Yesterday, in an opinion likely to have lasting effects on class action practice in the federal courts, the United States Supreme Court held that the statute of limitations is not equitably tolled under the American Pipe tolling doctrine for subsequent class actions that might be filed by members of a defined class in an initial class action. In China Agritech, Inc. v. Resh, the Court held that American Pipe tolling applies only to individual claims that might be brought by putative class members, reversing a Ninth Circuit decision and resolving a split among the circuits.
After China Agritech, plaintiffs seeking to proceed on behalf of a class of plaintiffs must file their complaint before the statute of limitations expires and cannot rely on the pendency of an earlier class action asserting similar claims to extend that limitations period.
Justice Ruth Bader Ginsburg authored the Court's decision, which was joined by seven other justices. Justice Sonia Sotomayor filed a concurring opinion agreeing with the Court's holding but advocating that it should be limited to securities class actions that are subject to the early class notice mandated as part of the "lead plaintiff" process in the Private Securities Litigation Reform Act of 1995 (PSLRA).
The action filed by Resh was the third successive class action brought on behalf of purchasers of stock issued by China Agritech, Inc. alleging class-wide claims of securities fraud under the Securities Exchange Act of 1934. Two earlier actions had been filed before the applicable two-year statute of limitations expired, but the trial court denied class certification in both. Resh filed his complaint after the statute of limitations period expired but argued that the pendency of the earlier cases in which he had been a putative class member tolled the statute of limitations for his class claims under the doctrine first articulated in American Pipe and Construction Co. v. Utah. The district court disagreed and dismissed the complaint as time-barred. The Ninth Circuit reversed.
In its decision disagreeing with the Ninth Circuit, the Supreme Court explained that American Pipe tolling was adopted to ensure efficiency and judicial economy when a court was considering whether an action should be permitted to proceed on behalf of a class. American Pipe and later decisions held that plaintiffs that fall within the proposed class definition in such an action are not required to seek to intervene or to file their own action before a class certification motion has been decided. The statute of limitations otherwise applicable to their claims is tolled until the court in the initial action has ruled on the question of class certification. This benefits the courts by eliminating new actions filed protectively, or unnecessary motions to intervene, while a proposed class action is in its initial stages.
Tolling the statute of limitations to permit a successive class action to be filed by a putative class member does not advance the same objectives. Instead, any "additional class filings should be made early on, soon after commencement of the first action seeking class certification." In addition, the Court reasoned, permitting equitable tolling for successive class actions could result in an equitable extension of the statute of limitations "time and time again," allowing plaintiffs "limitless bites at the apple" to successfully certify a plaintiff class. "This prospect," the Court reasoned, "points up a further distinction between the individual-claim tolling established by American Pipe and tolling for successive class actions. The time to file individual actions once a class action ends is finite, extended only by the time the class suit was pending; the time for filing successive class suits, if tolling were allowed, could be limitless."
The Court went on to explain that Federal Rule of Civil Procedure 23 demonstrates a preference for precluding untimely class filings by instructing district courts to determine class certification at "an early practicable time," and the rule allows courts time to determine the appropriate class counsel and whether a class should be certified. The PSLRA further supports this reasoning. The early competition for appointment as "lead plaintiff" required by that statute demonstrates a strong statutory preference to group filings of putative class actions asserting securities claims at the outset of litigation by requiring the first filed class action counsel to put any shareholder on notice who might wish to serve as a lead plaintiff. A potential class plaintiff that declines to heed that notice, the Court explained, "can hardly qualify as diligent in asserting claims and pursuing relief," and, accordingly, should not receive equitable tolling.
The Court concluded by reiterating that the "watchwords of American Pipe are efficiency and economy of litigation," and "[e]xtending American Pipe tolling to successive class actions does not serve that purpose."
In her opinion, Justice Sotomayor concurred in the judgment but argued that the Court should have limited its holding to securities class actions, which are subject to the early lead plaintiff procedures required under the PSLRA. Justice Sotomayor reasoned that the PSLRA's unique early notice provisions did not apply to other types of federal class actions, and, accordingly, it would not be equitable to preclude equitable tolling of a statute of limitations for class plaintiffs who might not have received notice of the first class claim.
After China Agritech, plaintiffs intending to assert a claim on behalf of a proposed class will be required to file suit within the applicable limitations period. This could lead to more competition for leadership of federal class actions at an early stage in the proceedings.
Learn more by contacting:
John J. Clarke, Jr.