Alert June 12, 2018

Supreme Court Limits Reach of Tolling Rule, Barring Successive Class Actions After Limitations Period

Summary

In China Agritech, Inc. v. Resh, the U.S. Supreme Court held that the American Pipe class action tolling rule does not suspend the running of applicable limitations periods for later-filed putative class claims where a previously filed putative class action is denied class certification or otherwise dismissed. Although the Court had previously held in American Pipe that the filing of a putative class action in federal court tolls the statute of limitations for subsequent individual actions, it refused in China Agritech to extend that holding to subsequent class actions, concluding that the policies that justify tolling as to subsequent individual actions do not support its extension to subsequent class actions. As a result of the China Agritech decision, class action defendants will not face “stacked,” successive class actions where the later-filed putative class suit is filed after the applicable limitations period.

Introduction

On June 11, 2018, the U.S. Supreme Court decided China Agritech, Inc. v. Resh, holding that the filing of a class action does not toll the statute of limitations for a subsequent class action filed outside the applicable limitations period. The Court refused to extend the class action tolling rule adopted in American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which it held that the timely filing in federal court of a putative class action tolls the statute of limitations for potential class members to bring individual claims, such that in the event class certification is denied (or the suit is otherwise dismissed), potential class members can later pursue individual claims even if the statute of limitations would otherwise have run. China Agritech means that class action defendants in federal court will not face “stacked,” successive class actions where the later-filed putative class suit is filed after the applicable limitations period.

Background

Following reports in 2011 that it had engaged in fraud and misleading business practices, China Agritech, Inc. was sued in three successive putative class actions asserting claims under the Securities Exchange Act of 1934 (the 1934 Act). The claims were subject to the 1934 Act’s two-year statute of limitations and five-year statute of repose. In the first class action, class certification was denied and the claims of the individual named plaintiffs were settled. A second class action asserting substantially the same claims was then filed by different named plaintiffs (within the two-year limitations period), and again class certification was denied and the claims of the individual named plaintiffs in this second putative class suit were settled. Thereafter a third class action was filed, more than two years after the applicable two-year limitations period had started running. The limitations period thus had expired for the putative class claims in the third suit unless the filing of the two prior class actions (within the two-year period) tolled the running of the limitations period for the third suit. The district court dismissed the third class action as untimely, holding that the first two class actions did not suspend the running of the limitations period for the putative class claims filed after the two-year period.

The Ninth Circuit Court of Appeals reversed, holding that the statute of limitations had been tolled as to the putative class claims in the third suit under the Supreme Court’s American Pipe decision. The Ninth Circuit reasoned that extending American Pipe tolling to successive class actions would advance the policy objectives underlying American Pipe, cause no unfair surprise to defendants, and prevent the filing of “protective” class actions by plaintiffs concerned that an already-filed class action will not achieve class certification.

The Supreme Court granted certiorari in December 2017 to resolve disagreement among the federal courts of appeals regarding whether the American Pipe tolling rule applies to putative class action claims filed outside of the applicable limitations period where substantially the same claims had been asserted in previously filed (but later dismissed) putative class actions.

The China Agritech Decision

In China Agritech, the Supreme Court ruled that American Pipe tolling does not apply to subsequent class actions filed in federal court, which now must be filed prior to expiration of the applicable limitations period regardless of whether substantially the same claims had been asserted in a previously filed putative class action. In a decision written by Justice Ginsburg and joined by seven of the other Justices, the Court explained that “[t]he efficiency and economy of litigation that support tolling of individual claims [under American Pipe] . . . do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.” 

The Court further explained that both Federal Rule of Civil Procedure 23, which addresses class certification procedures, and the Private Securities Litigation Reform Act of 1995 (the PSLRA), which addresses securities class action claims in particular, demonstrate a preference for class actions to be filed as early as possible, and for class certification to be resolved early on. The Court also noted that tolling of successive class actions would be inconsistent with the principle that plaintiffs seeking the benefit of equitable tolling must ordinarily show that they have been diligent in pursuit of their claims, because “[a] would-be class representative who commences suit after expiration of the limitation period . . . can hardly qualify as diligent in asserting claims and pursuing relief.”

The Court explained that extending American Pipe tolling to successive class actions would threaten the prospect of endless litigation; as each class were denied certification, a new named plaintiff could file a new class complaint that resuscitated the litigation. The Court noted that although statutes of repose, like the five-year statute of repose applicable to the 1934 Act claims at issue in China Agritech, provide an outer time limit for certain claims, such statutes of repose  “are not ubiquitous” among the range of legal claims that are filed in federal court and for which class action treatment is sought.  Finally, the Court explained that “there is little reason to think” that its decision in China Agritech would cause putative class action plaintiffs to file substantially more “protective class filings” out of concern that a pending class complaint will be dismissed or otherwise not certified. The Court noted that several federal appellate courts had long refused to extend American Pipe tolling to successive class actions, and that those courts have not experienced a disproportionate number of duplicative, protective class-action filings. In any event, the Court noted, district courts have a number of tools at their disposal to address multiple class action filings, including the ability to stay, consolidate, or transfer proceedings.

Justice Sotomayor concurred in the result reached by the Court, concluding that the Court’s holding was dictated by the special requirements of the PSLRA, which “contemplates a process by which all prospective class representatives come forward in the first-filed class action and make their arguments to the court for lead-plaintiff status.” But Justice Sotomayor also opined that there would be no basis for denying American Pipe tolling with respect to successive class actions that are not subject to the PSLRA.  Justice Sotomayor noted that “district courts can help mitigate the potential unfairness of denying American Pipe tolling to class claims not subject to the PSLRA” by “[w]here appropriate, . . . liberally permit[ting] amendment of the pleadings or intervention of new plaintiffs and counsel.”

Although Justice Sotomayor suggested that a different rule should apply if class certification is denied based on the adequacy of the proposed class representative, the Court rejected that proposal in a footnote, making clear that “Rule 23 contains no instruction to give denials of class certification different effect based on the reason for the denial.” The Court’s holding thus closes the door to tolling for successive class actions after any denial of class certification.

Practical Takeaways

The Supreme Court’s decision in China Agritech should put an end to securities plaintiffs’ efforts to extend the statute of limitations applicable to their putative class claims by “stacking” successive class actions one after another until certification can be achieved. Although China Agritech addressed class actions asserting claims under the 1934 Act, the decision applies equally to class actions asserting other types of securities claims – for example, claims filed under the federal Securities Act of 1933 which challenge the disclosures made by issuers of publicly traded securities. And the Court also noted the importance of prohibiting successive class actions with respect to claims that, unlike those under the 1934 Act, are not subject to statutes of repose.

The China Agritech decision may encourage plaintiffs to seek, and courts to decide, motions for class certification earlier in putative class cases, in an effort to leave some time under the applicable statute of limitations should class certification be denied in whole or in part or the putative class claims otherwise dismissed. Additionally, some district courts may adopt the suggestion made by Justice Sotomayor in her concurrence that federal district courts should consider permitting amendment of a putative class complaint and the intervention of new putative class plaintiffs and counsel to mitigate the potential impact of China Agritech.