Today the Supreme Court held in China Agritech, Inc. v. Resh (pdf) that the filing of a putative class action does not delay the time for others to file their own successive class action lawsuits. The decision should give businesses confidence that they will not face an endless series of class actions over the same conduct.
This morning I attended the oral argument in China Agritech, Inc. v. Resh. The case arises against the backdrop of the long-standing rule declared in American Pipe and Construction Co. v. Utah (1974) that the filing of a putative class action tolls the time for absent class members to bring individual claims while the case remains pending as a potential class action. The question in China Agritech is whether American Pipe’s equitable tolling rule applies beyond the context of individual actions and also allows absent class members to file a successive putative class action after the statute of limitations period has run.
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.
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.
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.
It’s not all that often that a federal court of appeals reverses an order granting class certification in an unpublished opinion—much less the Ninth Circuit. But a panel of that court just did so last week in holding that a district court erred in certifying a class of workers because of Kuwait’s statute of repose. Lee v. ITT Corp., No. 12-35375 (9th Cir. July 24, 2013).
The plaintiffs, who worked in Kuwait for ITT Corporation, brought a class action alleging overtime-pay claims on behalf of all individuals working in Kuwait for ITT or its subsidiaries under a particular contract. The district court for the Western District of Washington agreed that the law of Kuwait governed the substance of the plaintiffs’ claims, but believed that Washington’s six-year statute of limitations applied rather than the one-year Kuwait statute of repose. Applying the longer, six-year period would mean that none of the putative class members’ claims were untimely.
The Ninth Circuit reversed, concluding that while Washington allows an “escape hatch” to avoid another jurisdiction’s “substantially different” statute of limitations when the claimant lacked “a fair opportunity to sue,” that principle did not apply to statutes of repose. Moreover, the panel concluded, there was nothing unfair about applying the Kuwaiti statute of repose, as the one-year period is similar to the amount of time many U.S. states allow for certain kinds of claims, some absent class members had stated that they were aware of the claims during the one-year period, and the named plaintiffs themselves had been able to bring suit during the one-year time frame.
Perhaps most significant, the Ninth Circuit pointed out that it could not tell “how many class members would be affected by applying the Kuwaiti statute” of repose, and therefore vacated the class-certification order.
The difference between a statute of repose and a statute of limitations was critical to the resolution of the appeal. As one of my colleagues discussed in a recent blog post, statutes of repose create an absolute right to be free from liability, whereas statutes of limitations sometimes can be tolled (for example, under the American Pipe doctrine). This case, of course, involved a statute of repose. Accordingly, the fact that the named plaintiffs had sued within the one-year deadline did not stop the clock for absent class members.
The decision also seems to indicate that class certification will be difficult when a statute of repose creates an absolute bar to liability for certain putative class members, because individualized inquiries will be necessary to determine whether any particular class member had timely asserted his or her claim.
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.