Attorney: H. Adam Prussin
Pomerantz Monitor January/February 2017
The Supreme Court has recently granted certiorari in three cases of great interest to the business world.
Class action waivers in employment agreements. One case, Murphy Oil, concerns the question of whether employees can be forced, as a condition of their employment, to sign agreements that prevent them from joining together to bring class actions in court against their employers. In this case, employees claim that they were forced to sign agreements containing arbitration provisions that prohibit them from pursuing class or collective actions, in violation of the National Labor Relations Act (the “NLRA”). In the wake of the Supreme Court’s 2011 decision in AT&T Mobility, which upheld class action waivers in some consumer transactions, corporations have increasingly turned to this device to try to slam the courthouse door on people attempting to sue them. The availability of class actions is often the only economically feasible way for people with small claims, or small resources, to pursue their rights.
Wells Fargo is also trying to enforce agreements precluding class actions brought by its own customers who claim that Wells Fargo opened accounts in their names without permission.
The class action waiver debate turns on the fact that these provisions are included in arbitration agreements.
The Supreme Court likes to enforce arbitration agreements, which it considers to be an efficient, costeffective alternative to full blown judicial proceedings. Arbitrations are typically not considered suitable for conducting class action procedures because these procedures undermine the efficiency and costeffectiveness of arbitration. But wiping out the right to participate in class actions, just to promote the use of arbitration, would effectively deprive claimants of any effective remedy at all. That’s because the alternative to judicial class actions is not a host of individual arbitrations, which could never be cost-effective for the claimants, but no claims being filed at all.
The NLRA says that “[e]mployees shall have the right to “engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” The Supreme Court has described these provisions as including employees’ efforts “to improve terms and conditions of employment or otherwise improve their lot as employees through channels outside the immediate employee employer relationship,” including “through resort to administrative and judicial forums.” The National Labor Relations Board, which rules on these matters in the first instance, considers the “no class action” provisions to be illegal, in violation of the NLRA, because they interfere with efforts of employees to pursue their rights collectively. Because these provisions are illegal they are not enforceable under the Federal Arbitration Act, which governs the use of arbitration provisions.
In AT&T Mobility, the Supreme Court held that state laws providing that that class action waiver provisions are unenforceable because they are unconscionable (i.e. grossly unfair and one-sided) do not make the class action waiver provisions illegal. In Murphy Oil, the Fifth Circuit held that the NLRA does not “override” the FAA and that the “use of class action procedures . . . is not a substantive right.”
The two places where waiver provisions are most common are employment and consumer transactions. The Court’s resolution of Murphy Oil, and its companion cases, will decide the fate of such provisions in one of its two most common applications.
Tolling Statutes of “Repose.” Key provisions of the securities laws tend to have two different periods of limitations, within which actions must be brought or be time-barred. The first, and most familiar, is the statute of limitations, which typically expires a certain amount of time after the cause of action “accrues.” Because accrual typically depends on whether plaintiffs knew or should have known about the facts constituting their claim, statutes of limitation tend to be elastic, with no readily knowable expiration date. To mitigate this uncertainty, the statute of repose tends to expire a certain amount of time after the transaction occurs that is the subject of the lawsuit. This provides potential defendants with a definitive date when they are “in the clear.” For the antifraud provisions of the Securities Exchange Act, including Section 10(b), claims are barred two years after the plaintiff knew or should have known about the facts constituting the violation (statute of limitations) or five years after the violation itself (the statute of repose). Claims under Sections 11 or 12 of the Securities Act must be brought within the shorter of one year from the date of the violation (statute of limitations), or three years from the date the security was first offered to the public and in no event more than three years after the relevant sale (statute of repose).
What happens if, shortly after an alleged violation comes to light, an investor files a class action raising claims under the securities laws? Does every member of the class have to file his own case within the limitations/repose periods to prevent the statutory periods from running out on them? In American Pipe, the Supreme Court decided in 1974 that the filing of a class action “tolls” the statute of limitations for all class members; so that if, many years down the road, the court decides not to certify the class, or some class members are dissatisfied with a proposed settlement, members of that would-be class could still file their own actions.
But then, almost 40 years later, companies started wondering whether American Pipe tolling also stopped statutes of repose from running. And in 2013, in Indymac, the Second Circuit said that it didn’t. Although the Supreme Court granted cert in that case, the parties settled before the Court could decide it. The issue has now come up again in a case brought by CalPERS under the Securities Act against ANZ Securities and other underwriters of mortgage-related securities issued by Lehman Brothers.
Lehman Brothers issued over $31 billion of debt securities between July 2007 and January 2008. CalPERS purchased millions of dollars of these securities. On June 18, 2008, another investor filed a securities class action lawsuit in the Southern District of New York against Lehman Brothers and certain of its directors and officers, alleging that the defendants had made material misrepresentations and omissions with respect to the debt offerings. In February 2011, more than three years after the debt offerings, CalPERS filed its own, separate complaint under the Securities Act, also challenging alleged misrepresentations and omissions in the offering documents. Later in 2011, the securities class action lawsuit settled, and CalPERS opted out of the settlement in order to pursue its own claims. CalPERS argued that its own individual claim would not be barred by the three-year statute of repose for its Securities Act claims because that three-year period was tolled during the pendency of class actions involving those securities.
The pros and cons of this question are all quite technical, but boil down to the question of whether the equitable tolling doctrine derives from the class action procedural rules, or, rather, is based on judicially created doctrines intended to promote fairness. Appellate courts have come down on both sides of this issue. Although the issue is technical, the consequences of a ruling, either way, will be seismic.
As noted in the D&O Diary, a prominent securities industry publication, without the benefit of American Pipe tolling with regard to the statute of repose, many investors, including institutional investors, will have to monitor the many cases in which their interests are involved more closely, and intervene or file individual actions earlier in order to preserve their interests. It its cert petition, CalPERS argued that in the circuits’ holding that the prior filing of a securities class action lawsuit,
potential securities plaintiffs are forced to guess whether they must file their own protective lawsuits to safeguard against the possibility that class certification in a pending action will be denied (or granted, then overruled on appeal) after the limitations period has run. If they guess wrong, genuine injuries and blatant frauds may go unaddressed. If they act conservatively, they will burden the courts with duplicative pleadings and redundant briefing that serve no real-world purpose.
By the time a class action reaches the settlement stage, and class members have to decide whether to opt out or not, there is a very good chance that the statute of repose has already expired. Without tolling, opting out of the settlement at that time will be self-defeating: it will be too late, by then, for individual class members who opt out to start their own lawsuit.
Statutes of Limitations Period for “Disgorgement” Claims. “Disgorgement” is a technical legal term that brings to mind regurgitation; and that is appropriate, because the term means that a wrongdoer must cough up the profits wrung from his or her wrongdoing. It is a favorite remedy often sought by the SEC and other government agencies. Given the long delays that have often occurred before agencies have brought cases related to the 2008 financial crash and other similar cataclysmic events, it is important to know how long these agencies have to bring these cases. Courts are often skeptical of claims that the statute doesn’t start to run for years because government watchdog agencies did not know about the wrongdoing, or could not have discovered it earlier.
Notably, courts, including the Eleventh Circuit, have held that there is no statute of limitations for injunctive and other equitable relief. The law has, until now, been mixed as to whether disgorgement is a form of equitable relief immune from the five-year statute of limitations. In Gabelli v. Securities and Exchange Commission, the Supreme Court held, in 2013, that § 2462 and its five-year statute apply to enforcement actions seeking civil penalties, and they must be brought within five years from the date when the defendant’s allegedly fraudulent conduct occurs, rather than when the fraud is discovered. In January, the Supreme Court granted certiorari in a case addressing a question left open by Gabelli: whether claims for disgorgement are subject to the same rule.
Under 28 U.S.C. § 2462, any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.” A case called SEC v. Kokesh has now raised the question of whether this five-year statute of limitations applies to claims for disgorgement or whether, instead, forfeiture is simply an equitable remedy to which no statute of limitations applies. The resolution of this issue will also have huge consequences for the SEC and other agencies seeking similar remedies in other cases.
Under 28 U.S.C. § 2462, the question is whether disgorgement is a form of penalty or forfeiture. The SEC had filed suit against Kokesh in 2009, accusing him of misappropriating money from four business development companies over a twelve-year period. The agency won a jury verdict against Kokesh in 2014, and the court ordered him to disgorge nearly $35 million, plus more than $18 million in prejudgment interest, and pay a $2.4 million penalty.
Kokesh appealed to the Tenth Circuit, arguing he shouldn’t have been ordered to cough up money he was paid before 2004 because of the five-year statute of limitations. The Tenth Circuit rejected Kokesh’s arguments in August 2016, holding that neither his disgorgement nor an injunction warning him not to violate securities laws were penalties, because neither remedy was a punishment. The Tenth Circuit sided with the D.C. Circuit and the First Circuit, which had also said the two types of recovery are different. But the decision conflicted with another from the Eleventh Circuit, which ruled in May that disgorgement is effectively the same as “forfeiture,” which is specifically limited to five years. Barring a lengthy fight over Senate confirmation, it seems likely that the ninth seat on the Supreme Court, left vacant by the death of Justice Scalia, will be filled by the time this case is briefed and argued.