Supreme Court to Decide Whether American Pipe Permits Successive Class Actions After Statute of Limitations Has Expired
On March 26, 2018, the United States Supreme Court heard oral argument in China Agritech, Inc. v. Resh to decide whether tolling principles permit an absent class member to bring a subsequent class action outside the limitations period. The key issue in the case is whether the Court's landmark decision, American Pipe & Construction Co. v. Utah, tolls the statute of limitations for individual as well as class actions after the limitations period has expired.1 At oral argument, the Court appeared divided and peppered both sides with questions about the limits of equitable tolling and the practical problems that might arise if American Pipe were extended to permit successive class actions. A decision is expected later this year.
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.
Thereafter, in 2011 and 2012, shareholders sued China Agritech in two successive putative class action suits within the two-year limitations period set forth in 28 U.S.C. § 1658(b). 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 for violations of the Securities Act of 1933. The matters were assigned to the same judge, who denied class certification in both cases; the matters subsequently 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 in the previous two cases. The district court granted China Agritech's motion to dismiss the case as time-barred because it had been filed after the two-year limitations period had expired.2 After observing that the Supreme Court in American Pipe had not addressed whether the limitations period was tolled to allow new class claims to be brought, the district court held that, while the limitations period was tolled to allow the named plaintiff to bring individual claims, class action claims were not tolled.3 The court reasoned that to hold to the contrary "would allow tolling to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class certification on the basis of different expert testimony and/or other evidence."4
The Court of Appeals for the Ninth Circuit reversed, with a three-judge panel holding that American Pipe tolls the limitations period to allow absent class members to bring their own individual claims and class actions.5 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."6 The Supreme Court granted China Agritech's petition for a writ of certiorari.7
At oral argument, China Agritech faced a barrage of questions from Justices Kagan and Sotomayor. In response to questions from Justice Kagan about the extent to which plaintiffs may rely on a pending class action to toll the limitations period under American Pipe, counsel for China Agritech argued that absent class members who did not exercise diligence in filing a class action within the limitations period should not be entitled to equitable tolling.
Justice Sotomayor pressed China Agritech on whether this position is at odds with the Court's reasoning in American Pipe, noting: "So your regime is now encouraging the very thing that American Pipe was trying to avoid, which is to have a multiplicity of suits being filed and encouraging every class member to come forth and file their own suit." Justice Kagan similarly observed that China Agritech's position may run contrary to the policy behind Rule 23, noting "we don't want to have a million individual suits but instead want to encourage a class." Justice Kagan further expressed concern for situations involving valid small dollar claims where it would be "ridiculous" for plaintiffs to pursue individual claims after a class failed. Justice Sotomayor also questioned whether there was a basis to deprive plaintiffs taking advantage of American Pipe tolling of the procedural rights of Rule 23. Counsel for China Agritech attempted to allay these concerns by identifying docket management tools that federal courts have to address the potential volume of suits, such as consolidation orders.
Respondents argued China Agritech's characterization of "diligence" ran contrary to the purpose of the Court's holding in American Pipe, which was to encourage plaintiffs not to file duplicative claims. Absent plaintiffs who wait until class certification fails before bringing suit, therefore, are exercising diligence in reliance on the American Pipe decision.
Respondents were questioned by Chief Justice Roberts and Justice Gorsuch about the specter of serial class actions. The Chief Justice stated that, "there's no end in sight" because "if you allow the second, you've got to allow the third and then the fourth and the fifth." Justice Gorsuch added that plaintiffs could "stack" class actions forever such that the "statute of limitations never really has any force in these cases." Respondents argued that, in practice, there was a limiting principle because plaintiffs would have to identify different reasons why the successive class should be certified and courts could rely on statutes of repose in the securities context and comity in other circumstances to limit these new actions.
Justice Sotomayor questioned both sides about the possibility of reaching a middle ground–like the Third and Eighth Circuits–which have permitted successive class actions where there are deficiencies in the lead plaintiff's representation of the class. China Agritech reiterated its position that once the limitations period has expired, these claims too should be barred. Respondents argued that the Third and Eighth Circuit approach is fair as a matter of equity, but that it requires courts to engage in a more robust analysis of the previous suit and the reasons for its dismissal.
The impact of the Supreme Court's decision in China Agritech will be felt in the securities realm and beyond. If the Court affirms the Ninth Circuit's holding, defendants may face the prospect of successive class actions even after they have resolved previous actions involving the same claims, and the applicable statute of limitations will have little significance. On the other hand, if the Court adopts China Agritech's argument or the Third and Eighth Circuits' compromise position, plaintiffs may choose to file multiple class actions earlier. This could result in parallel class claims, or the consolidation of related actions.
The Court, which interpreted American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), last year in California Public Employees''Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017), is once again called upon to interpret this decision in China Agritech. For background on the ANZ Securities case, please see Advisory, Supreme Court Rejects Equitable Tolling of Claims Under the Securities Act's Statute of Repose, June 28, 2017.
In support of its petition for certiorari, China Agritech noted that various Courts of Appeal have reached different conclusions on whether American Pipetolling reaches otherwise untimely class actions. Compare Basch v. Ground Round, Inc., 139 F.3d 6, 11 (1st Cir. 1998) (American Pipe tolling only applies to individual claims); Korwek v. Hunt, 837 F.2d 874, 879 (2d Cir. 1987) (same); Salazar-Calderon v. Presidio Valley Farmers Ass'n, 765 F.2d 1334, 1351 (5th Cir. 1985) (same); Griffin v. Singletary, 17 F.3d 356, 359 (11th Cir. 1994) (same), with Yang v. Odom, 392 F.3d 97, 111 (3d Cir. 2004) (American Pipe tolling can apply to subsequent class actions where class certification has not been denied on the basis of the suitability of the claims for class treatment); Great Plains Trust Co. v. Union Pac. R.R. Co., 492 F.3d 986, 997 (8th Cir. 2007) (same), and Atlas Heating & Sheet Metal Works, Inc., 642 F.3d 560, 564 (7th Cir. 2011) (American Pipe applies to both individual and class actions); Phipps v. Wal-Mart Stores, Inc., 792 F.3d 637, 652 (6th Cir. 2015) (same).