Supreme Court Holds There Is No Tolling for Successive Class Actions
On June 11, 2018, the United States Supreme Court held in China Agritech Inc. v. Resh that class actions do not benefit from tolling under American Pipe v. Utah, 414 U.S. 538 (1974). In so ruling, the Supreme Court reversed the Ninth Circuit, holding that "American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations." The Court expressly limited the tolling principle announced in American Pipe to putative class members who wish to sue individually after the denial of class certification. This decision ensures some measure of finality and certainty to defendants following denial of class certification with respect to the scope of potential future claims.
China Agritech was a holding company listed on the NASDAQ stock exchange whose subsidiaries sold organic compound fertilizers in China. In 2011, China Agritech's stock price dropped after the company was confronted with allegations of fraudulent business practices. The SEC subsequently revoked China Agritech's stock registration.1
Thereafter, shareholders sued China Agritech in two successive putative class action suits in 2011 and 2012. In these suits, the shareholders alleged violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 and violations of the Securities Act of 1933. Both of these suits were within the two-year limitations period set forth in 28 U.S.C. § 1658(b). The district court denied class certification in both cases and the parties settled.
In 2014, shareholder Michael Resh brought a third putative class action against China Agritech and individual defendants alleging Exchange Act and Rule 10b-5 claims premised on the same facts and circumstances as the previous two cases. Unlike the prior suits, the third putative class action was brought outside the two-year statute of limitations. Accordingly, the district court granted China Agritech's motion to dismiss the case as time-barred.2
The Ninth Circuit reversed, holding that the American Pipe rule tolls the limitations period to allow absent class members not only to bring their own individual claims but also to file otherwise untimely class actions. The Ninth Circuit reasoned that, "Permitting future class action named plaintiffs, who were unnamed class members in previously uncertified classes, to avail themselves of American Pipe tolling would advance the policy objectives that led the Supreme Court to permit tolling in the first place."3 The Ninth Circuit's position was contrary to that of the Second and Fifth Circuits, and it further expanded a compromise position adopted by the Third and Eighth Circuits (which permitted tolling if class certification was denied based on deficiencies in the lead plaintiff's representation of the class).
The Supreme Court's Decision
In a decision by Justice Ginsburg, the Supreme Court unanimously reversed, holding that "extending American Pipe tolling to successive class actions" does not serve the purposes of the American Pipe rule. The Court reasoned that the purpose of tolling is to vindicate the rights of plaintiffs who "have been diligent in pursuit of their claims" and "have not slept on their rights," while the expansion of the rule to allow successive and potentially limitless class actions would run contrary to principles of "efficiency and economy of litigation."
Although the Court acknowledged that the decision could lead to the filing of multiple class-actions, it concluded that this could be beneficial as "efficiency favors early assertion of competing class representative claims" so that "the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel." In making this observation, the Court noted that the China Agritech litigation was governed by the Private Securities Litigation Reform Act of 1995 (PSLRA), which requires parties filing putative class actions to provide notice to potential plaintiffs of the filing of a purported class action, and an opportunity to apply for status as a lead plaintiff. This reflects a congressional preference "for grouping class-representative filings at the outset of litigation." In this action, shareholder Michael Resh had ignored such opportunities to join either of the prior class action complaints, and the Court saw no reason to allow such a plaintiff "to enter the fray several years after class proceedings first commenced."
The Court held that the decision would apply to class actions generally. Although the Court's judgment was unanimous, Justice Sotomayor issued an opinion concurring in the judgment in which she expressed her belief that the holding should be limited to securities class actions governed by the PSLRA. She explained that "instead of adopting a blanket no-tolling-of-class-claims-ever rule outside the PSLRA context," the Court could have held, more narrowly, "that tolling only becomes unavailable for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment." But as the Court noted, "Endless tolling of a statute of limitations is not a result envisioned by American Pipe."
In reaching its decision, the Court also rejected arguments that denying tolling in this instance would violate the Rules Enabling Act and Rule 23 of the Federal Rules of Civil Procedure, reasoning that "[p]laintiffs have no substantive right to bring their claims outside the statute of limitations" because American Pipe already marks an exception to the substantive rights that allows statute of limitations to be tolled. The Court also noted that Rule 23 itself instructs "that class certification should be resolved early on."
This decision is consistent with the Supreme Court trend of limiting plaintiffs' pursuit of federal class actions. For example, it follows on the Court's decision last year rejecting equitable tolling of statutes of repose.4 For more information, see our prior Advisory, "Supreme Court Rejects Equitable Tolling of Claims Under the Securities Act's Statute of Repose." Although the filing of "protective complaints" prior to class certification decisions may increase, the decision will avoid successive motions for class certification and bring some measure of certainty following denial of class certification motions.
© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
For more background, see our previous Advisory, "Supreme Court to Decide Whether American Pipe Permits Successive Class Actions After Statute of Limitations Has Expired."