Issues
Does the rule announced in American Pipe, tolling the statute of limitations for individual actions filed after a failed class action, also apply to subsequent class actions?
In American Pipe, the Court held that the statute of limitations is tolled for an individual that files an action after a related class action fails. This case asks the Court to decide whether American Pipe tolling also applies to subsequent class actions. China Agritech, Inc. argues that American Pipe tolling should not apply to subsequent class actions, because such an extension would be inequitable and would conflict with the rationale surrounding current law on class action procedures. Michael Resh counters that American Pipe tolling should apply to subsequent class actions because such an extension would be both equitable and consistent with current law and precedent. The Supreme Court’s ruling could potentially relax the urgency and attentiveness required of class action members, or emphasize the importance of awareness and involvement individuals must display to share in the judgment won by the asserted members of their class. The decision could also implicate burdens on the courts, separation of powers issues, and practical considerations for class action plaintiffs and defendants.
Questions as Framed for the Court by the Parties
Whether the rule of American Pipe and Construction Co. v. Utah tolls statutes of limitations to permit a previously absent class member to bring a subsequent class action outside the applicable limitations period.
Facts
China Agritech, Inc. (“China Agritech”) is a Delaware-incorporated holding company with its principal place of business located in Beijing, China. China Agritech claims to sell organic fertilizers and related products to farmers throughout China. The corporation began listing its shares on the NASDAQ stock exchange in 2005, reporting a revenue of $25 million that year. In 2009, the corporation reported a revenue of $76 million.
On February 3, 2011, the company “LM Research” published “China Agritech: A Scam,” a report written by individuals holding short positions in China Agritech stock. They claimed China Agritech was “not a functioning business,” but a device used to transfer outside investor wealth to company founders and management. China Agritech denied these allegations, and Bronte Capital (another short position stockholder) published another article on February 15, 2011. This article stated that China Agritech lacked basic equipment necessary for the large-scale operations it claimed to conduct. China Agritech’s stock value dropped from $10.78 to $7.44 per share during this time.
On March 13, 2011, China Agritech formed a Special Committee to investigate the fraud allegations. The next day, they dismissed their independent auditor, Ernst & Young Hua Ming (“E&Y”), and publicly disclosed that in December 2010, E&Y had insisted that China Agritech investigate previously identified accounting problems. Subsequently, NASDAQ halted trading China Agritech stock and began delisting proceedings, leading the SEC to issue an enforcement order that revoked the registration of China Agritech stock on October 17, 2012.
On February 11, 2011, Theodore Dean, on behalf of himself and others similarly situated, filed a would-be class action against China Agritech and certain managers and directors. Dean filed an amended complaint in June 2011 with additional listed defendants and plaintiffs, alleging two quickly dismissed Securities Act claims, and two Exchange Act claims that the California Central District Court declined to dismiss. On January 6, 2012, Dean plaintiffs moved for class certification. Judge Klausner denied their motion, holding that plaintiffs failed to establish the predominance requirement of Rule 23(b)(3), and therefore must pursue their cases individually. The Ninth Circuit affirmed, plaintiffs settled their individual claims on September 14, 2012, and the court ultimately dismissed all claims with prejudice.
On October 4, 2012, Kevin Smyth filed a near-identical class-action against China Agritech in Delaware Federal District Court, except alleging only Exchange Act violations and naming fewer defendants. The action was moved to the Central District of California, where it was deemed related to the Dean action and assigned to Judge Klausner. plaintiffs filed an amended complaint naming additional plaintiffs on July 18, 2013, and moved for class certification on August 5, 2013. The court denied the motion, finding that plaintiffs failed the typicality requirement of Rule 23(a)(3), and the representation requirement of Rule 23(a)(4). Hence, the parties agreed to dismiss the action with prejudice as to named plaintiffs on January 8, 2014.
On June 30, 2014, Michael Resh filed a would-be class action, also assigned to Judge Klausner, alleging Exchange Act violations under identical facts. On September 22, 2014, China Agritech moved to dismiss, citing the Exchange Act’s two-year statute of limitations. The court ultimately granted the motion, rejecting plaintiffs’ assertion that American Pipe and Construction Co. v. Utah jurisprudence supports tolling the limitations period for the duration of prior class-action suits. The district court denied reconsideration and plaintiffs appealed. The Ninth Circuit reversed, holding that American Pipe tolls the limitations period to allow absent class members to bring otherwise untimely class actions after a class-action suit. China Agritech appealed, and the Supreme Court granted certiorari on December 8, 2017.
Analysis
THE APPLICABILITY OF AMERICAN PIPE AND CROWN, CORK
China Agritech argues that the tolling of the statute of limitations permitted under American Pipe and Crown, Cork & Seal, Co. v. Parker applies only to subsequent individual actions and not subsequent class actions. China Agritech supports this argument in several ways, beginning by reminding the Court that statutes of limitations are strictly enforced, as they serve several interests of both the judicial system and potential litigants. China Agritech does admit that equitable tolling has been recognized by the courts, but argues that traditional principles of equitable tolling require not only “extraordinary circumstances” but also diligent pursuit of rights by any plaintiff seeking reprieve. China Agritech contends that while these principles are found in the preservation of individual claims after a failed class action, the rationale does not extend to subsequent class actions. China Agritech asserts that, unlike individual actions, in subsequent class actions, a future plaintiff has not been diligent in protecting his rights. China Agritech distinguishes the two scenarios by arguing that in a class action, the individual plaintiff relies on the class to protect her rights. To allow a subsequent class action, China Agritech contends, would be different from allowing a subsequent individual action in two respects: (1) it would allow an “absent plaintiff” to benefit from extended tolling despite taking no action if subsequent class actions are brought; and (2) the plaintiff that seeks to lead the subsequent class action cannot be said to have been relying on the initial class action in furthering that goal; and should have intervened in the original action.
China Agritech also argues that the extraordinary circumstances that justify protecting an individual’s action after a failed class action do not exist for subsequent class actions. China Agritech contends that the circumstances relied on in American Pipe were the policies behind class actions, and that allowing tolling furthered these statutory goals by preventing duplicitous filings. China Agritech asserts that these considerations do not apply to subsequent class actions for three reasons. First, China Agritech argues, the goal of the individual plaintiff (preserving his suit) differs from the goal of a subsequent class action plaintiff (leading the class action), because a plaintiff that wishes to lead the action already has an incentive to file early in the primary action. Second, China Agritech contends that Federal Rule of Civil Procedure (FRCP) 23 seeks to prevent duplicitous actions but invites potential lead plaintiffs to participate. Third, China Agritech asserts that there are judicial tools for managing multiple class actions (such as FRCP 42(a) and 28 U.S.C. 1404) that mitigate any duplicitous class actions. China Agritech concludes its argument against the extension of American Pipe by reminding the court that the amount of prejudice suffered by a defendant is not a factor traditionally considered in tolling cases.
Resh argues that the Court’s precedents create an equitable tolling rule that does not discriminate based on the subsequent action’s procedural form, resulting in the tolling of subsequent class actions. Resh contends that Crown, Cork extended the tolling to all potential class members, not just those who take affirmative action after the original action fails. This means, Resh argues, that China Agritech is incorrect in stating that only those that intervene or file subsequent individual actions receive the benefits of tolling. Resh supports this view by citing cases allowing unnamed plaintiffs in class actions to object to the class settlement, contending that such cases show that even unnamed and otherwise inactive class members retain the same rights and privileges as the rest of the class. Resh states that having these rights, even if not asserted, satisfies the diligence requirement of traditional tolling doctrine. Resh further argues that even if China Agritech’s reading of precedent—requiring affirmative action to show diligence—is accepted, the filing of a subsequent class action would satisfy that diligence requirement.
Resh also contends that the extraordinary circumstances—in previous cases, the policy considerations behind class actions—also apply to the extension of American Pipe to subsequent class actions. First, Resh maintains, the goal of preventing duplicitous filings supports the extension of American Pipe to subsequent class actions, because such duplicitous filings may occur not only for those seeking to lead a class, but for those seeking to protect their right to sue as a class (not individually). In addition, Resh argues, applying tolling to allow subsequent class actions (and not only individual actions) would further promote the class action policy of judicial economy. Resh explains that if the Court does not apply American Pipe’s tolling to subsequent class actions after a denial to treat claims as a class action, then individuals will have no choice but to clog the courts with individual claims. If, on the other hand, the Court applied American Pipe’s tolling to subsequent class actions, Resh contends that individual’s could again attempt class certification of their claims, supporting judicial economy. Finally, Resh maintains that a defendant facing a subsequent class action suffers no prejudice, and that such concerns should not be relied on when deciding whether to affirm the Ninth Circuit.
THE IMPACT OF FRCP 23, THE RULES ENABLING ACT, AND SEPARATION OF POWERS
China Agritech argues that the Ninth Circuit’s reliance on Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Company to prove that American Pipe extends to subsequent class actions is misplaced. China Agritech explains that Shady Grove’s holding applies only to whether state law restrictions on class certification apply to federal courts in diversity jurisdiction suits, emphasizing that the holding does not pertain to equitable tolling. China Agritech further maintains that (1) Shady Grove does not consider those who did not affirmatively act to preserve their rights; and (2) extending American Pipe in this context would ignore the “extraordinary circumstances” requirement of tolling. China Agritech also contends that equitable considerations should prevent subsequent attempts to form a class for two key reasons. First, in cases where class certification has been determined unsuitable for reasons pertaining to the class, China Agritech argues that a diligent plaintiff would bring a subsequent action individually rather than re-attempting to certify a class for his claims. Second, China Agritech asserts that it would be inequitable to allow
relitigation of already settled matters. Resh explains that where the certification of a class is an already-decided issue, allowing another bite at the apple is impermissible, especially for an until-then silent plaintiff.
China Agritech further contends that the Ninth Circuit’s reliance on the Rules Enabling Act and Tyson Foods, Inc. v. Bouaphakeo is misplaced. China Agritech, relying on its belief that a plaintiff must affirmatively assert his rights in order to receive the benefits of tolling, argues that extending American Pipe’s tolling to allow a second attempt at a class action suit would expand the non-diligent plaintiff’s rights and violate the Rules Enabling Act. Finally, China Agritech attacks any reliance on Tyson Foods, asserting that the case is not relevant since it did not consider either American Pipe tolling nor the interactions of class actions and relevant statutes of limitations. China Agritech supports this argument by noting that Resh did not cite Tyson in its opposition to certiorari, implying that even Resh doubted its relevance to the current action.
Resh argues that a combination of precedent and FRCP 23 indicates that the Court should extend American Pipe to subsequent class action suits. Resh cites to Shady Grove, contending that the case stands for the principle that a plaintiff has the categorical discretion to “ . . . bring his claim in a class action if he wishes,” in “each and every case where . . . Rule [23]’s criteria are met.” Resh asserts that, therefore, if a plaintiff has a tolled individual action that satisfies the requirements of FRCP 23, she is allowed to bring a subsequent class action. This rule, assuming that the individual has been tolled pursuant to American Pipe, applies to any potential plaintiff, not just those who have already affirmatively asserted their rights.
Resh also argues that applying different tolling rules depending on the form (individual or class) of the action would violate the Rules Enabling Act, which prohibits any Federal Rule of Civil Procedure from abridging, modifying, or enlarging any substantive right. Resh contends that the Rules Enabling Act in conjunction with Tyson Foods (holding that the Rules Enabling Act does not permit the validity of a claim to depend on whether it is asserted individually or as a class) prevents the Court from modifying the tolling rules based on the form of the subsequent action. Resh also relies on American Pipe in contending that tolling itself does not conflict with the Rules Enabling Act, as tolling is consistent with legislative intent.
Discussion
PRACTICAL CONSIDERATIONS REGARDING ALLOWING THE TOLLING OF CLASS CLAIMS
The Voice of the Defense Bar (“DRI”), in support of China Agritech, asserts that if operational control of statutes of limitations was given to the attorneys filing class actions, certainty and predictability concerns already prevalent in class action litigation would increase. DRI explains that extending American Pipe tolling to subsequent class actions would (1) take pressure off attorneys to preserve evidence, (2) reward unnamed class members who forgo the cost and effort of an individual claim “to prolong their risk-free ride on the class action train,” and (3) benefit non-diligent class members with an opportunity to pursue stale claims or receive an unearned windfall recovery. In response to the argument that failing to extend tolling to subsequent class actions would overburden courts, the United States Chamber of Commerce, Retail Litigation Center, Inc., and the American Tort Reform Association (“the Chamber of Commerce”) cite the lack of such influx in the Second Circuit since it adopted a no-tolling rule in securities class actions. The Chamber of Commerce also points to the precedent established by the Supreme Court that equitable tolling “is a rare remedy to be applied in unusual circumstances, not a cure-all for an entirely common state of affairs.”
Retired Federal Judges (“Federal Judges”), in support of Resh, caution against restricting tolling in class actions due to (1) potential duplicative class actions during the tolling period, and (2) an increase in practically identical individual actions that could be expediently decided through class action litigation. Additionally, Federal Judges emphasize the importance of avoiding conflicting federal judgments as a means of facilitating efficient administration and management of disputes by district courts. Thus, according to Federal Judges, extending American Pipe tolling to subsequent class actions would promote efficiency and reduce duplicative litigation. The National Conference on Public Employee Retirement Systems (“NCPERS”) notes that allowing tolling in class actions would not lead to “perpetual tolling” in similar cases because the CalPERS decision established that the statute of repose serves as the outer limit for filing securities class actions.
THE POTENTIAL OF CLASS ACTION TOLLING TO UNDERMINE CONGRESSIONAL POWER AND/OR INTENT
The Chamber of Commerce of the United States, supporting China Agritech, expresses concern that expanding American Pipe would create constitutional separation-of-powers issues because it would involve the judiciary jettisoning of Congress’ judgment on timeliness of claims. The Chamber of Commerce points to recent Supreme Court decisions that express the need for extreme deference to Congress regarding legislature-created time-bars on claims and emphasizes that constitutional balance will erode if the judiciary assigns to itself a specific power already delegated to Congress. The Securities Industry and Financial Markets Association (“SIFMA””) argues that if the Court expands American Pipe, it would further infringe on the legislature by disregarding Congressional intent behind reforms brought about by the Private Securities Litigation Reform Act. SIFMA claims that a ruling for Resh would directly conflict with the five specific goals underlying Congress’ current approach to class action procedures.
A group of law professors (“Law Professors”) who teach and write in the fields of federal courts, civil procedure, and constitutional law disagree with the assertion that a holding for Resh infringes on the legislative branch, and assert that Congressional intent behind 28 U.S.C. § 1658(b) actually compels equitable tolling for subsequent class actions. Law Professors explain that the limitations period at hand would not have been paired with a longer repose period in the statute if the limitations period was intended to bar class action suits without tolling. The professors warn that denying class action tolling in the present case could create a precedent of the judiciary willingly ignoring the totality of a statute in order to interpret its meaning against Congressional intent, even though the Supreme Court has stated that limitations periods should be subject to equitable tolling “unless tolling would be inconsistent with the text of the relevant statute.”
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Additional Resources
- Alison Frankel, Don’t Be Fooled: New SCOTUS Grant in China Agritech Isn’t About Securities Litigation, Reuters (Dec. 11, 2017).
- Stephanie L. Adler-Paindiris and Stephanie L. Goutos, U.S. Supreme Court to Rule on Application of American Pipe Tolling Decision on Class Actions, Lexology (Dec. 21, 2017).
- Rhonda Wasserman, Tolling: The American Pipe Tolling Rule and Successive Class Actions, Florida Law Review (2006).