One of the most important aspects of class action litigation in the U.S. is the right of individuals to “opt out” of the class. However, as discussed in the following guest post from David Kaplan and Lane Arnold, a series of recent developments has significantly complicated the decision-making framework for prospective opt outs. Kaplan is a Director at Saxena White P.A. and co-head of the firm’s Direct Action practice. Arnold is a Senior Director – Legal at the University of Texas/Texas A&M Investment Management Company (UTIMCO). This article was originally written and published in the April edition of The NAPPA Report. I would like to thank Dave and Lane for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Dave and Lane’s article.
For over forty years, public pension funds and other institutional investors have relied on class actions to preserve their individual claims for recovery under the U.S. securities laws. Under the “class action tolling” rule, the filing of a class action traditionally suspended applicable limitations periods for all would-be class members’ individual claims until class certification was denied or the case settled. Accordingly, if a securities class action settled for an insufficient amount or failed for reasons unrelated to the merits, a pension fund with a large exposure to the fraud could still file a direct action without facing the risk that its claims would be time-barred. Relying on the class action tolling rule, hundreds of institutional investors have secured substantial securities recoveries through direct “opt out” actions. However, recent developments threaten to eviscerate the class action tolling rule and greatly accelerate the timeframe for investors to file an “opt out” action or take other affirmative steps to preserve their individual claims.
As brief background, the principal private rights of action under the federal securities laws are subject to two different time bars: the statute of limitations and the statute of repose. The periods work together; both must be satisfied for a claim to be timely. The statute of limitations is relatively short and is based on the “discovery rule.” Claims under Section 11 or 12 of the ’33 Act for materially misleading offering materials are subject to a one-year limitations period, and general anti-fraud claims under Sections 10(b) of the ’34 Act and SEC Rule 10b-5 are subject to a two-year limitations period. These periods run from the date the plaintiff discovered (or should have discovered) the securities-law violation. In a garden variety securities case, there is generally only one statute of limitations. A company issues false or misleading statements, the truth emerges, and the company’s stock price drops causing investor losses. Eventually enough facts emerge for an investor to learn that it has been the victim of a securities fraud, and the statute of limitations begins running.
In contrast, the statute of repose is a longer period of time that is designed to provide defendants with peace against “an interminable threat of liability.” The ’33 Act claims have a three-year statute of repose measured from the date of the relevant securities offering. The ’34 Act’s general anti-fraud claims have a five-year statute of repose measured from the date of each material misstatement or omission. Thus, it is not uncommon for there to be several dozen statutes of repose in securities fraud cases involving long-running frauds. While a failure to satisfy the statute of limitations wipes out all of the investor’s claims, the statute of repose operates as a rolling time bar that gradually eliminates an investor’s claims and recoverable losses depending on when the misstatements were made and when the investor purchased its securities.
Under the “class action tolling” rule, the filing of a class action traditionally suspended both periods. This broad application made good practical sense and allowed investors to benefit from a “wait and see” approach to securities fraud recovery. Investors could remain passive, receive a notice of settlement or certification of a class action, and then decide whether to remain in the class or opt out to control their own claims and potentially obtain a bigger recovery of their losses. Recovery maximization was not the only benefit. Investors were also protected if the court declined to certify the case for class action treatment or if the class action failed on technical grounds unrelated to the merits. Class action tolling was critically important for investors for many reasons, including because most securities class actions do not reach a court decision on class certification until after the repose period has expired (or substantially expired), and the class action tolling doctrine serves one of the class action device’s raisons d’être—concentrating like claims in a single representative proceeding and avoiding splintered litigation and a morass of protective filings.
In 2017, however, the Supreme Court delivered a shot across the bow of the investment community when it held in CalPERS v. ANZ Securities that the class action tolling rule applies only to the statute of limitations but not the statute of repose. This landmark decision, which overturned decades of established law and policy, created a new framework that requires investors to track thousands of statute of repose deadlines in pending securities litigation in which their fund has suffered significant losses, identify the financial impact (if any) of each repose deadline based on their fund’s unique investment history, carefully monitor the cases for significant rulings, and be poised to take prompt action to protect their rights as filing deadlines approach.
As problematic as the ANZ decision was, investors could take solace in the fact that American Pipe continued to preserve the timeliness of their claims under the statute of limitations. In 2019, however, investors were delivered another blow when the federal district court presiding over the high-profile Valeant Pharmaceuticals securities litigation refused to “extend” the class action tolling rule to the statute of limitations. Reviving the so-called “forfeiture rule,” the Valeant court issued a series of decisions between September 2019 and June 2020 dismissing various individual claims brought by both institutional and individual investors who filed suit after the two-year statute of limitations expired, but before the court had decided whether to grant class certification. Disregarding that ANZ Securities dismantled tolling of the statute of repose, which required that these individual actions be filed before class certification, the Valeant court concluded that by not waiting to file their individual suits until after the court weighed in on class certification, these investors were not “entitled” to benefit from class action statute of limitation tolling and there would be no “injustice” in dismissing their claims.
The Valeant decision creates a Catch-22. If investors were to remain passive class members and wait to file an “opt out” suit until after the court decides class certification – i.e., as Valeant and the forfeiture rule instruct – the statute of limitations would be satisfied but the statute of repose will likely have eliminated most or all of the investors’ damages claims. Recognizing this dilemma, a prudent investor would be wise to file its direct action complaint ahead of any statute of limitations, the shorter of the two time bars, and avoid the need to rely on class action tolling at all. Notably, however, the “discovery rule” often makes it difficult to determine the statute of limitations in securities litigation and entails a fact-intensive inquiry that is ultimately left entirely to the court’s discretion.
Thus, rather than promoting efficiency and judicial economy, as the Valeant court posits, the forfeiture rule (1) places even greater burdens on investors to identify even more filing deadlines in any given case, including deadlines that are very difficult to determine and for which there is no certainty; (2) penalizes investors for waiting to file an individual complaint until after a more developed record (e.g., after an order on a motion to dismiss or more facts emerge about the fraud) but before class certification is decided; and (3) encourages a multiplicity of individual actions to be brought very early in the litigation.
The Valeant court’s revival of the forfeiture rule is creating ripple effects. Seeking to capitalize on the forfeiture rule, defendants in the high-profile Perrigo securities litigation are now seeking dismissal of direct actions brought by a half dozen institutional investors before class certification was issued. The Perrigo court, which is also located in the District of New Jersey, has not yet issued a ruling on the issue.
At the same time, the Valeant litigation has endorsed an even more aggressive application of the forfeiture rule. In January 2021, the Special Master overseeing the Valeant class and opt out litigation recommended to the district court that it dismiss a direct action brought by a hedge fund that waited to file its direct complaint until after the court had issued its order preliminarily certifying the class for a proposed $1.2 billion settlement, but before the court had issued its final settlement approval order. The Special Master found that waiting for preliminary certification was not “sufficient to invoke” class action tolling because it was merely a “preliminary determination that [the court] will likely be able to certify the class at the final approval stage.” It is hard to make sense of this finding. Investors do not, as the Special Master suggests, have the luxury of waiting to decide whether to pursue an opt out action until the final settlement approval stage—by that time, the opt out deadline would have already passed. Opt out deadlines are issued in connection with preliminary approval of a class settlement and expire before final settlement approval.
Under ANZ Securities and Valeant, the class action tolling rule is, practically speaking, a dead letter in many securities cases . While many courts have squarely rejected the forfeiture rule, including the Second, Ninth, and Tenth Circuits, the Valeant decision has exposed a split of authority among federal courts on this critical issue. The Valeant decision is on appeal to the Third Circuit and a decision is expected soon. If the Third Circuit endorses the district court’s application of the forfeiture rule, the Supreme Court may grant review.
The Valeant decision provides a stark reminder that as courts continue to chip away at the protections provided to investors under the federal securities laws, pension fund attorneys and their outside portfolio monitoring counsel should take great care to proactively monitor the fund’s exposures in securities litigation and, in cases in which the fund has suffered material losses, take early action to protect the fund’s individual claims for recovery. This may include filing a direct action complaint, seeking a tolling agreement from defendants, or seeking the court’s permission to intervene in the class action for the limited purpose of tolling statutes of limitations and repose. Diligent monitoring of securities class actions is not only important for institutional investors seeking to maximize and accelerate their securities fraud recoveries. Increasingly, direct actions may offer institutions the only avenue to recover for damages resulting from securities fraud as class actions fail for reasons completely unrelated to the merits, such as failures of expert proof, lack of standing, and disabling conflicts of interest. In such cases, direct actions may offer the only avenue for investors to recover pension assets lost to securities fraud and other corporate misconduct.
David Kaplan is a Director at Saxena White P.A., where he manages its California office and co-heads the firm’s Direct Action practice. Lane Arnold is a Senior Director, Legal at the University of Texas/Texas A&M Investment Management Company (UTIMCO).
 American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974).
 California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, 2049 (2017); Merck & Co. v. Reynolds, 559 U.S. 633, 650 (2010) (rejecting an “inquiry notice” standard for securities fraud claims).
 ANZ Securities, 137 S. Ct. at 2049.
 Brief of Civil Procedure and Securities Law Professors as Amici Curiae in Support of Petitioner, California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, No. 16-373, 2017 WL 929693 (2017) (noting empirical study’s “striking” results: (i) the ’33 Act’s 3-year statute of repose “would have expired prior to a certification decision in 73 percent … of cases that reached a certification decision”; and (ii) the ’34 Act’s statute of repose “would have expired prior to a certification decision in 44 percent … of cases that reached a certification decision.”).
 California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042, 2051-52 (2017) (concluding that class action tolling was an equitable tolling rule and “statutes of repose are not subject to equitable tolling”).
 Nw. Mut. Life Ins. Co. v. Valeant Pharm. Int’l. Inc., 2019 WL 4278929 (D.N.J. Sept. 10, 2019) (noting that class action tolling should be applied “sparingly”).
 Aly v. Valeant Pharm. Int’l, Inc., 2019 WL 4278045 (D.N.J. Sept. 10, 2019) (dismissing individual claims filed by a group of retail investors); In re Valeant Pharmaceuticals Int’l, Inc., Sec. Litig., No. 3:15-cv-07658, ECF No. 495 (D.N.J. Dec. 16, 2019) (dismissing mutual fund’s individual claims); In re Valeant Pharmaceuticals Int’l, Inc., Sec. Litig., 2020 WL 4034896 (D.N.J. June 26, 2020) (dismissing hedge fund’s individual claims).
 Nw. Mut. v. Valeant, 2019 WL 4278929, at *9-10.
 See Nationwide Mut. Funds, et al. v. Perrigo Co. plc, et al., No. 2:18-cv-15382, ECF Nos. 113, 115 (D.N.J. Dec. 7, 2020).
 Maverick Neutral Levered Fund, Ltd. et al. v. Valeant Pharmaceuticals International, Inc. et al., No. 3:20-cv-02190, ECF No. 43 (D.N.J. Jan. 26, 2021).
 Id. at 7, 11.
 In fact, the reaction of the class—including the number of investors who have opted out—is a specific factor the court considers in deciding whether to grant final approval.
 In re WorldCom Sec. Litig., 496 F.3d 245, 739 (2d Cir. 2007); In re Hanford Nuclear Reservation Litig., 534 F.3d 986, 1009 (9th Cir. 2008); State Farm Mut. Auto. Ins. Co. v. Boellstorff, 540 F.3d 1223, 1235 (10th Cir. 2008) (all squarely rejecting the forfeiture rule). District courts have reached different conclusions regarding the forfeiture rule (or the law is otherwise unsettled) in the Fourth, Fifth, Seventh, Eighth, and Eleventh Circuits.
 Bahaa Aly et. al. v. Valeant Pharmaceuticals et al., No. 19-3326, ECF Nos. 72-73 (3d. Cir. Oct. 20, 2020) (oral argument heard and appeal taken under submission).