On June 26, 2017, in a 5-4 decision, the U.S. Supreme Court, in an opinion written for the majority by Justice Anthony Kennedy, ruled that the Securities Act of 1933’s three-year time limit for filing liability lawsuits is a statute of repose and therefore is not subject to equitable tolling. The Court also said that the principles described in its 1974 American Pipe decision providing for equitable tolling of statute of limitations are inapplicable to the 3-year statute of repose. The Court’s ruling could have important practical implications, particularly with respect to the question whether or not class members will need to file protective individual actions to preserve a later option to opt-out of any class settlement. The court’s opinion in California Public Employees’ Retirement System v. ANZ Securities Inc. can be found here.
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, a plaintiff filed a securities class action lawsuit in the Southern District of New York against Lehman Brothers and certain of its directors and officers alleging, among other things, 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 asserting that company officials and others had made misrepresentations and omissions in the offering documents. Later in 2011, the securities class action lawsuit settled. CalPERS opted out of the settlement in order to pursue its own claims. The district court subsequently dismissed the separate CalPERS lawsuit as untimely. CalPERS appealed the dismissal to the Second Circuit.
The relevant statute of limitations and statute of repose provisions are set out in Section 13 of the Securities Act of 1933, which provides that all claims under the Act must be brought within one year of the discovery of the violation or within three years after the security involved was first offered to the public. Under the tolling doctrine established in the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Company v. Utah, the filing of a securities class action lawsuit tolls the running of a statute of limitations period. In its appeal to the Second Circuit, CalPERS argued that the American Pipe tolling doctrine also applied to the statute of repose.
In a July 8, 2016 summary order for a unanimous three-judge panel (here), the Second Circuit affirmed the lower court’s dismissal of the case, holding that CalPERS had filed its lawsuit after the expiration of the three-year statute of repose in the Securities Act, and that the prior filing of the securities class action lawsuit had not tolled the statute of repose. The U.S. Supreme Court granted CalPERS petition for a writ of certiorari.
The June 26, 2017 Opinion
On June 26, 2017, in an opinion written by Justice Kennedy for a 5-4 majority, with Justice Ginsburg dissenting (joined by Justices Breyer, Sotomayor, and Kagan), the U.S. Supreme Court affirmed the ruling of the Second Circuit and held that the separate complaint of CalPERS was properly dismissed because it was filed more than three years after the relevant securities offering.
In ruling that the lawsuit was untimely under Section 13’s three-year time limit looked at “the nature and purpose of the 3-year bar.” The court said, after reviewing the statute’s language and legislative history, that it “reflects the legislative objective to give a defendant a complete defense to any suit after a certain period.” The court went on to note that “the text, purpose, structure, and history of the statute all disclose the congressional purpose to offer defendants full and final security after three years.” Therefore, the majority concluded, the 3-year bar is a statute of repose.
The determination that the 3-year statute is a statute of repose is, the Court said, “critical in this case” because, the Court said, “statutes of repose are not subject to equitable tolling.” Courts may use equitable principles to toll statutes of limitation; however, “the purpose and effect of a statute of repose, by contrast, is to override customary tolling rules arising from the equitable powers of courts.” The “unqualified” nature of the Court’s determination that the 3-year time limit is a statute of repose “supersedes the court’s residual authority and forecloses the extension of the statutory period based on equitable principles.”
American Pipe, the Court said, it not to the contrary, because the source of the tolling applied in American Pipe is the judicial power to promote equity; however, these principles do not apply to statutes of repose, the purpose of which is “to grant complete peace to defendants,” which purpose “supersedes the application of a tolling rule based in equity.” The “mandate of the statute of repose takes the case outside the bounds of the American Pipe rule.”
The Court rejected CalPERS’s argument that refusing to allow the 3-year time limit to be tolled will introduce inefficiencies because class members, in order to preserve their option to later opt-out, will flood the courts with protective filings. The majority said these concerns are “overstated,” noting that CalPERS had “not offered any evidence of any recent influx of protective filings in the Second Circuit,” adding that the process is unlikely to be as onerous as petitioners claim.”
Finally, the Court rejected CalPERS’s argument that its separate lawsuit was not in fact untimely, because its claims were asserted on its behalf when the original class action complaint had been filed. The Court said “it defies ordinary understanding to suggest” that the initial class action lawsuit filing “in a separate forum, on a separate date, by a separate named party” was the same action or suit. The “limitless nature” of the argument “reveals its implausibility” – it “would make any subsequent action raising the same claims timely … even if it were filed decades after.” If the filing of a class complaint made all subsequent action by class members timely, there would be no need for tolling at all.
Justice Ginsburg’s Dissent
Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented. Ginsburg agreed with CalPERS on the effect of the filing of the first class action complaint for purposes of CalPERS later decision to opt out. Ginsburg expressed the view that when CalPERS elected to opt out to pursue individually the claims already stated in the class complaint, “it simply took control of the piece of the action that had always belonged to it.” Section 13’s purposes would not be defeated by allowing this action to go forward, because the defendants were already apprised of the nature of the claims against them.
Ginsburg also wrote that the majority’s opinion “disserves the investing public” and that the “harshest consequences” will fall on the least sophisticated investors, who will be most likely not to file a protective claim. All class members, meanwhile, will have “strong cause to file a protective claim,” which could “substantially burden the courts.” The majority’s decision, she said, “impels courts and class counsel to take a more active role in protecting class members’ opt-out rights”; it may be “incumbent on class counsel, guided by district courts, to notify class members about the consequences of failing to file a timely protective claim.”
Those court watchers who have wanted to know what the practical consequences as going to be of Judge Gorsuch’s arrival at the Supreme Court will want to take a look at the Justices’ lineup on this case. The newly arrived Justice joined the members of the Court’s conservative wing to provide the crucial fifth vote to provide majority. The lineup in this case is going to look very familiar in the months and years ahead (even if Justice Kennedy retires and he is replaced by a second Trump nominee) in disputed cases.
The question of whether or not the filing of a securities class action lawsuit tolled the three-year time limit is one that has vexed the lower courts and had led to a significant split between the circuits. The Tenth, Seventh and Federal Circuits had held that a prior class action lawsuit filing tolls the statute of repose in the Securities Act, while the Second, Sixth and Eleventh Circuits have refused to apply American Pipe tolling to the Securities Act’s statute of repose. The Supreme Court’s decision in ANZ Securities case resolves this circuit split and ensures that these questions no longer vex the lower courts.
The Court’s decision has important implications for litigants in ’33 Act claims, as well as for members of the putative class who must determine whether or not it is in their interests to opt out of the class. In the past, class members have had the luxury of waiting until the case has been resolved in order to determine whether or not they will opt out. The question now is whether class members, in order to preserve their option to later opt out, will file protective actions earlier in the case in order to avoid statute of repose issues.
Only time will tell how pervasive it will become in practice for class members in ’33 Act class actions to file protective actions. If may be, as the majority assumes, that the threat of inefficiencies from these an onslaught of types of actions is “overblown.” If, on the other hand, class counsel, as Justice Ginsberg suggests, and whether on their own or at the direction of the district court, are compelled to provide notice to class members about the consequences of failing to file a timely protective claim, there is the potential for these kinds of individual actions to “gum up the works of class litigation.”
It is not mere conjecture to suppose this might happen; indeed, in their amicus brief (here), a group of 75 institutional investors cited the recent development in connection with the Petrobras securities litigation, in which separate investors have filed cover 500 individual lawsuits alongside the securities class action lawsuit. While that is only one case, if this type of defense lawsuit filing were to become standard, the courts could indeed quickly become burdened.
There is one other potential practical implication from the Court’s decision in this case and that has to do with other statutes of repose. To cite just the most obvious example, there is the five-year time limit for liability actions under the ’34 Act. Much of the majority’s logic in this case would seem to apply to the five-year time limit in ’34 Act suits as well. And then of course there are the many other statutes of repose outside of the securities law arena.
Just to complete the thought, if the Court’s holding in this case applies also to ’34 Act class action lawsuits, then the protective for protective individual filings will extend even further, and the prospect for courts to become burdened with clusters of individual lawsuits seems to be increased.
To be sure, it is true, as the majority noted here, and as the respondents also argued as well, other than in the Petrobras securities suit, there was not a flood of protective individual lawsuit filings in the Second Circuit after the appellate court held that class actions do not toll the statute of repose.
Time will tell which way this will go and whether or not we will see protective lawsuit filings as a significant phenomenon. I am not going to try to predict the future. The one thing I will say is that if, as Justice Ginsberg suggests, class counsel and the courts take steps to make sure that class members are informed about the consequences of failing to file a timely protective claim, the likelihood of an increase in protective lawsuit filings seems greater. So while we will all be watching to see whether the separate lawsuits materialize, the first thing to watch arguably is what impact this holding has on communications to class members.
Alison Frankel’s June 26, 2017 post on her On the Case blog about the ANZ Securities decision can be found here.