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High Court to Resolve Circuit Split Over Applicability of 'American Pipe' Tolling Rule

Authors: Gay Parks Rainville and Robert L. Hickok

6/06/2018
High Court to Resolve Circuit Split Over Applicability of 'American Pipe' Tolling Rule

Reprinted with permission from the June 4, 2018 issue of The Legal Intelligencer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Nearly 45 years ago, the U.S. Supreme Court handed down its landmark decision in American Pipe & Construction v. Utah, 414 U.S. 538, 553 (1974), holding that the filing of a class action “tolls the running of the statute of limitations for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status.” A few years later, in Crown, Cork & Seal v. Parker, 462 U.S. 345, 350 (1983), the court expanded this equitable tolling rule to extend to the filing of new individual actions.

During the first 20 years after American Pipe, U.S. Courts of Appeal confronted with the issue (i.e., the First, Second, Fifth, and Eleventh circuits) declined to expand American Pipe to include the filing of new, otherwise untimely class actions. See, e.g., Basch v. Ground Round, 139 F.3d 6, 11-12 (1st Cir. 1998); Griffin v. Singletary, 17 F.3d 356, 359 (11th Cir. 1994); Korwek v. Hunt, 827 F. 2d 874, 877 (2d Cir. 1987); Salazar-Calderon v. Presidio Valley Farmers Association, 765 F.2d 1334, 1351 (5th Cir. 1985).

More recently, the U.S. Court of Appeals for the Third and Eighth Circuits have applied a more nuanced interpretation of American Pipe, holding that its tolling principle allows the filing of new class claims in certain limited circumstances, such as “where class certification has been denied solely on the basis of the lead plaintiffs’ deficiencies as class representatives, and not because of the suitability of the claims for class treatment,” as in Yang v. Odom, 392 F.3d 97, 111 (3d Cir. 2004) (emphasis added); accord Great Plains Trust v. Union Pacific Railroad, 492 F.3d 986, 997 (8th Cir. 2007).

Beginning in 2011, however, when the Seventh Circuit issued its decision in Sawyer v. Atlas Heating & Street Metal Works, three circuit courts—the Sixth, Seventh, and Ninth—dramatically parted ways with the majority view of American Pipe and held that the tolling rule of that case permits the filing of any new, otherwise time-barred class action. See Sawyer, 642 F.3d 560, 564 (7th Cir. 2011); Phipps v. Wal-Mart Stores, 792 F.3d 637, 652 (6th Cir. 2015); Resh v. China Agritech, 857 F.3d 994, 1004 (9th Cir. 2017).

Fortunately, the Supreme Court granted China Agritech’s petition for writ of certiorari in the Ninth Circuit case and will soon resolve this circuit conflict when it issues its opinion later this year in China Agritech v. Resh, No. 17-432. Though it is impossible to predict how the court will decide the issue, some of the justices’ questions and comments during oral argument, held on March 26, indicate that the court may be leaning toward either reversing the Ninth Circuit’s decision altogether or adopting, as a compromise, the approach applied by the Third and Eighth circuits.

Procedural Background

Prior to the filing of the original class action in this protracted securities litigation, China Agritech was a NASDAQ-listed holding company whose various subsidiaries purportedly manufactured and sold organic compound fertilizers in China. In 2011, China Agritech’s stock price dropped following public reports of its alleged fraudulent business practices. In 2012, the U.S. Securities and Exchange Commission (SEC) revoked the company’s stock registration.

On Feb. 11, 2011, company shareholder Theodore Dean filed the original class action, Dean v. China Agritech, in the U.S. District Court for the Central District of California, alleging that the company and several of its managers and directors violated various federal securities laws, including, inter alia, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), SEC Rule 10b-5, and Section 11 of the Securities Act of 1933 (Securities Act). On Jan. 6, 2012, the Dean plaintiffs filed a motion for class certification, which the district court denied on May 3, 2012. According to the court, the plaintiffs had failed to make a showing of market efficiency and, therefore, did not establish a fraud-on-the-market presumption of reliance. The plaintiffs filed an appeal under Federal Rule of Civil Procedure 23(f), but the Ninth Circuit affirmed the district court’s ruling. Thereafter, the plaintiffs continued litigating, and ultimately settled, their claims as individuals, which claims the district court dismissed with prejudice on Sept. 20, 2012.

On Oct. 4, 2012, company shareholder Kevin Smyth filed a class action complaint against China Agritech on behalf of the same putative class as that alleged in the Dean action in the U.S. District Court for the District Court of Delaware. Notably, the Smyth action was filed one year and eight months after the reports of China Agritech’s alleged fraudulent activity and, therefore, was filed within the Exchange Act’s two-year statute of limitations.

The Smyth complaint was nearly identical to the Dean complaint except that it did not allege any Securities Act violations and did not name all of the defendants named in the Dean action. Ultimately, the Smyth action was transferred to the Central District of California and assigned to the same judge, Judge R. Gary Klausner, who had been assigned the Dean action. On Aug. 5, 2013, the Smyth plaintiffs moved for class certification. On Sept. 26, 2013, the district court denied the motion on grounds that the Smyth plaintiffs failed to meet the typicality and adequacy requirements of Rule 23(a). On Jan. 8, 2014, the parties agreed to dismiss the Smyth action with prejudice as to the named plaintiffs.

On June 30, 2014, shareholder Michael Resh filed an action against China Agritech and several individual defendants based the same Exchange Act violations and on behalf of the same would-be class as alleged in the Dean and Smyth actions. As had the Dean and Smyth actions, the Resh action was assigned to Judge Klausner. On Sept. 22, 2014, China Agritech and one of the individual defendants filed motions to dismiss the Resh action on grounds that it was time-barred under the Exchange Act’s two-year statute of limitations. In opposition to the motions, the Resh plaintiffs argued that the statute of limitations had been tolled under American Pipe and, therefore, their action was timely.

On Dec. 1, 2014, the district court granted the motions to dismiss without leave to amend, holding that the statute of limitations was tolled for the named plaintiffs’ individual claims but not for their would-be class action. According to the district court, a contrary ruling “‘would allow tolling to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class certification on the basis of different expert testimony and/or other evidence.’” The district court also denied the Resh plaintiffs’ motion for reconsideration, “explaining that the ‘plaintiffs’ class action claims were time-barred regardless of the grounds on which class certification was denied in the two earlier actions.’”

On appeal, a three-judge panel of the Ninth Circuit reversed the district court’s decision, holding that the Resh plaintiffs’ claims—whether brought individually or as named plaintiffs in a would-be class action—had been tolled under American Pipe and Crown, Cork & Seal during the pendency of the Dean and Smyth actions and, therefore, were not time barred. The court reasoned that such an application of American Pipe “creates no unfair surprise to defendants because the pendency of a prior class suit has already alerted them ‘not only to the substantive claims being brought against them, but also [to] the number and generic identities of the potential plaintiffs who may participate in the judgment.’” In addition, such application “promotes economy of litigation by reducing incentives for filing duplicative, protective class actions because ‘a putative class member who fears that class certification may be denied would have every incentive to file a separate action prior to the expiration of his own period of limitations.’”

Signals From Oral Argument

During oral argument before the Supreme Court, the parties faced a multitude of questions from several of the justices. One line of questioning focused on the class action “stacking” risk that the application of American Pipe to otherwise-untimely class actions would present, i.e., that of would-be named plaintiffs filing a succession of class actions, extending the statute of limitations indefinitely until certification is achieved. Although the applicable statutes of repose would provide outer limits to successive class claims under the Exchange Act and Securities Act, see California Public Employees Retirement System v. ANZ Securities, 137 S. Ct. 2042, 2051 (2017) (holding that statutes of repose are not subject to equitable tolling), the effect of American Pipe tolling in other class action contexts would be to eviscerate the statute of limitations altogether. Such an undesirable result prompted Justice Neil Gorsuch to challenge the Resh plaintiffs’ counsel: “Can you stack them forever, so that try, try again, and the statute of limitations never really has any force in these cases. What do we do about that, given the congressional judgment that there should be a statute of limitations?” After the Resh plaintiffs’ counsel discussed the possible application of various comity principles, Justice Gorsuch asked why ruling against the Resh plaintiffs wouldn’t solve the problem, even if it encouraged the filing of more protective  filings: “We wouldn’t have to create these extraordinary rules in extending American Pipe in new ways; we’d just create a new incentive structure that would ensure that there are backup class actions available.”

Justice Sonia Sotomayor asked about another possible resolution: adopting the approach of the Third and Eighth circuits, which “say if there’s a deficiency in the plaintiff, they will permit a follow-on class action but otherwise no.” When she asked the Resh plaintiffs’ counsel “why shouldn’t we accept that compromise,” he conceded that “the compromise position would certainly solve the problem in this case.”

It appears at least from these lines of questioning that the justices may be leaning toward either reversing the Ninth Circuit’s decision altogether and holding (as have the First, Second, Fifth and Eleventh Circuits) that American Pipe cannot be used to toll any otherwise-untimely class claim, or adopting the Third Circuit and Eighth Circuit’s middle ground approach, which, according to the Third Circuit, would not lead to the stacking of class action suits “indefinitely,” Either outcome would appease the concern, specifically expressed by Justice Gorsuch, that the court’s ultimate decision uphold “the congressional judgment that there should be a statute of limitations.”

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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