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SCOTUS Clarifies Federal Class Action Tolling Rules; Bars “Stacked” Class Actions

In American Pipe & Construction Co. v. Utah, 414 U.S 538 (1974), the U.S. Supreme Court set out the rule that the timely filing of a class action tolls the applicable statute of limitations for all persons encompassed by the class complaint. Under American Pipe, therefore, a putative member of an uncertified class could wait until after a ruling on certification to either file an individual suit or join in the existing case.

In China Agritech, Inc. v. Resh, the Court took up the question of whether, upon denial of class certification, American Pipe tolling would permit a putative class member to commence a new class action that would otherwise be beyond the statute of limitations (called a “stacked” class action), rather than joining the existing suit or filing individually. In other words, does the American Pipe tolling rule apply to subsequent class actions in the same way that it applies to individual claims? According to the Supreme Court, the answer is no.

China Agritech involved a series of class actions brought on behalf of the purchasers of the common stock of China Agritech, Inc., alleging violations of the Securities Exchange Act of 1934. The ’34 act has a two-year statute of limitations and a five-year statute of repose and is governed by the Private Securities Litigation Reform Act of 1995 (“PLSRA”). The first class action was filed on February 11, 2011, at the beginning of the two-year limitations period, and the district court denied class certification on May 2, 2012. On October 4, 2012, still within the two-year statute of limitations, a new class complaint was filed with a new set of plaintiffs. Class certification was again denied, and the individual plaintiffs settled their claims and dismissed their suit.

Finally, on June 30, 2014, a third class action (and the subject of the Court’s ruling here) was filed, this time outside of the statute of limitations. The Court granted certiorari in light of a division of authority among the Courts of Appeals over whether otherwise-untimely successive class action claims could be saved by American Pipe tolling. In its ruling, the Court noted that American Pipe tolls the limitations period for individual claims under the rationale that judicial economy favors delaying those claims until after a class-certification denial, because if certification is granted there will be no need for individual claims. By contrast, however, judicial economy favors the early assertion of competing class claims so that a court can select the best possible plaintiff and class counsel, and the decision to deny or grant certification can be made at the outset of the case as to all would-be class representatives.

The Court also noted that the equities that favor tolling fall differently in the class context. According to the Court, in American Pipe, the plaintiffs who later intervened to pursue individual claims could not be accused of having slept on their rights, but rather had reasonably relied upon the class action process and their class representatives. In the class context, however, a would-be class representative who brings his or her own class suit after the expiration of the limitations period “can hardly qualify as diligent in asserting claims and pursuing relief.”

Finally, the Court noted that tolling class claims would allow the statute of limitations to be extended repeatedly, with a possibly endless succession of class claims, each following the denial of certification of the preceding attempt and remaining timely by virtue of tolling. Such an effect would cause undue hardship on defendants and allow plaintiffs to shop around until they find a judge willing to grant certification.

The lone justice not to join the majority opinion, Justice Sotomayor, concurred with the majority’s result but argued that while tolling is not appropriate in cases governed by the PLSRA, the same is not true of cases subject only to Federal Rule 23. In drawing that distinction, she noted that the PLSRA’s “significant procedural requirements,” most notably the process for appointing a lead plaintiff, caused the class action at issue in China Agritech to be untimely. However, Justice Sotomayor noted that Rule 23 contains fewer requirements, notably lacking a requirement of precertification notice to absent class members. Given that lack, there is no way for absent class members to learn that an action is pending or that they are entitled to seek status as a lead plaintiff in that action. As such, according to Justice Sotomayor, the majority’s arguments regarding plaintiff diligence make sense only in the context of the PLSRA, which does contain such a requirement. Further, given the lack of precertification notice, the majority’s goal of encouraging multiple representatives to come forward early in the litigation cannot be accomplished in non-PLSRA proceedings.

Justice Sotomayor also took issue with the argument that extending tolling to class actions would lead to endless successive claims. First, she noted that such an argument cannot apply to cases where a statute of repose, such as the one found in the PLSRA, puts an outer limit on the right to bring a civil action. Further, for the cases where such a risk is realistic, Justice Sotomayor proposed a rule that tolling only be denied to future class claims where certification was denied for a reason bearing on the suitability of the claims themselves for class treatment, rather than the suitability of the named plaintiff or some other non-substantive defect. According to Justice Sotomayor, in cases where the only issue in the first suit was the adequacy of the named plaintiff, such a rule would preserve the opportunity to find a new, more adequate plaintiff.

Despite Justice Sotomayor’s concern that the rule adopted in China Agritech was too broad, it is now clear that only individual claims are tolled during the pendency of a purported class action. Do you have thoughts on the Court’s ruling or Justice Sotomayor’s concerns? Leave them below in the comments!

-ZTD

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