Clarifying Class Action Tolling

[On June 11, 2018], the Supreme Court resolved a circuit split regarding whether the filing of a class action lawsuit tolls the statute of limitations for putative class members to file their own class actions. In China Agritech, Inc. v. Resh, 584 U.S.      , 2018 WL 2767565 (June 11, 2018), the Court held that so-called American Pipe tolling—which allows a putative class member to file an individual claim upon denial of class certification, even if the statute of limitations would have by that time otherwise run out—does not permit the maintenance of a follow-on class action past the expiration of the statute of limitations.

American Pipe tolling was first recognized by the Court over forty years ago in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), where the Court held that the timely filing of a class action tolls the applicable statute of limitations for all persons encompassed by the class complaint. In American Pipe, the Court further ruled that, where class action status has been denied, members of the failed class could timely intervene as individual plaintiffs in the still-pending action, shorn of its class character. In 1983, the Court clarified in Crown, Cork & Seal Co. Inc. v. Parker, 462 U.S. 345 (1983) that American Pipe’s tolling rule is not dependent on intervening in or joining an existing suit; it applies as well to absent class members who, after denial of class certification, prefer to bring an individual suit once the economies of a class action are no longer available.

Writing for the Court, Justice Ginsburg explained that the Court’s American Pipe and Crown, Cork decisions were rooted in concerns about “efficiency and economy of litigation,” which generally supported tolling individual actions. In other words, absent American Pipe’s tolling rule, potential class members would be forced to file their own actions at the outset of litigation or risk losing any chance of recovery if class certification failed following the expiration of the statute of limitations. The Court explained that those considerations pointed in the opposite direction in connection with potential additional class claims. With regard to additional class claims, “efficiency favors early assertion of competing class representative claims” because early resolution would encourage potential class members to come forward as potential lead plaintiffs, allowing the district court to select the most appropriate lead plaintiff and class counsel. And if the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated only once for all would-be representatives.

The Court explained that allowing tolling for successive class actions “would allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation.” Nothing in the rationale underlying American Pipe or Crown, Cork supported such limitless opportunities for successive class actions. For these reasons, the Court held that, upon denial of class certification, putative class members may promptly join an existing suit or promptly file an individual action, but they may not commence a new class action beyond the time allowed by the applicable statute of limitation. The Court also made clear that its decision applies regardless of the reason for the denial of class certification.

Observations

The Court’s decision in China Agritech should have relatively limited practical implications in the realm of securities litigation as compared to other areas:

• The Supreme Court made clear last term in California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017) that American Pipe’s tolling rule does not toll statutes of repose. The statute of repose under the Securities Act of 1933 provides that claims may not be brought more than three years after the security at issue was offered to the public, and the statute of repose under the Securities Exchange Act of 1934 provides that claims may not be brought more than five years after the occurrence of the alleged violation at issue. Accordingly, the China Agritech decision likely will have fewer practical implications in the realm of securities litigation than in other areas because, even before the Court decided China Agritech, there was no possibility of “limitless” securities class actions in light of the statutes of repose.
• The Court rejected the argument that its decision would lead to “‘needless multiplicity’ of protective class-action filings” at the outset of a case, explaining that several Courts of Appeals— including the Second and Fifth Circuits—declined thirty years ago “to read American Pipe to permit a successive class action filed outside the limitation period” and no data suggested that those circuits experienced a disproportionate number of duplicative, protective class action filings after other circuits disagreed with that conclusion.
• Justice Sotomayor, in her concurrence, urged district court judges to “help mitigate the potential unfairness of denying American Pipe tolling to class claims not subject to the [Private Securities Litigation Reform Act of 1995]” by “[w]here appropriate,…liberally permit[ting] amendment of the pleadings or intervention of new plaintiffs and counsel.” It will be worth monitoring whether district court judges in cases not covered by the PSLRA’s provisions concerning notice to potential class members (and where, as a result, absent class members might not know of the pending class action) follow Justice Sotomayor’s suggestion.