(Article from Securities Law Alert, April 2018)
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On March 26, 2018, the Supreme Court heard oral arguments in China Agritech, Inc. v. Resh, No. 17-432. At issue is whether an absent class member whose individual claims are timely as a result of the tolling doctrine established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), may file a new class action after the expiration of the otherwise applicable limitations period.
Background
Under existing American Pipe Supreme Court doctrine, a pending class action tolls the applicable statute of limitations, allowing absent would-be class members to intervene in a pending case or file new individual suits after the denial of class certification when the statute of limitations period would have otherwise expired. The moment class certification is denied or vacated, or the case is dismissed without a class being certified, the statute resumes running as to the previously asserted members of the class and they have whatever time remained to them when the prior class suit was filed within which to pursue an individual claim.
In Resh v. China Agritech, 857 F.3d 994 (9th Cir. 2017), the Ninth Circuit held that the American Pipe tolling doctrine permits plaintiffs to bring a new class action after the expiration of the statute of limitations if they were unnamed plaintiffs in a timely-filed putative class action, even if class certification was denied in the prior action on substantive grounds and the new action asserts similar class claims.[1] In so holding, the Ninth Circuit joined with the Sixth and Seventh Circuits in finding that the American Pipe tolling doctrine applies to subsequent class actions. In contrast, the First, Second, Fifth, and Eleventh Circuits limit the American Pipe tolling doctrine to claims by individual plaintiffs. The Third and Eighth Circuits have taken an intermediate position, only allowing subsequent class actions when class certification was denied for reasons that were unrelated to the validity of the class, such as where the denial was based solely on lead plaintiffs’ deficiencies as class representatives.
In China Agritech, the Court will determine whether the American Pipe tolling doctrine extends to subsequent class action suits, permitting so-called “stacking” of successive class actions in order to continue the toll otherwise ended by denial of class certification in a prior class action.
Oral Argument Highlights
The oral argument focused heavily on the traditional requirements of tolling as an equitable remedy, which include that plaintiffs must demonstrate “diligence,” meaning that they have taken action to defend their own legal rights, and some extraordinary circumstance. Counsel for China Agritech (“Petitioner”) argued that the Court permitted equitable tolling for individual plaintiffs in American Pipe because: (1) after the denial of class certification, plaintiffs show the diligence required for tolling when they bring their own individual claims in court; and (2) the enforcement of the statute of limitations would undermine the point of Rule 23 by encouraging plaintiffs to bring duplicative independent claims during a pending class action litigation instead of relying on the class action to represent their interests. Petitioner’s Counsel argued that neither of those reasons are applicable to the tolling of class action claims because: (1) the absent class action members have not shown the diligence required by equity as they are still absent and are not taking action to protect their individual rights even after class certification is denied; and (2) after the denial of class certification, there is no “extraordinary circumstance,” as the concern about plaintiffs filing redundant protective individual claims that detract from the value of a pending class action is no longer relevant.
Chief Justice Roberts questioned Petitioner’s counsel on how his approach was consistent with Rule 23, noting that it seemed like he was “creating an exception to the rule. If you just read [Rule 23] on its face, the statute of limitations hasn't run because of American Pipe … so why shouldn't that rule be available … ?”
Justice Kagan acknowledged that she was “a little bit skeptical” of Petitioner’s arguments. She noted that the Court reached its decision in American Pipe for two reasons: (1) plaintiffs are sufficiently diligent when they rely on a pending class action to represent their interests; and (2) the policies behind Rule 23 indicate that the Court should encourage class actions over individual actions in general. She noted that, in this case, “the exact same thing is true. Diligence is shown in the same way by reliance on the class, and, once again, even after the denial of a single motion for class certification, Rule 23 would indicate that we don't want to have a million individual suits but instead want to encourage a class.”
Counsel for William Schoenke, Heroca Holding, and Ninella Beheer (“Respondents”) agreed with Justice Kagan, claiming that: (1) class members in this case had shown diligence by relying on the tolling doctrine in American Pipe; and (2) the purpose of Rule 23 would be best served by allowing class actions to toll the statute of limitations for other class action claims because it avoids the potential of having an overabundance of individual claims filed by plaintiffs after the denial of class certification and before the expiration of the statute of limitations. He argued that the “extraordinary circumstance” here is the desire to enforce the principles behind Rule 23 and to “incentivize people not to bring duplicative claims.”
Justice Sotomayor pressed the parties on their view of the Third and Eighth Circuits’ approach, under which the application of the tolling doctrine depends on the reason for the denial of class certification. Both parties distanced themselves from this rule.
The Justices considered small value claims that would not be worthwhile to bring as individual actions. Justice Kagan observed that the reason for Rule 23 “is that we understand that with respect to some category of claims, we're not going to have them individually or it will be so ridiculous if we have them individually that we would prefer the class action device.” Justice Gorsuch commented that “encourag[ing] more protective filings … would solve the problem, wouldn't it? 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. … [W]hat's wrong with that?”
Justice Gorsuch showed concern about the perpetual filing of class actions, asking if plaintiffs could “stack them forever, so that try, try again, and the statute of limitations never really has any force in these cases.” Respondents’ counsel responded that comity will be a “powerful mechanism” to limit serial motions for class certification.
The Court will issue its decision in China Agritech later this term.
[1] Please click here to read our discussion of the Ninth Circuit’s decision in Resh.