Imagine a company that makes a material misrepresentation in August 2013, but the truth is not revealed until June 2018. Once the truth is revealed, the stock price drops and shareholders are injured. And, for our purposes, the statute of limitations begins to run. At first glance, a client or putative class has plenty of time to develop their case. The securities laws provide a two-year statute of limitations for 10b-5 claims, and thus there should be no rush to the courthouse. But, of course, that does not account for the statute of repose. The statute of repose, which is keyed off of not the discovery of the fraud but instead the August 2013 misrepresentation, is lurking. The same 10b-5 claim with a two-year statute of limitations has a five-year statute of repose. Thus, shareholders do not have until 2020 to file their claim; instead, they have only a couple of months left within the statute of repose to act.
Suppose a class action is filed in July 2018 (within both the two-year statute of limitations and the five-year statute of repose). What impact does the filing of that class action have on the deadline by which an individual investor must file its own federal securities action?
Until recently, many investors may have thought that, under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the timely filing of the class action delays the time in which they have to file their individual claims, allowing them to see how the class action plays out before deciding whether to opt out of the class and pursue their own claims. However, in California Public Employees’ Retirement System v. ANZ Securities, Inc. (CalPERS), 137 S. Ct. 2042 (2017), the Supreme Court held that class action tolling does not apply to statutes of repose. The Court observed that while statutes of limitations are “designed to encourage plaintiffs to pursue diligent prosecution of known claims,” statutes of repose are “enacted to give more explicit and certain protection to defendants.” Id. at 2049 (quoting CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014)). Statutes of repose, unlike statutes of limitation, “effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time.” Id. (quoting CTS Corp., 134 S. Ct. at 2183). Thus, according to the Court, the equitable considerations for tolling a statute of limitations upon the filing of a class action do not apply to the statute of repose.
Statutes of repose, then, have harsh effects. Because statutes of repose are not subject to equitable tolling, the filing of a class action does not toll the statute of repose (as opposed to the statute of limitation) for members of the class. In other words—five years means five years when it comes to the statute of repose and class action tolling. But for a statute of limitations, class action tolling still applies.
In China Agritech v. Resh, No. 17-432 (U.S. June 11, 2018), the Supreme Court considered whether equitable tolling of the statute of limitations applies only to individual class members or to subsequent classes as well. China Agritech involved the somewhat-rare instance where an originally filed class action was denied class certification but where another putative class representative came forward, filed suit, and sought to represent the same (or at least a remarkably similar) class. The defendants in China Agritech argued that tolling principles are meant to encompass only members of the putative class—and not additional or future classes. The China Agritech plaintiffs took a different view: If tolling encompasses every member of the putative class, what should stop a different class member than the original putative representative from pressing his or her rights as a potential class representative in the future?
The Court held that while American Pipe tolling applies to individual class members, it “does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” China Agritech, slip op. at 2. Writing for the seven-justice majority, Justice Ginsburg reasoned that the “‘efficiency and economy of litigation’ that support tolling of individual claims . . . do not support maintenance of untimely successive class actions.” Id. at 6 (quoting American Pipe, 414 U.S. at 553). The Court then issued the following warning to investors: “any additional class filings should be made early on, soon after the commencement of the first action seeking class certification. Id.
Although China Agritech was a securities case, the Court’s decision raises more fundamental questions about class actions in general than it does about securities cases in particular. The policy question behind the case turns on a balance between protecting plaintiffs’ rights and the fear of seriatim (and endless) class actions. While the securities laws contain statutes of repose—and thus defendants can rely on a date certain when their federal securities liability ceases to attach—class actions in other contexts and with other torts may not have statutes of repose. Indeed, this appears to have been a motivating factor behind the Court’s decision. The Court expressed concern that adopting the plaintiffs’ position in non-securities cases “would allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation. . . . [T]he time for filing successive class suits, if tolling were allowed, could be limitless.” Id. at 10.
Tolling issues—even involving statutes of repose—likely will remain an area of litigation as CalPERS did not shut the door on all possible equitable tolling of repose periods and China Agritech applies only to successive class actions. For example, as the Eleventh Circuit Court of Appeals explained in a post-CalPERS case,
equitable tolling of a statute of repose may be permissible “where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances”—as, for instance, where “the statute of repose itself contains an express exception. . . .”
Sec’y, U.S. Dep’t of Labor v. Preston, 873 F.3d 877, 885 (11th Cir. 2017) (quoting CalPERS, 137 S. Ct. at 2050).
The Eleventh Circuit went on to point out that CalPERS did not foreclose the possibility that a statute of repose might be expressly waived, even if not equitably tolled.
The takeaway from these decisions is that investors should not sleep on their rights. While a filed class action can toll the statute of limitations for an individual investor (who is a member of the class), the statute of repose continues to run during the pendency of the class action. And the filing of a class action does not toll the statute of limitations for a subsequently filed class action. Thus, if class certification is denied, individual actions may be the only option. Statutes of limitations, and their stricter cousin, statutes of repose, will continue to encourage quick action by class representatives, individual investors, and their counsel, so as to avoid the closer questions that recent case law has opened. The simplest answer, perhaps, is to act now—lest you end up having to forever hold your peace.
Michael J. Hampson is a partner with Lowenstein Sandler in Roseland, New Jersey. Richard A. Bodnar is counsel in the firm's New York City, New York, office.