Filed Class Action Does Not Toll Limitations Period For Later Class Claims

By Jeremy K. Robinson, CaseyGerry — as Published in the Daily Journal

More than 40 years ago, in American Pipe & Construction Co. v. Utah, the United States Supreme Court held that a putative class action in which class certification was denied nevertheless tolled the statute of limitations for any member of the class who wanted to intervene in the foundered class case. Roughly a decade later, in Crown, Cork & Seal v. Parker, the high court clarified that this tolling also applied to any class member who wanted to file a separate individual case following the unsuccessful bid for class certification.

On Monday, the Supreme Court revisited the “American Pipe tolling” rule and, resolving a split among the federal circuits, said the tolling did not extend to a later filed class action. In China Agritech, Inc. v. Resh, a unanimous court held a securities class action filed after the expiration of the statute of limitations could not be salvaged by reliance on American Pipe. The majority opinion, penned by Justice Ruth Bader Ginsburg, also extended that holding to any later-filed class action, regardless of its particulars. Justice Sonia Sotomayor concurred in the result, but disagreed that the rule should automatically apply outside the securities litigation realm.

China Agritech involved a third try by purchasers of China Agritech’s common stock to conjure a successful securities class action against the company. The plaintiffs in the first class suit failed to gain certification because of their inability to prove the stock traded on an efficient market – a requirement for proving reliance on a classwide basis. In the second try, the plaintiffs again failed to get class certification, this time because of “typicality and adequacy” concerns. Both cases settled after the denial of class certification and were dismissed.

Resh, not a participant in either of the earlier two cases, and who was represented by counsel not involved in those cases, then filed the case giving rise to this decision. He alleged, as had the prior cases, that China Agritech violated the Securities Act of 1934. Unlike the first two suits, however, Resh’s case was filed well after the limitations period had passed.

The District Court dismissed the complaint as untimely, but the Ninth Circuit reversed, relying on American Pipe. Allowing successive class actions, the court reasoned, was consistent with the policies that led to the Supreme Court’s creation of the American Pipe tolling, and would promote economy of litigation by reducing the incentive to file multiple redundant class actions before a decision on certification.

The Supreme Court disagreed with the Ninth Circuit’s read on its jurisprudence. The Court noted that while American Pipe and Crown, Cork allow for the tolling of individual cases, “[n] either decision so much as hints that tolling extends to otherwise time-barred class claims.” As Justice Ginsburg explained, “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’s reasoning flowed largely from the perceived differences between individual claims and class claims. With individual claims, the court said, it makes sense to delay those claims until after class certification has been denied. If class certification is granted, the individual claim becomes unnecessary, and if certification is denied, it is fair to allow the class members who might have relied on the class case to file their claims individually without being thwarted by the limitations period.

But, according to the court, stretching that logic to successive class action claims creates a new set of problems – the most obvious of which is the possibility of an essentially infinite statute of limitations. “Respondent’s 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.” The better practice in the court’s view is to encourage the early filing of all potential class actions so that, if necessary, they can be consolidated and the district court can select the most appropriate class representatives and counsel to lead the litigation.

Justice Sotomayor concurred, observing that the result was appropriate under the Private Securities Litigation Reform Act of 1995 (“PLSRA”), which requires publication of any putative securities class action so that any member of the class may come forward and move to serve as the lead plaintiff. This precertification notice to absent class members makes sure they are informed about the case and their right to seek to displace the named plaintiff as a class representative.

But, Justice Sotomayor parted ways with the majority as to the application of the holding to cases not subject to the PLSRA. Since Rule 23 has no similar pre-suit notice provisions, she reasoned, absent class members are often likely to be unaware of pending suits and are thus unable to ensure the class is properly represented and the case vigorously prosecuted. To avoid the problem of an indefinite statute of limitation for class claims, she suggested that the tolling “becomes unavailable for future class claims where class certification is denied for a reason that bears on the suitability of the claims for class treatment.” However, if certification were denied because of defects in the lead plaintiffs or for other “nonsubstantive” defects, tolling would remain intact.

The opinion concludes with a succinct summary:
The watchwords of American Pipe are efficiency and economy of litigation, a principal purpose of Rule 23 as well. Extending American Pipe tolling to successive class actions does not serve that purpose. The contrary rule, allowing no tolling for out-of-time class actions, will propel putative class representatives to file suit well within the limitation period and seek certification promptly. For all the above-stated reasons, it is the rule we adopt today: Time to file a class action falls outside the bounds of American Pipe.

Jeremy K. Robinson is a partner with San Diego-based Casey Gerry Schenk Francavilla Blatt & Penfield, LLP, and is chair of the firm’s Motion and Appellate Practice.