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Article: September 2017: U.S. Supreme Court Holds That American Pipe “Tolling” Does Not Apply to Statute of Repose for Securities Act Claims

Business Litigation Reports

In California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017) (“CalPERS”), the Supreme Court resolved a longstanding circuit split by holding that the class action “tolling” principle set forth in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) does not apply to the three-year statute of repose under the Securities Act of 1933. The five-to-four decision in CalPERS has significant implications for investors, underwriters, and issuers of securities, as well as for other litigants whose claims may be subject to repose periods.

American Pipe held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.” 414 U.S. at 554. The American Pipe doctrine gives putative class members the option to wait to see how the class action plays out to decide whether to pursue their claims independently. Absent protection, doing so would risk the opt-out claims being deemed untimely. In 2000, the Tenth Circuit held that American Pipe applies not only to limitations periods, but also to the three-year “repose” period in the Securities Act of 1933. See Joseph v. Wiles, 223 F.3d 1155, 1167-68 (10th Cir. 2000) (“Wiles”). The court in Wiles observed that “in a sense, application of the American Pipe tolling doctrine . . . does not involve tolling at all” because the plaintiff “has effectively been a party to” a class action lawsuit that already includes their claims. Id.

The Second, Sixth, and Eleventh Circuits disagreed, holding that the American Pipe rule does not apply to Securities Act claims because the three-year statute of repose is a creation of Congress that is absolute and cannot be extended by “equitable tolling” principles. See Police & Fire Ret. Sys. of the City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013) (“IndyMac”); Stein v. Regions Morgan Keegan Select High Income Fund, 821 F.3d 780 (6th Cir. 2016); Dusek v. JPMorgan Chase & Co., 832 F.3d 1243 (11th Cir. 2016). The Second Circuit applied its own IndyMac decision in more recent cases to again conclude the American Pipe rule does not reach statutes of repose. See In re Lehman Bros. Sec. and ERISA Litig. (California Public Employees’ Ret. Sys. v. Moody Investors Serv.), 655 Fed. Appx. 13 (2d Cir. 2016); SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., 829 F.3d 173 (2d Cir. 2016). The CalPERS plaintiffs petitioned for writ of certiorari on that issue, which the Supreme Court granted in January 2017.

In June 2017, Justice Kennedy delivered the majority opinion in CalPERS, which affirmed the Second Circuit’s rulings. The Court held that the three-year limit in the Securities Act is a statute of repose that was intended by Congress to be “an absolute bar on a defendant’s temporal liability,” and therefore cannot be extended by any “tolling” rule, including American Pipe. 137 S. Ct. at 2049. The Court elaborated that “the purpose of a statute of repose [] to give the defendant full protection after a certain time” trumps the “equitable balancing powers” of the courts to consider the rights of plaintiffs, and that any concerns about an influx of protective filings resulting from its decision “likely are overstated.” Id. at 2053-54. The majority made clear that its holding was limited to statutes of repose, as statutes of limitations still “may be tolled by equitable considerations.” Id. at 2050, 2053.

The dissent in CalPERS, which was authored by Justice Ginsburg, argued that the American Pipe rule is at bottom a recognition of the fact that the filing of a class action itself “commenced the action for all members of the class.” Id. at 2056-57. By opting out, a putative class member “simply [takes] control of the piece of the action that had always belonged to it,” and thus should not lose the benefit of the period that its claim was timely brought as part of the class. Id. The majority answered by focusing on the dictionary definition of “the action;” because a class action complaint is a separate judicial proceeding from an opt-out complaint, the filing of the former does not “stop the clock” for the latter. Id. at 2054-55.

For investors with Securities Act claims, the impact of CalPERS is immediate. Investors with significant holdings can no longer rely on class actions to stop the clock running on their opt-out claims, but rather now must presume that any direct action must be filed within three years of the offering, or else be time-barred. This is an important restriction because, as noted by the minority opinion in CalPERS, securities class actions often take over three years just to reach a class certification decision. Id. at 2057-58. This means that even investors who had hoped to participate in a favorable class-wide recovery can no longer sit on the sidelines without risking receiving little or no recovery if class certification is denied or proves to be problematic. On the other hand, underwriters and issuers of securities stand to benefit from the decision in CalPERS. Those defendants will often be able to determine, at a much earlier stage in the proceedings, “the number and identity of individual suits, where they may be filed, and the litigation strategies they will use,” and to thus “calculate [] potential liability or set []plans for litigation with [more] precision.” Id. at 2053.

Although the CalPERS decision specifically concerned only Securities Act claims, the Court’s general reasoning suggests that the American Pipe rule does not apply to any repose period, unless the particular statute of repose “itself contains an express exception.” Id. at 2050; see also id. at 2050 (“In light of the purpose of a statute of repose, the provision is in general not subject to tolling.”), 2051 (“statutes of repose are not subject to equitable tolling”), 2055 (“Because § 13’s 3-year time bar is a statute of repose, it displaces the traditional power of courts to modify statutory time limits in the name of equity.”). Thus, litigants in other subject areas that include statutes of repose should carefully consider the potential impact of CalPERS on their claims and defenses.

The CalPERS reading of American Pipe is also important to keep in mind when considering other areas where the scope of the American Pipe rule remains unsettled. For instance, most (if not all) courts recognize that American Pipe cannot just impact the timing analysis for the specific causes of action brought by class plaintiffs, but also other causes of action arising out of the same factual predicate. See, e.g., In re Libor-Based Financial Instruments Antitrust Litig., 2015 WL 6243526, at *147-48 (S.D.N.Y. Oct. 20, 2015) (“Libor IV”) (collecting cases). The logic is that “limiting American Pipe tolling to the identical causes of action asserted in the initial class action would encourage and require absent class members to file protective motions to intervene and assert their new legal theories prior to class certification, thereby producing . . . court congestion, wasted paperwork and expense.” Id. (citing Cullen v. Margiotta, 811 F.2d 698, 721 (2d Cir. 1987)). Other than in the general sense that CalPERS was a ‘narrowing’ decision which could thus be read by defendants to give license to question everything touching American Pipe, this application does not seem directly threatened by CalPERS.

However, use of that doctrine does often give rise to another disputed area. Specifically, parties often dispute what happens when a class member opts out of a federal class action and in the same opt-out complaint tries to assert state-law claims. Using the fact-pattern of CalPERS, an example would be an opt-out plaintiff choosing to also assert common law fraud claims arising out of the same allegedly false statements. When this happens, some courts take the approach that because the timeliness of a state-law claim is judged by state law, they must assess whether the relevant state would itself decide whether to “toll” the clock for its claims based on the filing of a related federal class-action. See, e.g., Libor IV, 2015 WL 6243526, at *138-47. As state laws often differ, that approach creates a patchwork of considerations for otherwise similarly situated class members. An argument against the need to do so was that, under the logic of Wiles, it was a mistake to look to each state’s approach to “tolling” because the filing of a class action represented the bringing of an “action” for all purposes, directly fulfilling the timeliness requirements of all states. As the majority in CalPERS took a technical view of American Pipe as a “tolling” doctrine, it seems likely that courts and class members will instead continue to be forced to continue to grapple with questions of so-called “cross-jurisdictional tolling” whenever an opt-out claim would include a cause of action arising out of state law.