In a recent post (here), David Kaplan of the Saxena White P.A. law firm and Lane Arnold, a Senior Director – Legal at the University of Texas/Texas A&M Investment Management Company (UTIMCO), discussed the Catch-22 in which the court’s rulings in the Valeant securities class action opt-out cases had put prospective securities suit opt-outs. In the following guest post, Kaplan and Hani Farah, also of the Saxena White law firm, update the prior post and discuss the June 16, 2021 Third Circuit decision in the Valeant case (here), in which the appellate court overturned the lower court’s rulings and rejected the “Forfeiture Rule” that put the opt-outs into the Catch-22. I would like to thank Dave and Hani 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 reader. Please contact me directly of you would like to submit a guest post. Here is Dave and Hani’s guest post.
On June 16, 2021, the Third Circuit Court of Appeals issued a precedential decision in the high-profile Valeant Pharmaceuticals securities litigation. The decision addresses an issue of critical importance for institutional investors regarding application of the American Pipe class action tolling doctrine to the statute of limitations. Specifically, the Third Circuit soundly rejected a revival of the so-called “forfeiture rule” – i.e., a widely discredited view that class members must delay the filing of individual/opt-out suits until after class certification is decided in order to enjoy the benefits of class action tolling – and held that “American Pipe makes clear that the filing of a class action is the operative event that tolls the limitations period, and that once the period is tolled, it remains tolled for all putative members until they are no longer part of the class.” The decision avoids a rule that would force investors to remain in a class action to satisfy the statute of limitations, only to see their valuable individual claims evaporate under the statute of repose—a separate statutory time bar.
The Third Circuit’s decision aligns with prior decisions by the Second, Ninth, and Tenth Circuits, and provides much-needed clarity that will enable institutional investors with outsized exposure in meritorious securities fraud cases to develop concrete and reliable plans for pursuing direct action claims. Such “opt out” suits are now an established part of the field of securities litigation, as institutional investors increasingly recognize that, in select circumstances, they can maximize and accelerate their securities fraud recoveries by taking control of their own claims and pursuing a direct resolution with the defendant company and other responsible parties.
The underlying litigation arose out of allegations that Valeant Pharmaceuticals, now known as Bausch Health Companies, misled shareholders about price gouging, kickbacks, a secret “captive” pharmacy network, and engaged in other deceptive business strategies. This unsustainable business model spurred a meteoric rise in the Company’s financial and stock price performance, with soaring revenues and Valeant’s stock price skyrocketing nearly 350%. However, the deceptive and undisclosed practices exposed the company to enormous risks. In late 2015, following a Congressional investigation and private litigation against Valeant, the company began disclosing its allegedly fraudulent practices. Numerous Valeant executives were fired, the company issued a financial restatement, and the value of the company’s stock plummeted nearly 90%. In total, investors suffered over $76 billion in market capitalization losses, prompting the filing of numerous class and individual lawsuits seeking recovery of securities fraud damages.
(In March 2020, after more than five years of litigation, the Valeant class action settled for $1.2 billion).
Between September 2019 and June 2020, the presiding District Court dismissed several individual suits as untimely under the governing two-year statute of limitations for federal securities fraud claims. The District Court found that these investors were not entitled to benefit from the American Pipe class action tolling rule because they did not wait to file their individual suits until after the court decided whether to certify the class. The District Court noted that its decision went against the majority of circuit courts that had addressed the issue, but reasoned the earlier decisions “did not have the benefit” of more recent Supreme Court precedent that counseled against the “expansion” of American Pipe tolling, and underscored that the decision of whether or not to apply American Pipe in any given case was left in the court’s discretion.
The District Court’s decision put investors seeking to pursue direct claims in a bind. The principal private rights of action under the federal securities laws are subject to two different time bars: the statute of limitations, which is determined by the discovery rule, and the statute of repose, which is determined by when the underlying misconduct (i.e., each alleged misstatement or material omission) occurred. The periods work together; both must be satisfied for a claim to be timely. However, if investors were to remain passive class members and wait to file an “opt out” suit until after the court decides class certification, the statute of limitations would be satisfied but the statute of repose will likely have eliminated most or all of the investors’ damages claims. Essentially, the rule would require investors to wait to file a direct action while the “repose clock” was already ticking, and the clock would strike zero for many, if not all claims, before they could be filed.
Not surprisingly, investors promptly appealed the decision. The appeal was fully briefed and submitted as of October 2020. Approximately eight months later, on June 16, 2021, the Third Circuit reversed the District Court’s ruling and refused to construe the American Pipe doctrine “in a way that would undermine its primary purpose—to protect the individual rights of putative members.” In holding that the statute of limitations was tolled by the filing of the class action complaint, the Third Circuit adopted decisions by the Second, Ninth, and Tenth Circuits, which held that American Pipe tolls the limitations period for individual claims regardless of whether a class member decides to remain in the case until class certification is decided.
The Third Circuit recognized that the Supreme Court’s recent jurisprudence in ANZ Securities and China Agritech underscored the importance of judicial economy, but concluded that “we are not convinced that efficiency concerns should trump the [American Pipe] doctrine’s core equitable purpose.” The Court reiterated that American Pipe was created to protect class members from being forced to file individual suits in order to preserve their claims, and noted the “District Court’s view would surely cause at least certain members to forfeit their individual rights, simply (and ironically) because they filed too early,” and that “other claims filed at a much later date would be allowed to proceed.” The Third Circuit explained that “Class members who were contemplating opting out and filing their own lawsuits would be penalized for giving the defendants and the Court earlier notice.” The Third Circuit recognized the “bind” that the District Court’s decision put investors in, and called it “counterintuitive” and “untenable.”
The Third Circuit concluded that denying class action tolling to pre-certification “opt outs” would serve “no compelling purpose.” A contrary rule would needlessly “lock” putative members into the class until after certification, which was “potentially costly, and certainly inefficient.” The Third Circuit cited studies noting that it can take years for a class action to reach the certification stage, adding that “in the meantime, members may deem their own claims valuable enough to pursue in an opt-out complaint, or otherwise decide that class certification is doubtful. The approach we adopt today will allow members in either situation to promptly file their individual actions, rather than indefinitely delay the resolution of those claims for no good reason.”
Finally, the Third Circuit rejected defendants’ arguments that application of American Pipe to pre-certification claims would lead to a flood of individual litigation. The Third Circuit concluded that “[c]ommon sense tells us that when a member determines his or her claims are substantially more valuable than those of the class, he or she is likely to pursue an individual complaint no matter what … Members who file individual claims before certification are likely the same members who—if forced to wait until after certification—would have opted out regardless.”
The Third Circuit’s ruling in Valeant is critical to the investor community in light of the Supreme Court’s 2017 decision in CalPERS v. ANZ Securities that American Pipe tolling does not apply to the statute of repose. If the “forfeiture rule” had been endorsed by the Third Circuit, its revival would have placed investors in a Catch-22: in most cases, they would be forced to delay filing their opt out suits in order to preserve their claims from expiration under the statute of limitation, while watching the same clams progressively erode and become time-barred under the statute of repose.
The Valeant ruling provides much needed clarity for investors considering pursuing individual/opt out litigation. It essentially takes out of play complex factual and legal determinations regarding the trigger date for the statute of limitations under the subjective discovery rule, and allows investors to rely on the pendency of a putative class action to preserve their claims under the statute of limitations.
And while the statute of repose is not tolled under American Pipe, investors can develop reliable and concrete plans for pursuing direct actions because repose deadlines, unlike limitations deadlines, are keyed-off ascertainable and certain dates, which can be indexed and cross-referenced against the investor’s trading history to determine the appropriate and most strategically advantageous time for filing a direct action. Even without class action tolling of the statute of repose, investors will often be able to hold-off filing their individual suits in order to evaluate their claims for recovery on a better developed legal and factual record. In certain cases, investors may also be able to evaluate their individual claims against a proposed class action settlement, with a grasp on what they would stand to receive if they were to accept their pro rata share of the class settlement versus opting out to pursue direct action claims.
While the Third Circuit’s decision in Valeant gives investors comfort that they will not be blindsided by the forfeiture rule, it is critical that institutional investors with outsized exposure in meritorious securities class actions closely monitor the litigation and remain apprised of all significant filing deadlines based on their organization’s unique investment history. First, as noted, American Pipe does not toll the statute of repose. In cases involving long class periods, the statute of repose may be triggered and erode claims early in the litigation. Second, the law is unsettled whether American Pipe protects claims not asserted in the class case, such as powerful direct reliance claims under Section 18 of the ’34 Act that do not require proof of defendants’ fraudulent intent. Third, the law is also unsettled on whether American Pipe protects claims on securities or financial instruments that are not covered by the class case, such as various types of fixed-income and derivative securities. Putting aside these nuanced issues, the Third Circuit’s decision in Valeant provides important clarity and comfort to investors around the timeframe for pursuing their core securities fraud claims in an individual/opt-out suit, and allows investors to develop concrete and tailored plans designed to maximize and accelerate their securities fraud recoveries.
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. Hani Farah is an attorney at Saxena White who specializes in securities opt-out matters.