ruling in Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc. (pdf), 721 F.3d 95 (2d Cir. 2013), that the filing of a class action does not toll the statute of repose in the Securities Act of 1933 for would-be class members who later seek to intervene or file their own suits. On Monday, the Supreme Court announced that it has chosen to review the Second Circuit’s ruling. Now, the Supreme Court has an opportunity to establish a uniform national rule that the tolling principles applicable to statutes of limitation under American Pipe and Construction Co. v. Utah, 414 U.S. 538 (1974), do not apply in the very different statute-of-repose context.
In American Pipe, the Supreme Court held that the filing of a class action suspends the statute of limitations as to all putative class members so long as they remain members of the proposed class. But lower courts have reached different conclusions on whether this American Pipe tolling applies to the three-year statute of repose for claims under Sections 11, 12(a)(2), and 15 of the Securities Act. As our previous post described, in the IndyMac case, the Second Circuit rejected an effort by putative class members to revive class claims under Section 11 of the Securities Act after the period of repose had expired. (The district court had first concluded that the named plaintiffs lacked standing to assert the claims.) The Second Circuit reasoned that the American Pipe rule cannot be applied to the Securities Act’s statute of repose because the Supreme Court held in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), that equitable tolling does not apply to a repose period and because the Rules Enabling Act does not allow a court to use Rule 23—the source of any legal tolling—to “abridge, enlarge or modify” the repose promised by the Securities Act.
One of the absent class members who had sought to intervene petitioned for a writ of certiorari. It argued that IndyMac conflicted with a Tenth Circuit decision, Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000), which held that American Pipe tolling applied to the Securities Act’s statute of repose. The petitioner also asserted a conflict with Federal Circuit decisions applying American Pipe to time limits for suits against the United States. In my view the claimed conflicts are mirages. That said, the Supreme Court—having now granted certiorari—has a perfect opportunity to bless the Second Circuit’s well-reasoned conclusion that there is no basis for American Pipe tolling of the repose period created by Section 13 of the Securities Act. That provision is an absolute bar to stale claims. Would-be plaintiffs should not be able to use American Pipe to bring such claims after Section 13 has cut off liability for a challenged securities offering.
At its conference on January 10, the Supreme Court can get serious about fixing consumer class actions. The Justices should take up that challenge, because it will consider two certiorari petitions that seek review of class certifications—involving alleged “moldy odors” in high-tech front loading washing machines—that are prime examples of what has gone wrong with the lower federal courts’ application of Rule 23. We’re somewhat biased: along with our partner Steve Shapiro and our co-counsel at Wheeler Trigg, we represent the petitioners in Whirlpool Corporation v. Glazer, No. 13-431, and Sears, Roebuck & Co. v. Butler, No. 13-430; copies of our cert petitions are available here, and our reply is available here (pdf).
But we and our clients are by no means alone in thinking that these cases present excellent vehicles for the Justices to bring more rigor and fairness to the application of Rule 23(a) and (b)(3). A bevy of amici has filed briefs in support of certiorari, explaining to the Court why the technology industry, appliance and other manufacturers, retailers, and U.S. businesses in general need the Court to intervene. Commentators too have seen in these cases the chance for the Supreme Court to clean up the class action mess. See, for example:
- this op-ed in the Wall Street Journal by Governor John Engler, President of the Business Roundtable (subscription required);
- this editorial in the Washington Examiner;
- this article in the New York Law Journal by Michael Hoenig (subscription required); and
- this piece by Desmond Hogan and Erica Songer in InsideCounsel.
In Whirlpool, plaintiffs allege that Whirlpool front-loading washing machines have a design defect that makes it possible for the machines to produce moldy odors. In Sears, the plaintiffs allege that Kenmore-brand washers made by Whirlpool have the same design defect and that some also have a manufacturing defect that on occasion may produce a false error code. In both cases, the alleged odor and error-code issues have manifested for only a tiny portion of purchasers—less than five percent according to Whirlpool and Sears service records and independent surveys by Consumer Reports. Yet the Sixth Circuit in Whirlpool approved certification of a class of all Ohio residents who bought 21 differently designed washing machine models. And the Seventh Circuit did the same in Sears for a class of buyers of 27 different models in six different States, the relevant laws of which vary. Over the course of the class period not only did the design of the machines change, but so did the instructions given to consumers to protect against any moldy odors. Individual owners used their machines differently, cared for them differently, and operated them in varied conditions.
As we explain in our briefs, both courts of appeals ignored a raft of individualized issues that make it impossible for plaintiffs to satisfy the class-certification requirement that common issues predominate over individual ones. Only class-member-specific inquiries could determine the crucial questions of whether any particular buyer experienced the alleged issues with moldy odors or error codes at all, whether the alleged defect or other factors caused any such issues, whether the buyer followed care and use instructions, whether problems manifested during the warranty period, whether the buyer requested and received adequate warranty service, and whether any damages resulted from any alleged defect (among other questions). And the fact that the certified classes are filled with uninjured buyers fatally undermines constitutional standing to litigate the class claims and threatens to unfairly dilute the rights of the few class members who may actually have injuries.
The harms caused by the decisions of the Sixth and Seventh Circuits are not limited to the violence those decisions have done to Rule 23’s requirements. Indeed, the adverse social and economic consequences of certification of these sorts of cases cannot be overstated. The introduction of front-loading washers reflected years of innovation to improve water- and electrical-efficiency in response to regulatory mandates. Independent testing shows that front-loading washers perform very well both on those measures and on cleaning capability. Yet every manufacturer of front-loading washers is now the subject of class actions across the Nation.
Massive class action litigation of this sort is immensely costly. Those costs end up being absorbed by consumers. Class suits over products that for the vast majority of owners perform as advertised undermine the generous warranty programs that manufacturers and retailers offer to quickly address problems actually experienced by individual customers. And they deter innovation. Any manufacturer must think twice before creating an innovative product when the reward is an onslaught of class litigation. What technologically advanced new product does not have glitches or sporadic issues? That is what warranty programs are designed for—to keep customers happy and coming back despite the likelihood of teething troubles in advanced, innovative products that make all our lives better.
Of course, the Supreme Court has tried before to bring more rigor to Rule 23 analysis—but many lower federal courts have ignored the message. Take the Sears case, in which the Seventh Circuit thumbed its nose at a litany of Supreme Court precedents. After the Supreme Court GVR’d the Seventh Circuit’s initial certification decision in light of Comcast Corp. v. Behrend, Judge Posner seemed perplexed about why his ruling had been vacated. Despite the GVR, he concluded that there was “no possibility” that the holding in Comcast could apply. And although the Supreme Court in Wal-Mart Stores, Inc. v. Dukes ruled that “common answers,” not “common questions,” are the key to satisfying the Rule 23(a) commonalty requirement, Judge Posner wrote that asking for “common answers” would place too “heavy” a burden on plaintiffs to justify certification. And why the stretch to certify? Because, in his view, individual claims would be too “meager” to make “suing worthwhile.” But that “ends-justifies-the-means” rationale for class actions runs counter to the Supreme Court’s repeated teachings that substantive law cannot be modified to pave the way for employing the class device.
What explains this flouting of precedent? The Seventh Circuit’s realpolitik approach recognizes that once cases are certified they tend to “quickly settl[e]” without any adjudication of the merits and using some mechanical “schedule of damages”—a result the Seventh Circuit deemed “efficient” (never mind that the Supreme Court repeatedly has identified blackmail settlements as a problem, not a solution). Indeed, the Court has again and again admonished that “[t]he class action is ‘an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only’”—as the Court said in both Dukes and Comcast. For that reason, Court said just last Term in American Express Co. v. Italian Colors Restaurant that Rule 23’s stringent requirements should “in practice exclude most claims” from class treatment; but federal trial and appeals courts still treat those requirements as authorizing class certification of “most claims.” So long as that departure from precedent continues, class actions will effectively impose a tax on every American, with the only beneficiaries being the plaintiffs’ bar, as a recent empirical study our colleagues conducted documents. Granting certiorari and reversing certification in the washer cases would go a long way indeed to putting the class action device back on track.
As I have previously blogged, my colleagues and I have filed certiorari petitions in two significant cases affecting class-action litigation, Sears Roebuck & Co. v. Butler (pdf) and Whirlpool Corp. v. Glazer (pdf). The petitions challenge decisions that bless broad class actions on behalf of largely uninjured purchasers of front-loading washing machines whose product-defect claims depend on the particular model purchased, the purchaser’s use and care of the machine, and numerous other purchaser-specific determinations.
Last week, in an unusually strong outpouring of support, twelve different organizations filed nine different amicus briefs asking the Supreme Court to grant review in these two cases. Among other compelling arguments, the amicus briefs made two interesting points that put these class actions in context.
First, most manufacturers and many retailers have established product-warranty programs that are effective alternatives to broad purchaser class actions. These warranty programs operate on an opt-in principle that targets those who actually have problems with the product. And these programs quickly resolve any problems with a product by providing repairs or replacements at little or no cost to the purchaser. An unwieldy class action on behalf of mostly uninjured purchasers is no improvement on—indeed, would significantly interfere with—these warranty programs.
Second, the principal alleged defect in the washing machine cases—moldy odors resulting from residue that supposedly builds up because the machines use less water and lower temperatures—is tied directly to government-mandated water and energy efficiency improvements. Beginning in 2004, Department of Energy regulations started requiring aggressive efficiency increases for washing machines. In turn, manufacturers undertook groundbreaking product-innovation efforts, including the development of front-loading machines. Those machines provide significant efficiency gains, are highly rated by third-party organizations, and are popular with customers. Yet front-loading washing machines have now become the center of massive class-action litigation against every manufacturer.
As these amici arguments illustrate, there are powerful practical and policy reasons that the Supreme Court should review the class certification rulings in the washing-machine cases.
For interested readers, here are copies of the amicus briefs:
- Chamber of Commerce of the United States, Business Roundtable, and the National Association of Manufacturers
- DRI—The Voice of the Defense Bar
- Product Liability Advisory Council
- Washington Legal Foundation and International Association of Defense Counsel
- Association of Home Appliance Manufacturers
- Pacific Legal Foundation
- Retail Litigation Center
- TechAmerica and TechNet
Today, Mayer Brown filed a pair of certiorari petitions that challenge efforts by two federal appellate courts to narrow the Supreme Court’s recent class-action decisions in Comcast Corp. v. Behrend and Wal-Mart Stores, Inc. v. Dukes to tickets good for a single ride only. The Supreme Court previously remanded both cases for reconsideration after Comcast, but both courts of appeals reinstated their decisions. The certiorari petitions explain why those decisions are wrong: both putative class actions are beset by individual liability and damages questions and are filled with uninjured class members.
In one case, Sears, Roebuck and Co. v. Butler (pdf), Sears challenges a Seventh Circuit decision allowing class actions to proceed based upon an allegation that Kenmore-brand front-loading clothes washers have a design defect that causes musty odors and a manufacturing defect that produces false error codes. In an opinion by Judge Posner, the Seventh Circuit ruled that the supposed efficiency of a class trial on the supposedly common “defect” issue justified class certification, even though only a small minority of class members experienced musty odors or false error codes, the suit raises numerous individual questions, claims are brought under the laws of six different states, and the supposedly common question would not yield common answers.
In the other case, Whirlpool Corporation v. Glazer (pdf), Whirlpool challenges a Sixth Circuit decision allowing a class action on behalf of Ohio residents based on allegations that Whirlpool front-loading clothes washers have a design defect that can cause moldy odors and that Whirlpool did not adequately warn buyers about the defect. The Sixth Circuit swept aside the many individual liability questions—including whether a class member was among the small percentage who experienced any moldy odors—by using a “premium price theory” never recognized by Ohio law that assumes that every purchaser paid a uniform overcharge regardless of the purchaser’s actual experience with the washer. One point is especially worthy of note: Even though the Supreme Court had vacated and remanded the original Sixth Circuit decision in light of Comcast, the Sixth Circuit’s opinion on remand focused far more heavily on a different Supreme Court precedent, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, from the securities class action context.
These cases are of obvious importance to the growing number of suits seeking to litigate supposed product defects on behalf of all purchasers when the alleged defects have only manifested in a relative handful of products owned by a small fraction of putative class members. More broadly, the cases present the Supreme Court with an opportunity to clarify the confusion wrought by the Sixth and Seventh Circuit’s decisions over how to properly apply Comcast, Wal-Mart, and the Court’s other class-action decisions.
Under the American Pipe rule, in federal court the filing of a class action tolls the statute of limitations for would-be class members. Otherwise, the Supreme Court reasoned in American Pipe, putative class members would have to intervene or file their own individual actions during the pendency of the class action in case class certification is denied to avoid having their claims become time-barred.
But does the American Pipe rule also apply to statutes of repose, which create an absolute right to be free from liability after a certain time frame? District courts had reached conflicting decisions on this issue with respect to the statute of repose for the Securities Act—Section 13.
The Second Circuit has now provided its answer. In Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc. (pdf), — F.3d —-, 2013 WL 3214588 (2d Cir. June 27, 2013), the Second Circuit held that the filing of a class action does not toll Section 13’s statute of repose. Nor does intervention under Rule 24 or “relation back” under Rule 15(c) allow absent class members to avoid application of the statute of repose to claims dismissed for lack of jurisdiction.
The IndyMac case involved allegations by plaintiffs that offering documents for a host of IndyMac MBS mortgage pass-through certificates contained misstatements that violated the Securities Act. The district court dismissed the claims as to many of the certificates because the named plaintiff did not purchase those certificates and thus lacked standing to assert the claims. Several putative class members who purchased certificates beyond those purchased by the named plaintiff then moved to intervene in the suit and amend the complaint pursuant to the “relation back” doctrine of Rule 15(c). The district court denied the motion based on Section 13’s statute of repose, which had expired during the pendency of the case.
In affirming, the Second Circuit first rejected the argument that Section 13 should be tolled by the filing of a class action. The court reasoned that, whether the American Pipe tolling rule is “equitable” or “legal” in nature, it cannot be applied to Section 13. The Supreme Court has expressly held that equitable tolling principles do not apply to the repose period in Section 13. And the Rules Enabling Act does not allow a court to use Rule 23—the source of any “legal” tolling—to “abridge, enlarge or modify any substantive right,” which by the Second Circuit’s reckoning includes the repose promised by Section 13.
The Second Circuit also rejected the argument that the would-be intervenors should be allowed to “relate back” their proposed amended complaint to the prior, timely complaint. The court explained that untimely intervention could not cure the jurisdictional defect that led to dismissal of the claims that the proposed intervenors wanted to assert.
As sensible and welcome as the Second Circuit’s tolling and intervention holdings are, their importance is diminished somewhat by the same court’s decision in NECA–IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), which (as we have noted) allows named plaintiffs to bring some class claims regarding certain securities that the named plaintiff did not purchase. Still, the IndyMac decision offers a valuable tool to prevent belated expansion of securities class actions. And it may even be of use in other areas of the law when plaintiffs’ lawyers try to either prop up expansive class actions after a repose period has expired or use tolling to shop successive class actions in different courts until a favorable forum appears.