LawFlash

Supreme Court Limits American Pipe Tolling

June 13, 2018

The unanimous ruling in China Agritech, Inc. v. Resh, et al., reflects the US Supreme Court’s continued attempt to confine American Pipe tolling, denying such tolling for follow-on class actions filed after the expiration of statute of limitations. The decision, however, leaves a number of questions unanswered, and it remains to be seen how it will apply in specific circumstances. 

On June 11, the US Supreme Court unanimously reversed a decision by the US Court of Appeals for the Ninth Circuit applying the tolling doctrine set forth in American Pipe & Constr. Co. v. Utah, 414 US 438 (1974), which provides that the timely filing of a class action tolls the applicable federal statute of limitations for all persons encompassed by the class complaint during the pendency of the class certification decision. In China Agritech, the Supreme Court held that, where a court denies class certification of a putative class action, the American Pipe tolling rule does not permit a putative class member to bring a class action anew if the applicable statute of limitations has run. In so holding, the Supreme Court resolved a longstanding circuit split on the application of American Pipe to subsequent class litigation. Although China Agritech involved class claims under the Securities Exchange Act of 1934 (1934 Act)[1] that are subject to the Private Securities Litigation Reform Act (PSLRA),[2] the Court’s broad ruling denies American Pipe tolling to all successive class actions, not just those subject to the PSLRA.

Background

The case before the Court is the third class action brought on behalf of purchasers of petitioner China Agritech’s common stock, alleging violations of the 1934 Act. The successive complaints each made, in general, the same material allegations that China Agritech engaged in fraud and misleading business practices, causing the company’s stock price to decline when several reports revealed the misconduct. The 1934 Act has a two-year statute of limitations that begins to run upon discovery of the facts constituting the violation.[3] It also has a five-year statute of repose that begins to run on the date of the last culpable act or omission of the defendant.[4] The parties agreed that the statute of limitations accrued on February 3, 2011, and the statute of repose began to run on November 12, 2009.

The first class action, brought by shareholder Theodore Dean, was filed in February 2011; class certification was denied in May 2012 and the remaining individual action was settled in September 2012. Subsequently, in October 2012, Dean’s attorney filed another class complaint, representing Kevin Smyth. Class certification was again denied and the action was settled in January 2014. In June 2014, respondent Michael Resh filed the present putative class action, a year-and-a-half after the statute of limitations would normally have expired. Notably, in the Dean and Smyth proceedings, as required by the PSLRA, plaintiffs’ counsel had posted notice of the actions in two widely circulated national business-oriented publications and invited any member of the purported class to move to serve as lead plaintiff.[5] Resh had not sought lead plaintiff status in either. A district court dismissed Resh’s class complaint as untimely, but the Ninth Circuit reversed, reasoning that applying American Pipe tolling to the benefit of successive class actions would promote economy of litigation and reduce protective class suits during the pendency of an initial certification motion.

Tolling of Individual Vis-à-Vis Class Claims

In a carefully crafted opinion, the Supreme Court held that American Pipe only tolled the statute of limitations insofar as putative class members wished to sue individually after a class certification denial.[6] The Court noted this interpretation is consistent with Crown, Cork & Seal Co. v. Parker,[7] which had held American Pipe tolling was not dependent on a putative class plaintiff’s intervening in or joining an existing suit in order to “to bring an individual suit.”[8] As the Court noted, “economy of litigation favors delaying those [individual] claims until after a class-certification denial” because “[i]f certification is granted, the claims will proceed as a class and there would be no need for the assertion of any claim individually.”[9]

In contrast, where a plaintiff, like Resh, brings his or her claims as a new class action after the expiration of the statute of limitations, “American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action.”[10] The Court explained that, “[w]ith class claims . . . efficiency favors early assertion of competing class representative claims” so that a court can evaluate the appropriateness of class treatment and select the best plaintiff to represent the class.[11] The Court also noted, “Rule 23 evinces a preference for preclusion of untimely successive class actions by instructing that class certification should be resolved early on”[12] and the PSRLA “evinces a similar preference . . . for grouping class-representative filings at the outset of litigation.”[13]

Although the Court did not limit this opinion to cases governed by the PSLRA, as Justice Sonia Sotomayor notes in her concurring opinion, “the PSLRA is essential to the conclusion the Court reaches here.”[14] She points out, “this case involves a putative class-action lawsuit brought by a plaintiff with a timely individual claim, joined by coplaintiffs with timely individual claims, on behalf of a putative class of absent class members with timely individual claims . . . One might naturally think, then, that the class claims in the lawsuit are timely.”[15] That, under the China Agritech holding, individual claims remain timely but class claims do not underscores the significance of the PSLRA’s procedural requirements, such as pre-certification notification, in the Court’s consideration of whether to extend tolling to successive class actions.[16]

Implications and Takeaways

Albeit a relatively brief and seemingly straight-forward opinion, China Agritech reflects the Court’s continuing struggle to cabin American Pipe and leaves open a number of pragmatic questions. Uncertainty remains as to precisely when American Pipe tolling ceases in a particular case, or how American Pipe applies where a court partially certifies a class or certifies an issue for class treatment. Moreover, although the Court relies heavily on a conceptual distinction between a plaintiff’s “class claims” and “individual claims,” the Court has not made it entirely clear how these “claims” differ; China Agritech is essentially concerned with the joinder device, that is, the right to bring a class action under Rule 23. It is not obvious how courts will interpret China Agritech when class certification is sought multiple times (perhaps over a period of years) in the same civil action. In short, it remains to be seen how the decision will apply in specific circumstances.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
Timothy P. Burke
Jordan D. Hershman
Jason D. Frank
Emily E. Renshaw

Chicago
Scott T. Schutte

Hartford
Michael D. Blanchard

Los Angeles
J. Warren Rissier

New York
Susan F. DiCicco
Mary Gail Gearns
Brian A. Herman
Kenneth I. Schacter

Orange County
Robert Gooding

Philadelphia
Ezra D. Church
Joseph B.G. Fay
Laura Hughes McNally
Karen Pieslak Pohlmann
Marc J. Sonnenfeld

San Francisco
Joseph E. Floren
Molly Moriarty Lane
Susan D. Resley
Charlene S. Shimada
Lucy Wang



[1] 48 Stat. 881, as amended, 15 USC §§ 78a et seq.

[2] 109 Stat. 737.

[3] 28 USC § 1658(b).

[4] Cal. Pub. Emps. Ret. Sys. v. ANZ Secs., Inc., 582 U.S. ___, 137 S. Ct. 2042 (2017) (holding American Pipe tolling does not apply to the statute of repose of the Securities Act of 1933, 15 USC §§77k(a)).

[5] See 15 USC § 78u­-4(a)(3)(A)(i).

[6] Slip op. at 6 (citing Am. Pipe, 414 US at 552). By focusing on distinctions between individual and class claims, the Court did not base its reasoning on whether the denial of class certification had been based on deficiencies of the lead plaintiff as class representative or because of some other non-substantive defect, a consideration that had animated some previous appellate decisions applying American Pipe. See Yang v. Odom, 392 F.3d 97, 112 (3d Cir. 2004).

[7] 462 US 345 (1983).

[8] Id. at 350, 353-54.

[9] Slip op. at 6.

[10] Id. at 6.

[11] Id. at 7.

[12] Id. at 7 (citing Fed. R. Civ. Pro. 23(c)(1)(A)).

[13] Id. at 8.

[14] Concurring op. at 1.

[15] Id. (emphasis added and internal citation omitted).

[16] Id. at 2-3.