June 27, 2017

Supreme Court Upholds Strict Time Limit for Securities Actions

On June 26, 2017, the Supreme Court issued a decision in the closely watched case of California Public Employees’ Retirement System v. ANZ Securities, Inc., holding that claims under Section 11 of the Securities Act of 1933 must be brought within three years of the securities’ public offering, even if the plaintiffs were previously members of a timely filed class action. In a 5-4 decision, the Court distinguished between statutes of limitations, which are designed to encourage plaintiff diligence and may be tolled for fairness reasons, and statutes of repose, which effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time and may not be tolled. The Court held that the 1933 Act’s statute of repose is not subject to tolling under the class-action tolling rule adopted by the Supreme Court in American Pipe Construction Co. v. Utah, and that putative class members who opt out and pursue individual claims must do so within three years of the securities’ offering to the public. The Court’s holding ensures that Section 13 of the 1933 Act and other statutes of repose will function as intended, providing defendants greater certainty about the scope of their potential liability.

In 2008, just before Lehman Brothers filed for bankruptcy, a putative securities class action lawsuit was filed in federal court in New York, alleging, among other things, that Lehman had violated Sections 11 and 12(a)(2) of the Securities Act of 1933 (the 1933 Act) in connection with several 2007 and 2008 securities offerings. One putative class member was the California Public Employees’ Retirement System (CalPERS), the largest pension fund in the United States. In 2011, CalPERS filed a separate complaint in another district court in California, asserting the same Section 11 claims as those brought by the putative class. After class counsel reached a proposed settlement with defendants, CalPERS exercised its right to opt out of the class action and proceed with its own case.

Various defendants then filed motions to dismiss the Section 11 claims in CalPERS’s separate complaint as untimely. Section 13 of the 1933 Act provides two time limitations for Section 11 claims: (a) a one-year statute of limitations, which provides that no Section 11 claim can be brought more than one year after plaintiffs discover—or reasonably should have discovered—the alleged misstatement or omission; and (b) a separate three-year time limit, which states that “[i]n no event shall any action be brought to enforce a liability created under [Section 11] more than three years after the security was bona fide offered to the public.” This second provision, at issue in ANZ Securities, establishes an outside time limit on liability:  no matter when a plaintiff discovers a material misstatement or omission, that plaintiff may not file suit if three years have elapsed since the security was offered to the public. Time bars that guarantee defendants freedom from suit after a certain amount of time has elapsed are commonly called “statutes of repose.”

The defendants argued that CalPERS’s Section 11 claims were untimely because CalPERS had indisputably filed suit more than three years after the securities were offered to the public. In response, CalPERS relied on the Supreme Court’s decision in American Pipe Construction Co. v. Utah, 414 U.S. 538 (1974), which held that a timely filed class action complaint tolls the statute of limitations for any members of the putative class that subsequently opt out and file their own cases.

The district court rejected CalPERS’s argument and dismissed its Section 11 claims, reasoning that American Pipe’s tolling rule applies only to statutes of limitations, not to statutes of repose. The Second Circuit affirmed. On June 26, 2017, the Supreme Court affirmed the ruling of the Second Circuit, holding by a 5-4 vote that the American Pipe tolling rule does not apply to statutes of repose, including the three-year time bar in Section 13 of the 1933 Act.

The Court began by reiterating the distinction between statutes of limitations, which are designed to encourage plaintiffs to pursue their claims diligently, and statutes of repose, which are designed to guarantee defendants freedom from suit after a certain amount of time. The Court rejected CalPERS’s suggestion that the three-year time bar of Section 13 might properly be construed as a statute of limitations, reasoning that the text, structure and history of the1933 Act support treating the one-year bar as a statute of limitations, and the three-year bar as a statute of repose.

The Court then observed that statutes of repose are not subject to equitable tolling—i.e., tolling based on fairness considerations—because they apply irrespective of plaintiffs’ diligence. After examining American Pipe closely, the Court concluded that the source of its tolling principle was the equitable authority of the federal courts, not any legislative enactment or federal rule of procedure. The Court therefore held that American Pipe can toll only the one-year statute of limitations applicable to Section 11 claims, not the three-year statute of repose. Because CalPERS had filed its complaint more than three years after the securities were first offered to the public, the Court concluded, CalPERS’s Section11 claims had properly been dismissed as untimely.

In reaching this conclusion, the Court rejected several counterarguments presented by CalPERS.  Among these, the Court recognized CalPERS’s argument that the putative class complaint provided sufficient notice to defendants about the scope of their potential liability, but reiterated that such fairness considerations are inapplicable to statutes of repose. The Court also addressed CalPERS’s argument that, absent American Pipe tolling, members of a putative class might swamp district courts with individual complaints to preserve their right to opt out of the class later. Only Congress has the authority to rewrite the statute to prevent this possibility, the Court explained, and in any event, the Second Circuit has refused since 2013 to apply American Pipe tolling to statutes of repose, but it has not experienced an influx of protective filings in that time. (This was a point that Goodwin had made in its brief for the U.S. Chamber of Commerce as amicus curiae.) Finally, the Court rejected CalPERS’s argument that it had “brought” its individual “action” when the putative class action complaint was filed by the would-be named plaintiffs, holding that the individual “action” was not “brought” until CalPERS filed its individual complaint.

The Court’s decision is significant in a number of respects. Foremost among them, as explained in Goodwin’s amicus brief for the Chamber of Commerce, statutes of repose appear in numerous federal and state statutory schemes, many of which are routinely the subject of class action litigation. The Court’s reasoning applies equally to similarly worded repose provisions in other statutes, as well as to other claims subject to Section 13 of the 1933 Act, including claims for material misstatements or omissions in prospectuses under Section 12(a)(2). Similarly, the reasoning of the Court’s decision should apply to the five-year period applicable to securities fraud claims under the Securities Exchange Act of 1934 (the 1934 Act), which has been construed as a statute of repose. Like the 1933 Act, the 1934 Act reflects the same two-pronged structure (a two-year statute of limitations and a five-year statute of repose). Had the Court reached a different holding in this case, all of those statutes of repose would have become subject to tolling, rendering illusory the supposed guarantee that suits must be brought within a certain period of time. The Court’s decision ensures that all of those statutes of repose will continue to provide defendants freedom from the risk of suit after a legislatively determined period of time.

Moreover, the Court nowhere distinguished between certified classes and putative, not-yet-certified classes. In this case, CalPERS opted out of a putative class that had not yet been certified as of the date it filed its individual action. But the Court gave no indication that the result in this case would have been any different had the class been certified within the three-year repose period and CalPERS had filed its individual action after expiration of the three-year period.

In the Section 11 and 12(a)(2) context, the effects of the Court’s decision remain to be seen. It is not uncommon for institutional investors to opt out of major securities class action cases, and the Court’s decision may simply accelerate the filing of those suits well before the three-year repose period expires. Once the three-year repose period expires, litigants will have greater certainty than in the past regarding their maximum potential liability, which may facilitate their ability to negotiate a comprehensive resolution of their securities litigation exposure.