Saturday, July 1, 2017
On Monday, the Supreme Court decided Public Employees’ Retirement System v. ANZ Securities Inc. The case resolved a critical issue of class action administration that was left hanging after the Supreme Court dismissed an earlier-granted petition in a similar case (see my earlier posts on the subject).
In American Pipe & Construction Co. v. Utah, 414 U. S. 538 (1974), the Supreme Court held that the filing of a class action tolls the statute of limitations for all members of the putative class. That way, if individual members wish to opt out and pursue their claims individually, or if the class is not certified and they are forced to file their own complaints, they are free to do so without fear of a limitations period that may have expired years earlier. The rule has long been thought of as a practical necessity for the administration of class actions. After all, class actions change over time – claims are dropped, class definitions are narrowed, class counsel may pursue remedies and settlements that don’t satisfy all class members. If individual class members were not assured that they could file their own claims if any of these events occurred, they might be forced to file prophylactic complaints in advance, thus burdening the court with unnecessary filings.
Following American Pipe, a number of questions arose regarding its precise contours (when does the tolling period expire (Taylor v. UPS, Inc., 554 F.3d 510 (5th Cir. 2008); Smith v. Pennington, 352 F.3d 884, 893 (4th Cir. 2003)); which claims are tolled (Cullen v. Margiotta, 811 F.2d 698 (2d Cir. 1987)); whether subsequent class actions, as well as subsequent individual actions, are tolled (Yang v. Odom, 392 F.3d 97 (3d Cir. 2004))), but the basic contours remained reasonably certain.
Until recently. In a pair of cases, the Supreme Court drew sharp distinctions between statutes of limitations, which are intended to force a plaintiff to act promptly once his claim accrues, and statutes of repose, which are intended to assure the defendant of “peace” once a certain time has passed since the original harmful conduct. See CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991). This raised the question: was it possible that American Pipe applied only to limitations periods, and not repose periods?
Enter ANZ. In the wake of Lehman’s bankruptcy, certain purchasers of Lehman bonds filed a class action lawsuit against the underwriters under Section 11 of the Securities Act. Section 11 contains a limitations period – providing that an “action” may be “brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence” – and a repose period, prohibiting any “such action” if “brought … more than three years” after the offering. 15 U.S.C. §77m. In the case of ANZ, after the filing, the action lay dormant for years. One class member, CalPERS – frustrated by the delay – filed its own action, which was eventually consolidated into the main action. When a settlement was proposed, CalPERS chose to opt out to pursue its claims individually, but its complaint was dismissed on the grounds that the CalPERS complaint had been filed after the expiration of the repose period.
The Supreme Court agreed. Writing for a 5-4 Court, Justice Kennedy concluded that courts have no power to toll repose periods; therefore, even after the class action complaint was filed, the repose period continued to run. Three years after the offering, then, no individuals could file their own complaints, regardless of their concerns about the conduct of the class action.
Although the logic of the opinion would seem to apply to all statutes of repose, Justice Kennedy clearly tried to keep his options open. He emphasized that some repose periods might be drafted in a manner that suggests courts have greater equitable power; presumably, then, there’s room to make an argument that American Pipe tolling could apply to some repose periods under particular statutes – though, most have assumed, not ones related to securities claims (i.e., not the 5-year repose period applicable to claims under Section 10(b)).
Writing in dissent, Justice Ginsburg argued that by filing the class action complaint, the original plaintiffs commenced the action for all members of the asserted class, and that the statute of repose was therefore satisfied for all of them, regardless of whether they chose to litigate individually.
(For more description of the case, see this post at The D&O Diary.)
There are a couple of things about this decision that leap out at me.
Most obviously, this is a wildly impractical opinion that undermines the utility of American Pipe. Three years is nothing in securities litigation time; assume there’s some delay before a complaint gets filed, then there’s maybe 3 months or more before the lead plaintiff is selected, then possibly 60 days before an amended complaint is filed, another 60 days before the motion to dismiss is filed – you’re looking at potentially more than a year before the case even makes it past the motion to dismiss. Class members simply will not have enough information before the 3-year repose period expires to make an intelligent decision about whether to opt out (either because they’re unsatisfied with the lead counsel’s performance, or because they’re unsatisfied with a settlement, or because class certification is denied). That means their only option is a “protective” filing, opting out in advance, just to preserve their rights. Justice Kennedy pooh-poohed the possibility, pointing out that investors have not filed protective complaints en masse so far, but that’s because the state of the law was uncertain and holdings refusing to toll were relatively new. Courts can now expect to be flooded with protective filings by absent institutional class members who feel they must opt out in order to fulfill their fiduciary duties to their funds. See, e.g., David Freeman Engstrom & Jonah B. Gelbach, American Pipe Tolling, Statutes of Repose, and Protective Filings: An Empirical Study, 69 Stan. L. Rev. Online 92 (2017).
Moreover, any investors who fail to opt out are now trapped if they are unhappy with the conduct of litigation. They could object, presumably, but there’s a really wide space between what an individual member might believe is in their own interest, and lead counsel performance that’s so deficient as to warrant replacement. A critical mechanism for disciplining class counsel - often accused of selling out classes for easy attorneys fees - will be lost.
By the way, when a case is settled and notice is sent to class members, must it warn them that opting out is no longer an option due to expiration of the repose period?
I also wonder what this ruling will do to the Rule 23 inquiry itself. In determining whether a class should be certified, courts must evaluate whether a class action is “superior” to individual actions. If the repose period has expired, does that mean the class action is always superior, regardless of what other defects there are in class cohesion?
Additionally, what happens if the court wants to create subclasses with new representatives, or if the current class representative is inadequate and a new one must be substituted? Often, these administrative matters are accomplished by motions to intervene – but American Pipe itself suggests that intervention by an absent class member counts as a new complaint, permissible after the expiration of the limitations period only with tolling. What about lead plaintiff selection under the PSLRA - can that happen after the repose period expires? (These are basically questions I raised when the Court first granted cert, by the way).
But aside from this parade of horribles, here’s what leaps out at me on a gut level:
The rule adopted by the majority has really nothing to recommend it practically; indeed, the defendants’ brief offers virtually no policy reasons to support their argument. The plaintiffs, of course, argued that there was simply no injustice here: all of the purposes of a statute of repose are fulfilled when the class action complaint is filed. At that time, the defendants know of the claims against them, and the identities of the plaintiffs; it hardly matters, for repose purposes, that particular class members might later choose to litigate individually.
The Court disagreed. It held that even though defendants may formally be placed on notice of the class claims, there is a practical difference between litigating a class action, and litigating individual actions as follow-ons; that difference, said the Court, increases the defendants’ burdens and potentially their liability.
Which is indisputably true. But recall the cases involving class-action waivers in the context of arbitration agreements. Frequently, plaintiffs argue that such waivers make it impossible, as a practical matter, for them to bring their substantive claims, and therefore the waivers act as a de facto – and prohibited – waiver of certain federal rights. See, e.g., Am. Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991). Yet in that context, the Court has been obtrusively unsympathetic; the class action device, the Court has held, is merely a procedural mechanism for aggregating claims, and there is no dicially-cognizable difference between claims brought individually and claims brought as a class.
Obviously, these are different situations, but it seems to me that the Court is somewhat inconsistent about when it will recognize the practical realities of how the class action form affects the underlying claim, and when it will not. And the Court is far more sympathetic to practical complaints that originate from the defense side than from the plaintiffs’ side.