Securities Regulation Daily Justices, counsel debate boundaries of American Pipe tolling
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Monday, March 26, 2018

Justices, counsel debate boundaries of American Pipe tolling

By Anne Sherry, J.D.

The Supreme Court heard oral argument on whether American Pipe tolling permits follow-on class actions after the statutory limitations period has run. In the view of the hopeful plaintiffs, tolling permits individual claims, and individuals have access to class actions under the federal rules. But some justices seemed skeptical of the idea that the equitable concept of tolling should be applied so expansively as to permit serial class action filings (China Agritech, Inc. v. Resh, March 26, 2018).

China Agritech actions. Several named plaintiffs, the respondents here, brought a class action against China Agritech and its officers and directors. The plaintiffs had been unnamed class members in two earlier class actions based on the same underlying events; class certification was denied in both of those earlier actions. The district court dismissed the new class action as time-barred, observing that the Supreme Court had not yet determined whether American Pipe allows tolling for an entirely new class action based on a substantially identical class. But the Ninth Circuit reversed, reasoning that allowing class action plaintiffs who were unnamed class members in previously uncertified classes to avail themselves of tolling would advance the policy objectives that led the Court to permit tolling in the first place. China Agritech successfullypetitioned the Supreme Court to review the case.

Rule 23 v. equitable tolling. The respondents, seeking affirmance of the Ninth Circuit rule, argue that American Pipe tolling preserves claims during the pendency of the class action, and this includes access to Federal Rule of Civil Procedure 23 establishing the procedures for class actions. Chief Justice Roberts asked petitioner’s counsel whether he was not in fact arguing for an exception to Rule 23. "If you just read it on its face, the statute of limitations hasn't run because of American Pipe and Crown, Cork, so why shouldn't [Rule 23] be available to you?" Petitioner’s counsel clarified his position that the statute of limitations has run. The question then is whether the plaintiffs are entitled to equitable tolling.

On a question from Justice Alito, counsel further clarified that his argument is not that there is an exception to equitable tolling. Instead, it is that the claims at issue are not equitably tolled because equitable tolling requires diligence and extraordinary circumstances.

Respondents’ counsel, in his argument, explained that under classical equitable principles, a court looked at the due diligence of the person before the case was filed. An absent class member exercises due diligence by relying on the American Pipe rule. This answer did not satisfy Justice Gorsuch, who expressed skepticism about the American Pipe holding itself, much less an even more expansive interpretation. "I can’t think of another example in equitable tolling doctrine where we do this, which may suggest some question about whether American Pipe is correct," the Justice said. "And if we have doubts about that, why should we extend it so radically here in a way that was unforeseen even by the authors of American Pipe?" Respondents’ counsel responded that this would not be an extension of the doctrine. If a claim would be timely filed as an individual claim, the rationales for allowing class actions still apply.

Small claims v. ignoring the first class action. Justice Kagan also had a more practical argument that seemed to favor an expansive interpretation of American Pipe. She raised a hypothetical in which there is a serious wrong with high aggregate damages but low individual damages—each person is out $32. Class certification is denied for a reason that has nothing to do with whether class action treatment is appropriate. In that case, foreclosing a follow-on class action effectively means "claims that we would want to be brought in order to force defendants to internalize the costs of their illegal behavior" will not go forward. China Agritech’s counsel said that enforcing a statute of limitations will ensure that plaintiffs come forward according to that rule. In the case of claims that will only be brought as class actions, there are hopefully multiple plaintiffs willing to represent the class in case the first class representative falls through.

During respondents’ counsel’s argument, Justice Breyer summarized China Agritech’s equitable argument. Someone like himself, "a common person," gets a class action notice in the mail and tosses it without reading it. The class action gets dismissed, individuals who were tolled come back in and file a second class action, and that common person still doesn’t read the notice. "I don’t want to put words in [petitioner’s counsel’s] mouth, but … he is saying, it is not equitable to give that person who didn’t even read the letter a second chance again to be a person who didn’t read the letter."

Respondents’ counsel responded that the principal reporter of Rule 23 at the 1966 amendment explained that part of the reason for the change was to address "the small claim of the small person." Justice Gorsuch said that no one questions the importance of that function of the rule, but that he and Justice Breyer were wondering "can you stack [class actions] forever, so that try, try again, and the statute of limitations never really has any force in these cases. What do we do about that, given the congressional judgment that there should be a statute of limitations?"

In the securities context, counsel responded, the repose period is the outer limit. For situations where there is no repose period, the Ninth Circuit suggested that the principle of comity is the most powerful mechanism for addressing concerns about serial class actions. During rebuttal, however, petitioner’s counsel said that China Agritech class actions themselves demonstrate how weak comity is as a defense. The same judge proceeded over both class actions, but he did not allow preclusion. "The district judge wouldn’t show deference to himself," he argued, "So how can we expect other judges to show deference to other judges?"

The case is No. 17-432.

Attorneys: Seth A. Aronson (O'Melveny & Myers LLP) for China Agritech, Inc. David C. Frederick (Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C.) for Michael H. Resh.

Companies: China Agritech, Inc.

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