Supremes: No More Class Action Stacking

Financial Services Law

A putative class action plaintiff may not launch a new class action lawsuit after an earlier court denies class certification if the applicable statute of limitations has run, says the U.S. Supreme Court, in a unanimous ruling in China Agritech v. Resh.

The opinion—authored by Justice Ruth Bader Ginsburg—rejects the plaintiff’s argument that new class actions may be commenced after expiration of the statute of limitations.

What happened

Since 1983, federal courts have applied the rules laid out in American Pipe & Construction Co. v. Utah (1974) and Crown, Cork & Seal Co. v. Parker (1983), that the earlier, and timely, filing of a putative class action tolls the applicable statute of limitations for all persons encompassed by the class complaint. If class action status was denied, members of the earlier putative class could still pursue their claims in later filings because the earlier filing tolled the statute of limitations.

Left unresolved by these two cases was the question of whether the so-called American Pipe rule permitted successive class actions, known as “stacking,” after expiration of the limitations period. However, most federal appeals courts to rule on the subject, including those in the First, Second, Fifth, Sixth and Eleventh Circuits, extended American Pipe to permit class action stacking.

After the U.S. Court of Appeals for the Ninth Circuit joined the majority of appeals courts in extending American Pipe to successive class actions, the Supreme Court accepted certiorari to resolve the issue. In China Agritech, plaintiffs brought suit on behalf of purchasers of China Agritech’s common stock. Stockholder Theodore Dean filed the first putative class action on Feb. 11, 2011, alleging violations of the Securities Exchange Act of 1934 for engaging in fraud and misleading business practices that caused the company’s stock price to plummet when reports brought the misconduct to light.

As required by the Private Securities Litigation Reform Act of 1995 (PSLRA), Dean’s counsel posted notice of the action in two “widely circulated national business-oriented publication[s],” inviting any member of the purported class to move to serve as lead plaintiff. After several months of discovery (and deferral of a lead plaintiff ruling), a federal district judge denied class certification.

The Dean action settled in September 2012. On Oct. 4, Dean’s counsel filed a new complaint (Smyth) with a new set of putative class plaintiffs and new evidence. Again, the district court denied class certification, and again, the plaintiffs settled their individual claims and voluntarily dismissed their suit.

On June 30, 2014, Michael Resh filed a third putative class action against China Agritech. His problem: The complaint was filed outside the two-year Exchange Act statute of limitations.

China Agritech moved to dismiss Resh’s lawsuit as untimely, and the district court granted the motion, holding that the Dean and Smyth actions did not toll the time to initiate class claims. The Ninth Circuit reversed. Permitting Resh to bring his lawsuit would advance the policy objectives of American Pipe, the federal appellate panel wrote, and cause no unfair surprise to defendants.

Resolving the circuit split, the Supreme Court now holds that a putative class member may not commence a new class action after the applicable statute of limitations has run, although he or she may join an existing suit or file an individual action: “American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails,” Justice Ginsburg wrote. “But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.”

Looking back at American Pipe and Crown, Cork, “[n]either decision so much as hints that tolling extends to otherwise time-barred class claims,” the Court noted, as both cases addressed individual claims. The interests protected by the earlier decisions would not be served by extending them to the situation presented in Resh, the justices added.

The limitation period for individual claims was tolled in American Pipe because economy of litigation favors delaying those claims until after a class certification denial, the Court explained. If certification is granted, the claims proceed as a class, with no need for individual claims; only if certification is denied will it be necessary to pursue claims individually.

“With class claims, on the other hand, efficiency favors early assertion of competing class representative claims,” the Court wrote. “If class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel. And if the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated once for all would-be class representatives.”

The principles of equitable tolling also weighed against allowing class stacking, the justices said. “Ordinarily, to benefit from equitable tolling, plaintiffs must demonstrate that they have been diligent in pursuing their claims,” the Court said. “A would-be class representative who commences suit after expiration of the limitation period, however, can hardly qualify as diligent in asserting claims and pursuing relief.”

Adopting the reading proposed by the plaintiff “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,” Justice Ginsburg wrote. “Endless tolling of a statute of limitations is not a result envisioned by American Pipe.”

Nor was the Court persuaded by the plaintiff’s argument that declining to toll the limitation period for successive class suits would lead to a “needless multiplicity” of protective class action filings. Pointing to the four circuit courts that refused to permit such class stacking, the justices said no evidence exists to support the proposition that protective class filings will substantially increase.

“The watchwords of American Pipe are efficiency and economy of litigation, a principal purpose of Rule 23 as well,” the Court concluded. “Extending American Pipe tolling to successive class actions does not serve that purpose. The contrary rule, allowing no tolling for out-of-time class actions, will propel putative class representatives to file suit well within the limitation period and seek certification promptly. For all the above-stated reasons, it is the rule we adopt today: Time to file a class action falls outside the bounds of American Pipe.”

Justice Sonia Sotomayor filed an opinion concurring in the judgment but arguing that the Court’s holding should be limited to PSLRA class actions. The statute imposes “significant procedural requirements” that do not apply in other types of class actions, she wrote, leaving absent putative class action members without a mechanism to learn a lawsuit is pending or that they are entitled to seek to displace the named plaintiff in the lawsuit as class representative.

To read the opinion in China Agritech, Inc. v. Resh, click here.

Why it matters

This is a huge victory for class action defendants, but it comes with some consequences. While some are predicting it could lead to additional class action complaints—filed pre-emptively to protect a putative class action plaintiff’s rights in the event a district court declines to certify a class in a first attempt—the justices noted that district courts are equipped to manage the situation, with the ability to stay, consolidate or transfer proceedings.