Attorney: H. Adam Prussin
Pomerantz Monitor July/August 2017
In one of its last decisions of the term, regarding California Public Employees Retirement System v. ANZ Securities, Inc., the Supreme Court ruled, 5-4, that the three-year limitations period for filing claims under the Securities Act cannot be “tolled” by the filing of a class action. That means that even if a class action is filed, investors who are part of the class cannot sit back for three years and wait to see how the action turns out. Once a statute of repose is about to expire, it is every man, woman and institution for himself.
A “statute of repose” is different from a statute of limitations. The Securities Act has two limitations periods: actions must be brought one year from the date investors discovered the wrongdoing; and, regardless of when the wrongdoing was discovered, no case can be filed more than three years from the date the securities in question were first offered to the public. The one-year period has long been considered to be a statute of limitations, which is intended to force potential claimants to act with reasonable promptness and diligence to pursue their claims. The concept of reasonableness opens the door to the concept of “equitable tolling”: the time limitation clock stops running under certain circumstances that might justify claimants to delay before pursuing their rights. One such justification is fraudulent concealment of the wrongdoing by the defendant. If the facts are concealed, how can potential claimants be blamed for not immediately realizing they had claims to pursue?
Another potential justification for delay is the filing of a class action that seeks to cover the investors’ claims. If that happens, an investor in the class would be justified not to pursue his own individual action right away. In fact, class actions were invented in part to prevent the proliferation of unnecessary, duplicative individual actions by hundreds or even thousands of injured parties. Decades ago, the Supreme Court endorsed this justification for delay in the case American Pipe, holding that if someone files a class action raising a particular claim, the statute of limitations for that claim is “tolled” for all class members, meaning that the limitations clock stops running during the tolling period. If the class action is later dismissed, or if class certification is denied, or if class members want to opt out of a proposed settlement of the case, they can do so and bring their own individual action without worrying that the statute of limitations has run out on them while they waited for the class action to be resolved. This legal principle is called “American Pipe tolling.”
But what about the three-year limitations period for Securities Act claims? Here the defendant in the California Public Employees Retirement System (“CalPERS”) case argued that this period was not a statute of limitations but a statute of “repose,” designed not only to assure prompt action by claimants, but also to give potential defendants the assurance that, after a certain period, no (more) claims can be raised that relate to a given transaction. In CalPERS, the Supreme Court has now agreed with this argument, ruling that this purpose would be undermined if the three-year limitation period could be “tolled” for any reason, including the pendency of a class action. It therefore refused to apply American Pipe tolling to the three year limitation period provided by the Securities Act.
As an aside, it is unclear to us, as well as to the four dissenters on the Supreme Court, what kind of “repose” defendants can enjoy if they are already being subjected to a class action asserting all the investors’ claims. But never mind.
The CalPERS decision will have dramatic consequences in securities class actions. For one thing, if a class was not certified after three years had expired, putative class members used to be able to bring their own action. Not anymore. For another thing, if after three years the lead plaintiff agrees to a settlement that investors believe is inadequate, they no longer can “opt out” at that point and bring their own action. That’s exactly what happened to CalPERS itself. It didn’t like the proposed settlement, opted out of the class action, and brought its own action – which was summarily dismissed for violating the statute of repose. In short, opting out of a Securities Act class action after three years is no longer an option. To protect themselves against the absolute three-year bar, investors will have to file their own individual actions within the three year period, even if the class action is still pending and unresolved.
The implications of the CalPERS decision will not be limited to claims under the Securities Act. Claims under the Exchange Act, including under its antifraud provisions, are subject to a five-year statute of repose; and many other statutes also have such “drop dead” “repose” periods.
The CalPERS decision poses a challenge for institutional investors and those advising them. They will now have no choice but to monitor all securities class actions in which they are class members, and in which they have significant losses; and if the actions are still unresolved when the statute of repose is about to expire, they will need to consider whether they should file their own individual actions, to protect themselves. Given that most securities class actions take years to resolve, this is a dilemma that will confront many institutional investors in many cases.
Not surprisingly, newly minted Justice Gorsuch voted with the 5-4 majority, proving once again that elections have consequences.