Issues
Does the timely filing of a class action lawsuit stop the running of the three-year time limit for individual class members to bring their claims under Section 13 of the Securities Act?
This case presents the Supreme Court with an opportunity to clarify the applicability of the time limitations in Section 13 of the Securities Act of 1933 for individual claims brought after a class action lawsuit has been filed in the same matter. Petitioner California Public Employees' Retirement System (“CalPERS”) argues that Section 13 is a statute of limitation, which may be overridden by judge-made rule, as opposed to a statute of repose, which is not subject to judicial extension even in cases of extraordinary circumstances. Accordingly, CalPERS asserts that a prior Supreme Court decision, American Pipe, establishes that the filing of a class action tolls the statute of limitation as to all putative members of that class. Respondent ANZ Securities, however, argues that Section 13 is a statute of repose, and under the Second Circuit precedent the American Pipe tolling rule does not extend to statutes of repose. The outcome of this case could encourage litigation strategies that decrease court efficiency or, alternatively, benefit large investors at the expense of smaller ones.
Questions as Framed for the Court by the Parties
Does the timely filing of a valid class action satisfy or toll the three-year filing period set by Section 13 of the Securities Act of 1933 with respect to subsequent opt-out suits by individual class members?
Facts
This case arose out of the 2008 collapse of Respondent Lehman Brothers Holdings Inc. (“Lehman Brothers”). Lehman Brothers was a large investment bank, which traded its securities on the New York Stock Exchange.
Before Lehman Brothers filed for bankruptcy in September of 2008, investors who had purchased Lehman Brothers’ securities filed lawsuits against Lehman Brothers under the Securities Act of 1933 ("the '33 Act"), alleging that Lehman Brothers’ registration statements contained untrue statements and omitted material facts about the bank’s finances. In 2009, a district court consolidated all such investor suits into a single class action. The class action was filed on behalf of all investors, persons, and entities that acquired the Lehman Brothers’ securities.
California Public Employees’ Retirement System (“CalPERS”), a large pension fund, was one of the investors that purchased Lehman Brothers’ securities. In 2011, before a class certification motion for the Lehman Brothers’ class action had been filed, CalPERS also filed an individual action under Section 11 of the '33 Act against Lehman Brothers. CalPERS filed its action more than 3 years after the Lehman Brothers issued the securities that were at issue in the class action. Shortly after, CalPERS’s individual action was consolidated with the earlier-filed class action litigation. However, when the class action reached settlement in 2012, CalPERS chose to opt out of the class settlement and again pursue recovery in its own individual action. Soon after, the district court dismissed CalPERS’ action as time-barred under the three-year statute of repose, pursuant to Section 13 of the '33 Act.
CalPERS appealed the case to the Second Circuit arguing that the Supreme Court made clear in American Pipe and Construction Co. v. Utah that filing a class action tolls the statute of limitations for all putative members of that class, meaning that the three-year time limit for filing an individual lawsuit should have been suspended by the pending class action suit. The Second Circuit upheld the district court’s decision, finding that, under Second Circuit precedent, American Pipe tolling does not apply to the statute of repose embodied in Section 13 of the Securities Act of 1933. The Second Circuit also found that its holding did not violate CalPERS’s due process.
On September 22, 2016, CalPERS appealed to the Supreme Court of the United States, which granted certiorari on January 13, 2017.
Analysis
STATUTE OF LIMITATIONS VS. STATUTE OF REPOSE
CalPERS argues that the three-year bar in Section 13 is a statute of limitations rather than a statute of repose. CalPERS points out that at the time Section 13 was enacted, Congress did not distinguish between these two types of statutes. Furthermore, CalPERS argues that Congress has consistently described the three-year period in Section 13 as a statute of limitations.
ANZ Securities counters that CalPERS’s attempt to classify Section 13 as a statute of limitations runs contrary to the plain text of Section 13 and the Supreme Court's holding in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson that “the three-year limit is a period of repose inconsistent with tolling.” ANZ Securities argues that Section 13’s text makes clear that its three-year provision is a period of repose. They argue that the language employed in this provision, “in no event” may an action be brought more than three years after the offering of the security, clearly shows Congress’s intent to create an absolute bar. ANZ Securities argues that the three-year bar is meant to operate as an outer limit on the right to bring a civil action that cannot be overridden by judge-made rules. Furthermore, ANZ Securities contends that unlike statutes of limitations, statutes of repose such as Section 13 are not subject to judicial extension even in cases of extraordinary circumstances.
AMERICAN PIPE TOLLING RULE AND SUBSTANTIVE RIGHTS
CalPERS argue that this case falls squarely within the Supreme Court’s ruling in American Pipe. In that decision, the Supreme Court interpreted Rule 23 of the Federal Rules of Civil Procedure ("FRCP") to provide that the filing of a class action commences the action for all class members, whether they are named or not, and tolls the limitations periods applicable to the underlying cause of action if the class action should fail and class members wish to intervene in the suit. CalPERS concedes that, under a statute of repose, the time to initiate a claim cannot be equitably tolled, but they argue that this reasoning does not apply to American Pipe tolling because, under this doctrine, a claim is initiated by the timely filing of the class action complaint. In the alternative, CalPERS argues that even if Section 13 is a statute of repose that is not subject to equitable tolling, the American Pipe rule is not a type of equitable tolling, but rather a “legal” tolling rule that emanates from Rule 23.
ANZ Securities counters that the American Pipe tolling rule does not apply to Section 13 of the '33 Act. They contend that the American Pipe rule is correctly categorized as an equitable tolling doctrine because the Supreme Court relied on equitable considerations in reaching its holding in that case. ANZ Securities argues that since the Supreme Court has previously held that “statutes of limitations, but not statues of repose, are subject to equitable tolling,” the American Pipe tolling rule does not apply to Section 13. ANZ Securities contends that even if the American Pipe rule was a form of “legal tolling” that emanated from Rule 23, it still could not extend the three-year repose period of Section 13 because statutes of repose confer substantive rights on defendants to be free from suit after a specified period. Furthermore, they argue that the Rules Enabling Act ensures that the FRCP will not “abridge, enlarge or modify any substantive right.”
DUE PROCESS IN THE CLASS ACTION CONTEXT
CalPERS argues that the American Pipe rule upholds the constitutionally protected right of class members to opt out of class actions brought on their behalf and pursue their own individual claims with their own attorneys. CalPERS suggests that it would violate due process to bind a class member to a class action against her will. CalPERS maintains that in the instant case all they did was attempt to exercise that constitutional right by opting out of a class action to pursue the same claims on their own. Moreover, CalPERS contends that the right to opt out becomes merely illusionary if the court holds that an individual class member’s claims may be dismissed as time barred simply because they chose to opt out of the class action settlement and did not file their individual complaint at the outset of litigation.
ANZ Securities responds that there is no due process problem with applying statutes of repose to class actions because class members will still have a right to opt out of the settlement, or alternatively, fight for a better class-wide resolution of the claims. Further, ANZ Securities notes that the Constitution does not attempt to ensure that a class member who chooses not to participate in a class action suit will be allowed to bring its own viable claim under all circumstances. ANZ Securities maintains that even when a potential class member has imperfect information with which to decide whether to opt-out of a suit, that the class member’s due process rights have not been violated.
WAS THE ACTION TIMELY REGARDLESS OF TOLLING?
Alternatively, CalPERS argues that its individual action against ANZ Securities was timely regardless of tolling because the action was first brought in the class action complaint and then continuously maintained when CalPERS filed its own complaint and opted out of the settlement. CalPERS asserts that since the class action complaint commenced all of CalPERS’s claims on its behalf, the cause of “action” was “brought” within three years of the date that the securities were offered to the public, making it a timely filing under Section 13. Moreover, CalPERS argues that the individual complaint merely transferred control over the already existing “action” from the class to CalPERS.
ANZ Securities counters that the word “action” in Section 13 refers to a lawsuit rather than to a cause of action. They argue that the court should use the time at which CalPERS filed its individual complaint to assess whether the action was timely brought under Section 13, not the time at which CalPERS’ claims were first brought by the class action. MoreoverANZ Securities contends that the Court never granted certiorari for the question of whether a member of a timely filed putative class action may bring an individual action asserting the same claims.
Discussion
POTENTIAL FOR NUMEROUS PROTECTIVE FILINGS
CalPERS argues that disallowing American Pipe tolling for Section 13 statute of repose would create wasteful litigation, which would burden the courts. Current and Former Directors of Publicly Traded Companies et al. (“Directors”) likewise assert that, if tolling is not allowed, class members would have an incentive to file duplicative individual actions, in order to avoid losing their rights before Section 13 filing period expires. In response to empirical studies allegedly indicating that such duplicative actions do not occur in practice, Civil Procedure and Securities Law Professors (“The Law Professors”), assert that such studies are incomplete because they examined protective filings only in class actions that ultimately settled, but did not examine class actions that never reached settlement or certification. The Law Professors argue that, if the Court adopts the Second Circuit approach to tolling, class members would make protective filings in at least one-quarter of all filed securities class actions. The Law Professors also estimate that class members would make protective filings in nearly half of securities class actions that actually reach an order on class certification.
ANZ Securities, nevertheless, asserts that the number of such protective duplicative filings will be trivial. ANZ Securities argues that despite the state of the law on the statute of limitations for class action suits in the Second Circuit for the past few years, studies show there have hardly been any protective filings. Further, the Securities Industry and Financial Markets Association (“SIFMA”) argues that the most recent annual data available shows that out of the sixty-three securities class actions that settled in 2014 class members filed zero individual duplicative suits. SIFMA argues that, even if protective filings do occur, district courts have mechanisms to deal with them. SIFMA asserts that the courts could simply stay the individual actions, pending the resolution of the class suit, or consolidate individual actions for the pre-trial period of litigation.
EFFECTS ON THE GOALS OF RULE 23: EFFICIENCY AND AIDING SMALL INVESTOR SUITS
Institutional Investors, in support of CalPERS, argue that applying the American Pipe rule to Section 13 can promote efficiency and thus fulfill the goals of FRCP 23. Institutional Investors argue that, without the American Pipe rule, institutional investors would necessarily engage in protective measures, such as duplicative filings, in order to preserve their rights before the Section 13 filing period runs out. Institutional Investors assert that, because institutional investors invest on behalf of their beneficiaries, they must take any losses from their investment activity very seriously. Accordingly, Institutional Investors argue that, if the Second Circuit ruling is upheld, they necessarily must engage in protective practices to ensure that their beneficiaries’ losses are compensated, which would then undermine the efficiency goals of FRCP 23.
In contrast, ANZ Securities argues that applying the American Pipe rule to Section 13 will undermine the goals of FRCP 23, which is partly intended to give small investors with limited funds an incentive to sue. ANZ Securities contends that, although the American Pipe rule would benefit large institutional investors, it would do so at the expense of all other investors, especially small investors. If a statute of repose can be tolled indefinitely, ANZ Securities argues that large institutional investors will choose to passively wait until the class action settles, rather than actively litigating to secure the best recovery for the class as a whole. Such a strategy would allow institutional investors to opt out of the class action at the last minute and use the class settlement to negotiate a larger recovery in an individual suit.
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Additional Resources
- Joyce Hanson, High Court to Hear CalPERS’ Argument Over American Pipe, Law360 (Jan. 13, 2017).
- Kevin LaCroix, Supreme Court Agrees to Hear Securities Act Statute of Repose Tolling Question, The D&O Diary (Jan. 15, 2017).