February 04, 2015 Top Story

Growing Divide over Class Action Tolling under American Pipe

Class members who opt out prior to class certification decision do not forfeit tolling

Renee Choy Ohlendorf

Widening the divide over the scope of class action tolling, the U.S. District Court for the Southern District of Texas held that putative class members do not forfeit tolling of the statute of limitations under American Pipe & Construction Co. v. Utah by opting out of the class prior to a decision on class certification and further held that tolling applies to statutes of repose.

Under American Pipe, the filing of a class action lawsuit in federal court tolls the statute of limitations for the claims of unnamed class members until class certification is denied or when the member ceases to be part of the class, at which point the class member may intervene or file an individual suit.

In In re BP P.L.C. Securities Litigation, plaintiff shareholders opted out of a class action prior to denial of class certification and filed a separate suit against BP and its executives for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Plaintiffs alleged that misrepresentations about BP’s safety procedures and ramifications of the Deepwater Horizon oil spill caused a precipitous drop in BP’s stock prices. Defendants moved to dismiss, arguing that plaintiffs’ federal securities claims were barred by the two-year statute of limitations because plaintiffs waived American Pipe tolling by opting out of the class. Defendants also contended that American Pipe tolling applies only to statutes of limitation and does not extend statutes of repose.

The district court disagreed, finding that class members who opt out prior to a decision on class certification still benefit from American Pipe. It explained, “The American Pipe tolling doctrine was created to protect class members from being forced to file individual suits in order to preserve their claims. It was not meant to induce class members to forgo their right to sue individually.” The court further reasoned that American Pipe “treats a putative class action as a ‘pre-filing’ of all covered individual claims within the limitations and repose periods,’” which puts the defendant on notice of the type and number of claims that may be asserted against it. Essentially, the unnamed class member steps into the shoes of the named plaintiff, and the subsequent individual suit is not a “new” action subject to the limitations and repose periods.

Circuits Split on Application of American Pipe

Presently, the U.S. Courts of Appeal for the SecondNinth, and Tenth Circuits hold that American Pipe tolls the statute of limitations for all putative class members until they are no longer part of the class, either upon opting out or a denial of class certification. This is the view adopted by the BP court. The First and Sixth Circuits, by contrast, hold that unnamed class members must wait until a denial of class certification to take advantage of American Pipe, because otherwise the judicial efficiency goals underlying the doctrine would be undermined.

The federal circuits are also divided as to whether American Pipe applies to statutes of repose, which set an outer limit on a plaintiff's right to file suit and extinguish a defendant's liability after the statutory period. Because the U.S. Supreme Court in American Pipe did not identify the basis for its tolling doctrine, the division arises from differing views of whether American Pipe constitutes legal tolling derived from Rule 23, or equitable tolling derived from the court's inherent powers. If American Pipe tolling is equitable in nature, it would be barred by Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, in which the U.S. Supreme Court held that equitable tolling does not apply to statutes of repose. The Supreme Court reiterated that premise in CTS Corp. v. Waldburger.

The majority of courts, including the Tenth Circuit, view American Pipe as legal in nature and conclude that Lampf does not apply because the statute of repose began running on the absent class members’ claim when the initial class action was filed. The minority view, adopted by the Second Circuit, holds that American Pipe does not apply to statutes of repose because (1) it is equitable in nature, and (2) the Rules Enabling Act, which “forbids interpreting Rule 23 to ‘abridge, enlarge or modify any substantive right,’” would prohibit class action tolling.

Practical Implications 

Leaders of the ABA Section of Litigation agree it is fair to toll the statute of limitations for putative class members whether they opt out of the class or cease to be a member upon denial of class certification, even if it is not the most efficient procedure. “The primary rationale in American Pipe is to discourage the filing of unnecessary individual actions because someone is afraid class certification is going to be denied,” explains Helen B. Kim, Los Angeles, CA, cochair of the Section of Litigation's Securities Litigation Committee.

“The real purpose behind the tolling and Rule 23 together is to make it a more efficient system so that unnecessary lawsuits aren’t filed,” agrees Kathryn A. Honecker, Phoenix, AZ, cochair of the Section’s Class Actions & Derivative Suits Committee. “But the First and Sixth Circuit rule may be a cleaner rule from a case management standpoint since there is just one deadline at class certification, and, oftentimes, you can opt back into the case before the deadline expires,” she acknowledges.

Whether American Pipe also tolls the statute of repose, however, is subject to debate. “The Texas court got it wrong here,” asserts Kim. “The purpose of a statute of repose is for a defendant to have certainty that their liability is going to be cut off at some determined amount of time after their last culpable act or omission. Tolling undermines that purpose,” she explains.

“Moreover, the initial class action may not provide defendants with adequate notice of the individual claims to justify tolling,” notes Kim. “The Texas court was persuaded that the statute of repose could be tolled because there had been inquiry notice to defendants, so there was no ‘unfair surprise’ to defendants. ‘Surprise’ is not a factor in applying a statute of repose,” she says. “If the original class representative was not typical, you could demonstrate that defendants didn’t have notice because they were dealing with a different type of plaintiff. Even equitable tolling would not be fair under those circumstances,” contends Kim.

Honecker disagrees. “By filing on behalf of a class, everybody is in theory filing on the same day. The defendants know what the main problem is, and they’re on notice of the central theme of the case,” she says. “If there are any individual issues, those will have identified during the briefing process on class certification. For example, in a fraud case, the defendant still knows there’s a problem with the statement, even if there are individual issues with someone’s motive or reliance. That would not take away any notice that they had of the claims of the other potential class members,” Honecker argues.

No Resolution in Sight

The parameters of American Pipe remain unresolved for now after the Supreme Court recently dismissed the writ of certiorari in Public Employees Retirement System of Mississippi v. IndyMacMBS, Inc. as “improvidently granted” following a settlement of the case. The question posed in IndyMac was whether the filing of a securities class action would toll the statute of repose for all members of the putative class.

Until the Supreme Court speaks on these issues, Honecker recommends that claimants sitting on the sidelines come forward and become a named plaintiff in the event that both the statutes of limitations and repose run during a potentially lengthy class certification process.

Renee Choy Ohlendorf is an associate editor for Litigation News.

Keywords: statute of limitations, repose, tolling, class action, class certification, F.R.C.P. 23

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