Attorney: Aatif Iqbal
Pomerantz Monitor July/August 2018
Class actions are brought by individuals or institutions (the proposed (“named”) class representatives) who seek to represent a “class” composed of a large number of parties (the “absent class members”) who, they believe, have been similarly victimized by the same wrongdoing. Can absent class members rely on the class action to protect their rights, or should they bring their own lawsuits? It may take years for the court to decide whether the action should be dismissed or properly proceed as a class action. What happens if, before the court makes such a determination, the statute of limitations expires? If the court then refuses to certify the class, or dismisses the action altogether, is it too late for individual class members to act to protect themselves? Until recently, the answer was an unequivocal “no.” A recent decision by the Supreme Court in China Agritech, Inc. v. Resh now makes the answer unsure. Decades ago, in American Pipe & Construction Co. v. Utah, and then in Crown, Cork & Seal Co. Inc. v. Parker, the Supreme Court held that a timely-filed class action tolls the statute of limitations for all would-be class members—so that, if the class action is dismissed or class certification is denied after the limitations period has run out, they can still pursue their individual claims by filing a new lawsuit. The Court reasoned that one of the main purposes of the class action device is to make it unnecessary for similarly situated plaintiffs to rush to pursue their claims individually, resulting in courts being inundated with countless duplicative individual actions, all raising essentially the same issues. This benefit would be eroded if statutes of limitation forced class members “to file protective motions to intervene or to join in the event that a class was later found unsuitable.” American Pipe addressed this problem by protecting class members’ rights to pursue other options if the class action failed. This made it possible for class members to rely on a pending class action to protect their interests, while holding off on pursuing other options until after a court could decide if class treatment was appropriate. At that point, they could make a more informed decision about what to do. In fact, the Court emphasized that absent class members had no “duty to take note of the suit or to exercise any responsibility with respect to it” until after “the existence and limits of the class have been established and notice of membership has been sent.” In other words, the best way for class members to promote the “efficiency and economy of litigation” was to wait for a court to rule on class certification before pursuing other litigation options. But more recent court decisions have sharply limited the scope of American Pipe tolling, eliminating many of its efficiency benefits and forcing absent class members to make premature protective litigation decisions. Last year, in California Public Employees’ Retirement System v. ANZ Securities Inc., the Supreme Court held that although a timely class action tolls the statute of limitations, it does not toll statutes of repose. Statutes of repose begin as soon as a defendant’s violation takes place, whereas statutes of limitation don’t start to run until a plaintiff discovers or should have discovered the defendant’s violation. (For example, the Securities Act has a 1-year statute of limitations and a 3-year statute of repose; and the Exchange Act has a 2-year statute of limitations and a 5-year statute of repose.) So class members cannot wait until they receive a notice about class certification being granted or denied before deciding whether to opt out or pursue an individual claim, as the American Pipe Court instructed. If a class certification ruling takes more than 3 or 5 years— as is increasingly common—then class members have forfeited their right to opt out or file any individual action. This creates perverse incentives for defendants to delay class certification so as to cut off potential class members’ opt-out rights. Now, in China Agritech, Inc., the Supreme Court has limited the scope of American Pipe once again, holding that, even within the repose period, if class certification is denied after the limitations period has passed, former class members can file new individual actions, but they cannot file a new class action, even if class certification had been denied, solely because the previous class representative was inadequate. The Supreme Court unanimously held that the pendency of an existing class action does not toll the statute of limitations for claims brought on behalf of a class. As a result of the Supreme Court’s ruling, if the statute of limitations expires and the original class action is later dismissed, or class certification is later denied, it is too late for class members to file another class action. Now, those who fear that class certification may be denied after the statute of limitations expires can no longer afford to wait to see how the class action unfolds. They must file their own separate class action suit right away. It is therefore increasingly important to monitor class actions closely from the outset, in order to make informed decisions early on about whether to stay in the class, fight for class leadership, or file a separate class action. The Court reasoned that American Pipe tolling promoted efficiency for individual claims because there was no reason for plaintiffs to bring individual claims until after class certification had been litigated. But any competing class representative claims were most efficiently addressed early on and all at the same time, so that courts could hear all the parties’ relevant arguments, select the best class representative, and then either grant or deny class certification once and for all. The Court also reasoned that any would-be class representative who filed a lawsuit after the limitations period could “hardly qualify as diligent in asserting claims and pursuing relief,” as is ordinarily required both to benefit from equitable tolling and to show adequacy as a class representative. Finally, the Court reasoned that limiting American Pipe tolling in this way was necessary to prevent a “limitless” series of successive class actions, each rendered timely by the tolling effect of the previous ones. However, as Justice Sotomayor pointed out, this reasoning may have been viable with respect to securities class actions such as China Agritech itself, but far less so in in other kinds of class actions that may raise more difficult questions about how to structure a class or subclasses. Among other things, the Private Securities Litigation Reform Act already mandates an early process for resolving competing class representative claims following the dissemination of notice. But in employment or consumer class actions, it may be far more efficient to encourage absent class members to wait and see if a proposed nationwide class is viable before forcing them to file precautionary class action lawsuits with regional or other kinds of subclass structures. But under China Agritech, class members who take this “wait and see” approach would be deemed not “diligent” enough. Even worse, what if a case turns out to be perfectly suited for class treatment, but class certification is denied solely because the class representative is inadequate? Then the former class members would be able to pursue their claims through duplicative individual actions, all raising essentially the same issues, but not through a class action – even though they can satisfy every element of Rule 23. The result is that, in many class actions, the availability of effective avenues for relief will turn largely on accidents of timing, forcing absent class members to make premature decisions to protect themselves, and thus squandering many of the efficiency and consistency benefits of the class action device.