The Supreme Court has ruled that American Pipe tolling does not allow a previously absent class member to bring a subsequent class action outside the limitations period. "The watchwords of American Pipe are efficiency and economy of litigation, a principal purpose of Rule 23 as well," Justice Ginsburg wrote for the eight-member majority. "Extending American Pipe tolling to successive class actions does not serve that purpose." Justice Sotomayor concurred in the judgment only for cases governed by the PSLRA (China Agritech, Inc. v. Resh, June 11, 2018, Ginsburg, R.).
Tolling of individual actions. American Pipe & Construction Co. v. Utah (U.S. 1974) holds that the timely filing of a class action tolls the applicable statute of limitations for class members so that if class certification is denied, members of the failed class could timely intervene in the action as individual plaintiffs. In Crown, Cork & Seal Co. v. Parker (U.S. 1983), the Court clarified that the tolling rule also applies to putative class members who bring an individual suit rather than intervene in the existing action. The question presented to the Court in China Agritech was whether a putative class member could, upon denial of class certification, bring a new class action beyond the limitations period instead of joining an existing suit or filing an individual action. The Court ruled in the negative.
Several named plaintiffs, the respondents before the Court, brought a class action against China Agritech and its officers and directors a year and a half after the statute of limitations had expired. The plaintiffs had been unnamed class members in two earlier class actions based on the same underlying events (both filed within the limitations period); class certification was denied in both of those earlier actions. The district court dismissed the new class action as time-barred, but the Ninth Circuit reversed. China Agritech successfully petitioned the Supreme Court to review the case, and the Court has now reversed and remanded the Ninth Circuit decision.
American Pipe does not contemplate "endless tolling." The rationale for American Pipe tolling, Justice Ginsburg reasoned, is that it promotes economy of litigation by delaying individual claims until after denial of class certification. Certification obviates the need for individual claims; only if and when certification is denied is there a need to pursue claims individually. With class claims, however, it is more efficient to assert competing class representative claims early. If class treatment is appropriate, the district court can select the best plaintiff from among all those who have come forward. If class treatment is not appropriate, the decision denying certification will have been made at the outset of the case, "litigated once for all would-be class representatives."
The PSLRA furthers this preference for an early grouping of potential representatives by requiring notice of the commencement of a class action. Although this statute presumes that the most adequate plaintiff is the one who moves first and has the largest financial interest, multiple plaintiffs have reason to apply for the role because it is not always obvious whose financial stake is largest.
Equitable tolling ordinarily requires due diligence on the part of plaintiffs, and American Pipe observed that tolling was permissible in the circumstances because the plaintiffs had reasonably relied on the class representative to protect their interests in their individual claims. In contrast, Justice Ginsburg wrote, "A would-be class representative who commences suit after expiration of the limitation period … can hardly qualify as diligent in asserting claims and pursing relief."
Another distinction between individual-claim tolling permitted by American Pipe and the class-action tolling pursued by the respondents here is that the tolling of individual claims does not extend the statute of limitations indefinitely. Rather, the limitations period is extended only by the amount of time the class action was pending. Although in this particular case the five-year statute of repose would place an outer limit on respondents’ claims, such statues are not ubiquitous. Under the respondents’ reading of American Pipe, "the time for filing successive class suits … could be limitless."
Federal Rule of Civil Procedure 23. The Court also rejected the respondents’ argument that American Pipe tolling preserves claims during the pendency of the class action, including access to class actions under Federal Rule of Civil Procedure 23. The argument was based on the Court’s observation in Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co. (U.S. 2010) that "a class action may be maintained" if Rule 23(a) and (b) are satisfied, and that Rule 23 "automatically" applies in actions in federal district court. Justice Ginsburg clarified that Shady Grove addressed a case in which a Rule 23 class action could have been maintained absent state law to the contrary. The respondents’ case is the opposite: the class action would be untimely unless American Pipe tolling applied. Rule 23 does not call for the revival of class claims; to the contrary, it instructs that class certification should be resolved early on. Notably, the rule was amended in 2003 to permit district courts to take account of multiple class representative filings.
The Court was unpersuaded that declining to toll the limitations period for class actions would lead to a glut of protective class filings. Several courts of appeals, including the Second and Fifth Circuits, already declined to extend American Pipe’s reasoning to class actions, and the respondents and amici made no showing that these circuits have experienced a disproportionate number of protective filings. Furthermore, a multiplicity of filings is not necessarily "needless," the Court wrote; multiple filings may help a district court determine whether class treatment is appropriate and which plaintiff would make the best class representative. District courts are increasingly familiar with managing complex cases, and the Federal Rules of Civil Procedure provide a range of mechanisms to help. "What the Rules do not offer is a reason to permit plaintiffs to exhume failed class actions by filing new, untimely class claims."
Concurrence. Justice Sotomayor agreed with the majority that American Pipe tolling does not extend to class actions governed by the PSLRA. However, she did not join the majority in holding that the same is true for class actions not subject to the PSLRA.
That a class action "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" would be time-barred is surprising except that the PSLRA supplies a special reason to treat class claims differently. The PSLRA imposes procedural requirements on securities class actions that do not apply to individual or traditionally joined securities claims, primarily a process for the appointment of lead plaintiff. The respondents bypassed the statutory process by which all prospective class representatives come forward in the first-filed class action and make their arguments for lead-plaintiff status. Their failure to use that process distinguishes them from the absent class members in American Pipe, who were subject only to Rule 23.
Unlike the PSLRA, Justice Sotomayor continued, Rule 23 contains no requirement of notice to class members prior to class certification, only after. There is no mechanism for absent class members to learn of a pending class action or that they are entitled to seek lead-plaintiff status. Furthermore, Rule 23 contains no process for a district court to choose from among the lead-plaintiff candidates or specify factors making a person the most adequate representative. Therefore, the majority’s conclusion that absent class members who did not seek lead-plaintiff status were not diligent applies only in the PSLRA context. "The same conclusion simply does not follow in the generic Rule 23 context, where absent class members are most likely unaware of the existence of a putative class action." Discouraging dueling class actions in the Rule 23 context could also mitigate "gamesmanship" in which plaintiffs’ counsel vie to be the first to file an action and defense counsel bargains with the firm willing to accept the lowest bid on behalf of the class, the Justice wrote.
The concurring opinion also noted that the majority itself acknowledged that there was no risk of "limitless" class actions in this case, with the statute of repose in play. Even in the many other types of cases where no statute of repose applies, principles of comity will enable courts to manage litigation brought by multiple plaintiffs. Even if some modification to the American Pipe rule is necessary to prevent indefinite tolling, the Court might hold as a matter of equity that tolling is unavailable for future class claims only where the denial of class certification bears on the suitability of the claims for class treatment. If certification is denied based on deficiencies of the lead plaintiff as class representative or some other nonsubstantive defect, tolling would remain available.
"Despite the Court’s misstep in adopting an unnecessarily broad rule," Justice Sotomayor exhorted district courts to mitigate the potential unfairness of denying tolling outside of PSLRA-governed class actions. "Where appropriate, district courts should liberally permit amendment of the pleadings or intervention of new plaintiffs and counsel."
The case is No. 17-432.
Attorneys: Seth Alben Aronson (O'Melveny & Myers LLP) for China Agritech, Inc.
Companies: China Agritech, Inc.
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