Agritech, Inc. v. Resh: U.S. Supreme Court Holds Equitable Tolling Not Applicable to the Filing of Successive Class Actions

• Posted on: Jun 18 2018

On June 11, 2018, the United States Supreme Court held that the filing of a putative class action equitably tolls the limitations period for absent class members to file individual claims but does not toll the limitations period for the filing of a new class action involving the same or substantially the same claims. China Agritech, Inc. v. Resh, No. 17-432. (Here.)

Nearly 45 years ago, the Supreme Court decided American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the seminal case on equitable tolling and class action lawsuits. In American Pipe, the Court held that the filing of a class action lawsuit tolls the statute of limitations for members of the putative class. The Court held that if the trial court denied class certification, then members of the putative class could timely intervene as individual plaintiffs in the lawsuit or file new lawsuits in their individual capacities, even if the statute of limitations had run. Unless and until the trial court certified the class, the case was pending as an individual action.  Nine years later, the Court expanded American Pipe to allow putative class members to file their own lawsuits after the trial court denied class certification. Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983). Thus, putative class members could either intervene in the lawsuit or commence a new action in their individual capacity so long as they did so within the original limitation period extended by the tolling period under American Pipe.

American Pipe did not, however, resolve the issue of whether putative class members could rely on American Pipe tolling to file a new class action that was based on the same claims as the original action. Not surprisingly, a circuit court split arose, with the Second and Fifth Circuits, among others, holding that successive class action lawsuits involving the same claims are not tolled, and the Ninth Circuit holding that the filing of successive class actions is tolled under American Pipe.

The Court’s decision in China Agritech resolves this issue. Writing for an eight-justice majority in which Justice Sotomayor concurred, Justice Ginsburg held that “American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails. But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” China Agritech, 584 U. S. ____ (2018) (Slip Op. at 2).

Together with the Court’s decision in CalPERS v. ANZ Securities, Inc. (discussed by this Blog here), in which the Court held that a putative class action does not toll the statute of repose, the Court has limited the time within which a plaintiff can file a follow-on class action lawsuit involving the same set of allegations.

Background

In 2011, shareholders of China Agritech filed a putative class action lawsuit under the federal securities laws against the company and certain of its officers and directors, alleging, among other things, that the defendants made materially false and misleading statements about China Agritech’s income and revenue, and that the disclosure of the truth caused the price of the company’s stock to decline. Slip op. at 2. After several months of discovery and deferral of a lead-plaintiff ruling (required under the Private Securities Litigation Reform Act of 1995 (“PSLRA”)), the district court denied class certification. The court determined that the plaintiff had failed to establish that China Agritech stock traded on an efficient market—a necessity for proving reliance on a class-wide basis. Slip op. at 3. Thereafter, in September 2012, the plaintiff settled his individual claims and the case was dismissed. See Resh v. China Agritech, Inc., 857 F.3d 994, 998 (9th Cir. 2017). (Here.)

On October 4, 2012—within the two-year statute of limitations—a new set of shareholders filed a putative class action against many of the same defendants, alleging the identical set of facts and circumstances as the prior lawsuit but including “new efficient-market evidence.” Slip op. at 3-4. Once again, the district court denied class certification, “this time on typicality and adequacy grounds.” Id. at 4. Thereafter, the named plaintiffs settled their individual claims with the defendants and voluntarily dismissed their lawsuit. Id.

On June 30, 2014, Michael Resh, who had not sought appointment as lead plaintiff in the other two actions, filed a putative class action, alleging the same allegations as the prior two complaints. The lawsuit was commenced a year and a half after the statute of limitations expired. The district court dismissed the class complaint as untimely, holding that the prior two actions did not toll the time to initiate class claims. Slip op. at 4.

The Ninth Circuit reversed the district court’s dismissal, holding that American Pipe tolled all claims derivative of those asserted in the earlier actions, whether brought individually or on behalf of a putative class. Resh, 857 F.3d at 1004. In reversing the district court, the Ninth Circuit rejected the holding of its sister circuits, reasoning that allowing follow-on class actions “would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” Id.  The Ninth Circuit added that applying American Pipe to successive, follow-on class actions would not cause unfair surprise to defendants and would promote economy and efficiency of litigation by reducing incentives for filing protective class suits during the pendency of an initial certification motion. Id.

The Supreme Court granted certiorari to resolve the split among the circuits “over whether otherwise-untimely successive class claims may be salvaged by American Pipe tolling.” Slip op. at 4-5.

The Court’s Decision

In reversing the Ninth Circuit, the Court held that tolling under American Pipe does not apply to successive, follow-on class actions, as opposed to successive individual actions. Justice Ginsburg reasoned that the rationale underlying American Pipe did not permit a plaintiff to “wait[] out the statute of limitations” and “piggyback” class claims “on an earlier, timely filed class action.” Slip op. at 6 (“We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action.”). The Court explained that the goals of “efficiency and economy of litigation” are not advanced by allowing successive, follow-on class actions beyond the applicable statute of limitations. Id. (“The ‘efficiency and economy of litigation’ that support tolling of individual claims, American Pipe, 414 U. S., at 553, 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.”).

In fact, explained Justice Ginsburg, economy and efficiency of litigation are increased by the timely filing of class action claims: “[i]f class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives 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 once for all would-be class representatives.” Slip op. at 7.

Justice Ginsburg explained that “Rule 23 evinces a preference for preclusion of untimely successive class actions by instructing that class certification should be resolved early on.” She noted that the amendment to Rule 23(c) (which governs when the motion for class certification is to be made) confirms this point by “allow[ing] greater leeway, more time for class discovery, and additional time to ‘explore designation of class counsel’ and consider ‘additional [class counsel] applications rather than deny class certification,’ thus ‘afford[ing] the best possible representation for the class.’” Slip op. at 7-8 (citations omitted). Justice Ginsburg observed that the PSLRA “evinces a similar preference … for grouping class-representative filings at the outset of litigation.” Id.

The Court also observed that permitting successive, follow-on class action claims, unlike later individual claims, could result in “limitless” class action filings related to the same conduct, because the statute of limitations would be continuously tolled with each subsequent filing. Slip op. at 10 (“Respondents’ proposed reading 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.”) (citing Ewing Indus. Corp. v. Bob Wines Nursery, Inc., 795 F. 3d 1324, 1326 (11th Cir. 2015) (tolling for successive class actions allows plaintiffs “limitless bites at the apple”)). Although Justice Ginsburg recognized that the statute of repose applicable to federal securities claims would eventually foreclose successive, follow-on filings, she noted that statutes of repose “are not ubiquitous” and that many claims under other state or federal laws are not subject to repose in the same manner. Slip op. at 10-11. Simply stated, “Endless tolling of a statute of limitations is not a result envisioned by American Pipe.”

Finally, Justice Ginsburg addressed the prospect that plaintiffs would file “protective” class action lawsuits – i.e., class action lawsuits filed solely for the purpose of protecting a plaintiff’s ability to bring a class action at a later date if class certification is denied in the initial class action – in the wake of the Court’s decision. In doing so, she expressed little concern, noting that such actions could be easily “manage[d]” by the district courts, which have “ample tools at their disposal …, including the ability to stay, consolidate, or transfer proceedings.” Slip op. at 14.

Justice Sotomayor separately concurred in the judgment only. Justice Sotomayor agreed that American Pipe should not be available for successive class action lawsuits brought under the PSLRA, given its unique procedures. Concurrence, Slip op. at 2 (“The PSLRA imposes significant procedural requirements on securities class actions that do not apply to individual or traditionally joined securities claims.”). But Justice Sotomayor disagreed with the majority to the extent the Court did not limit its holding to other types of class actions brought under Rule 23, particularly because Rule 23 (unlike the PSLRA) does not provide for precertification notice to putative class members or a process for district courts to appoint the most adequate lead plaintiff. Instead, Justice Sotomayor suggested that, as to non-PSLRA class actions, lower courts could exercise their “comity” power “to mitigate the sometimes substantial costs of similar litigation brought by different plaintiffs.” Alternatively, said Justice Sotomayor, the Court could, “as a matter of equity,” prohibit tolling “for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment.” Slip op. at Id. at 5. “[B]y contrast,” however, “tolling would remain available” where “class certification is denied because of the deficiencies of the lead plaintiff as class representative, or because of some other nonsubstantive defect.” Such an approach, said Justice Sotomayor, would “ensure that in cases where the only problem with the first suit was the identity of the named plaintiff, a new and more adequate representative could file another suit to represent the class.” Id. at 6.

Takeaway

In this Blog’s consideration of ANZ, we wrote: “institutional investors will no longer be able to ‘wait and see’ whether to opt out of Securities Act class actions – that is, wait to see if there is a settlement that adequately recompenses the fund and its beneficiaries. Under ANZ Securities, the decision will have to be made within the repose period, which often occurs before there is any discovery or settlement.” This analysis also applies to China Agritech.

Following China Agritech, institutional investors, as well as individual investors, will no longer be able to “wait and see” whether to opt out and file an individual action or file a class action on the basis of the allegations in the initial lawsuit. Now, the decision must be made with the statute of limitations in mind, as well as the statute of repose. Time will tell whether this results in an uptick in “protective” class action filings.

While plaintiffs have to make their decision early in the process, defendants will enjoy certainty about the potential for future liability if they successfully defeat a motion for class certification, for whatever reason. With China Agritech, defendants will no longer be exposed to “endless” follow-on class action lawsuits arising from the same operative facts and circumstances if class certification fails in one lawsuit and the limitations period has expired.

Tagged with: Business Litigation, Class Action, PSLRA, Securities Litigation, Statute of Limitations