(Article from Securities Law Alert, July 2017)
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On June 26, 2017, the Supreme Court held American Pipe tolling does not apply to the three-year statute of repose set forth in Section 13 of the Securities Act of 1933, which governs claims brought under Sections 11 and 12 of that Act. California Public Employees Ret. Sys. v. ANZ Securities (No. 16-373), 2017 WL 2722415 (2017) (Kennedy, J.) (CalPERS). The Court’s decision resolves a circuit split, and affirms the approach adopted by the Second Circuit in Police & Fire Retirement System of City of Detroit v. IndyMac MBS, 721 F.3d 95 (2d Cir. 2013) (IndyMac).[1]
Background
Section 13 establishes a one-year statute of limitations and a three-year statute of repose for claims under Sections 11 and 12. The statute provides in relevant part that “[i]n no event shall any . . . action be brought to enforce a liability created under [Section 11] or [Section 12(a)(1)] . . . more than three years after the security was bona fide offered to the public, or under [Section 12(a)(2)] . . . more than three years after the sale.” 15 U.S.C. § 77m.
In 2008, investors filed a timely putative class action complaint in the Southern District of New York asserting Section 11 claims in connection with offerings made in 2007 and 2008. Petitioner in the case before the Court was a member of the putative class, but was not a named plaintiff in the suit.
In 2011, more than three years after the offerings at issue, petitioner brought an individual suit in the Northern District of California alleging securities law violations “identical” to those pled in the class complaint. Petitioner contended that Section 13’s three-year time bar was tolled during the pendency of the putative class action pursuant to the American Pipe doctrine. In American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the Supreme Court held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.”
The Southern District of New York found American Pipe tolling inapplicable to Section 13’s three-year time bar, and the Second Circuit affirmed based on its earlier decision in IndyMac. The Sixth Circuit followed the Second Circuit’s approach, while the Tenth Circuit had previously concluded that the repose period was subject to American Pipe tolling. [2]
Court Holds Section 13’s Three-Year Statute of Repose Creates a “Fixed Bar Against Future Liability” That Cannot Be Altered by American Pipe Tolling
Justice Kennedy delivered the Court’s 5-4 opinion, joined by Chief Justice Roberts and Justices Thomas, Alito, and Gorsuch. The Court first reaffirmed that Section 13’s three-year bar sets forth a statute of repose.[3] The Court reasoned that the statutory language “admits of no exception and on its face creates a fixed bar against future liability.” CalPERS, 2017 WL 2722415. The Court found Section 13’s inclusion of a one-year statute of limitations supported its view, since “[t]he pairing of a shorter statute of limitations and a longer statute of repose is a common feature of statutory time limits.” In addition, the Court deemed it significant that Congress shortened Section 13’s previous “outside limit” from ten years to three years in order “to protect defendants’ financial security in fast-changing markets by reducing the open period for potential liability.”
The Court deemed “critical” its “determination that the 3-year period is a statute of repose” because “the question whether a tolling rule applies to a given statutory time bar is one of statutory intent.” The Court emphasized that “[t]he purpose of a statute of repose is to create ‘an absolute bar on a defendant’s temporal liability’” that “is in general not subject to tolling.” Id. (quoting CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014)). The Court found that tolling a statute of repose “is permissible only 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,” such as cases in which “the statute of repose itself creates an express exception.”
With this framework, the Court held “the American Pipe tolling rule does not apply to the 3-year bar mandated in § 13.” The Court explained that “the object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity” such as the American Pipe tolling doctrine. The Court found “[n]o feature of § 13 provides that deviation from its time limit is permissible in a case such as this one.” The Court rejected petitioner’s contention that “the filing of a class-action complaint within three years fulfills the purposes of” Section 13’s statute of repose “with regard to later filed suits by individual members of the class” because “the class complaint puts a defendant on notice of the content of the claims against it and the set of potential plaintiffs who might assert those claims.” The Court found that “permitting a class action to splinter into individual suits” would “threaten to alter and expand a defendant’s accountability, contradicting the substance of a statute of repose.”
Court Holds the Word “Action” in Section 13 Means a Complaint, Not a Claim
The Court rejected petitioner’s argument that “an ‘action’ is ‘brought’ when substantive claims are presented to any court, rather than when a particular complaint is filed in a particular court.” The Court observed that adopting this approach would mean that “an individual action would be timely even if it were filed decades after the original securities offering—provided a class-action complaint had been filed at some point within the initial 3-year period.”
The Court also found meritless petitioner’s contention that dismissal “would eviscerate its ability to opt out.” The Court explained that the “privilege to opt out” does not encompass the right to file suit “without regard to mandatory time limits set by statute.”
Justice Ginsburg, Dissenting, States the Majority’s Rule Will Have Adverse Consequences for Unsophisticated Investors Who Fail to File a Timely Protective Claim
Justice Ginsburg filed a dissenting opinion, joined by Justices Breyer, Sotomayor, and Kagan. The dissent asserted that petitioner’s claim “was timely launched when the class representative filed a complaint . . . on behalf of all members of the described class,” including petitioner. The dissent stated that petitioner’s “statement of the same allegations in an individual complaint could not disturb anyone’s repose, for respondents could hardly be at rest once notified of the potential claimants and the [claims] at issue” by the class complaint.
The dissent opined that “[t]he harshest consequences” of the majority’s decision “will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period . . . [and] stand to forfeit their constitutionally shielded right to opt out of the class.”
[1] Please click here to read our prior discussion of the Second Circuit’s decision in IndyMac. [2] Compare Stein v. Regions Morgan Keegan Select High Income Fund, 821 F.3d 780 (6th Cir. 2016) with Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000).
[3] The Court noted that it has previously “described [Section 13’s three-year time bar] as establishing a ‘period of repose’ which ‘impose[s] an outside limit’ on temporal liability” CalPERS, 2017 WL 2722415 (quoting Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 401 U.S. 350 (1991)).