In Dusek v. JPMorgan Chase & Co., decided August 10, 2016, the Eleventh Circuit joined the Second and Sixth Circuits in holding that the statute of repose period for claims under the federal securities laws—the period after which claims can no longer be brought—cannot be extended under the tolling rule established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), commonly referred to as “American Pipe tolling.” Although the Eleventh Circuit joins the Second and Sixth Circuits in reaching this conclusion, the Dusek decision notably directly held that American Pipe tolling is a form of equitable tolling that cannot apply to statutes of repose under Supreme Court precedent. The only decision to the contrary is the Tenth Circuit’s decision over fifteen years ago in Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000). It seems likely that the tolling issue will end up at the Supreme Court for resolution.

Background

Unlike statutes of limitation, which typically run from when a cause of action accrues upon reasonable discovery by a plaintiff, statutes of repose place an outer limit on the period within which a claim can be brought. Claims brought under Section 11 or 12 of the Securities Act of 1933 (“Securities Act”) are subject to a three year statute of repose. See 15 U.S.C. § 77m. Since the enactment of the Sarbanes-Oxley Act in 2002, claims brought under Sections 10(b) and 20(a) of the Exchange Act of 1934 (“Exchange Act”) are subject to a five year statute of repose. See 28 U.S.C. § 1658.

In American Pipe, the Supreme Court unanimously decided that the pendency of a class action “suspends” the statute of limitations for all members of the asserted securities class. Since that decision, the Supreme Court has drawn a distinction between statutes of limitations and statutes of repose. In particular, the Supreme Court has made clear that, unlike statutes of limitations, statutes of repose cannot be extended under the equitable power of courts because of the different purpose that they serve. See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991); see also CTS Corp. v. Waldburger, 134 S. Ct. 2175, 2183 (2014).

In Joseph, the Tenth Circuit held that the American Pipe rule was a form of “legal” (not equitable) tolling based on Rule 23 of the Federal Rules of Civil Procedure governing class actions and, thus, could be applied to the three year repose period for Securities Act claims. Several district courts across the country followed suit by allowing American Pipe tolling of the federal securities laws’ statutes of repose.

In 2013, in a ground breaking decision, the Second Circuit concluded that American Pipe tolling—whether legal or equitable in nature—cannot extend the repose period for claims under the federal securities laws. See Police & Fire Retirement System of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013). According to the Second Circuit, to the extent the rule is equitable, Lampf would bar any extension of the repose period. To the extent the rule finds its source in Rule 23 of the Federal Rules of Civil Procedure, the Second Circuit relied on Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), to conclude that it would violate the Rules Enabling Act, which prohibits federal rules from “abridg[ing], enlarg[ing] or modify[ing] any substantive right.” 28 U.S.C. § 2072(b). A statute of repose, the court concluded, is a substantive right to be free from liability after the repose period set by the legislature.

In 2016, the Sixth Circuit became the first federal circuit court after CTS to analyze whether American Pipe tolling applies to statutes of repose. See Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016). Highlighting the distinction drawn between statutes of limitations and repose in CTS, the Sixth Circuit adopted the rationale of the Second Circuit’s decision in IndyMac, describing it as “the more cogent and persuasive rule.”

The Dusek Decision

The Dusek appeal arose out of the ponzi scheme orchestrated by Bernie Madoff. The same day that Madoff was arrested in 2008, the SEC filed a civil complaint against him and his investment advisory business, Bernard L. Madoff Investment Securities LLC (“BLMIS”). Several class actions were filed against JPMorgan Chase & Co. and certain affiliates (collectively “JPMorgan”) in the wake of these proceedings, as BLMIS maintained a series of accounts with JPMorgan. The class actions were consolidated in 2011 in New York federal court. In January 2014, JPMorgan entered into a global settlement to resolve those matters that, inter alia, excluded investors that withdrew more money than they deposited in their BLMIS account.

In March 2014, a putative class action was filed against JPMorgan in federal court in Florida on behalf of the investors excluded from the global settlement. The class action asserted “control person” claims against JPMorgan under Section 20(a) of the Exchange Act for allegedly playing a role in the securities violations by BLMIS. The class action plaintiffs sought to recover nearly $65 billion. However, because the last alleged violation of Section 20(a) took place no later than Madoff’s arrest in December 2008, and the case was filed more than five years after that, plaintiffs’ claim would be barred by the five year statute of repose absent tolling of some kind.

When defendants moved to dismiss the action, the district court held that the claims were untimely because “American Pipe is equitable in nature and does not extend to [the Exchange Act’s] statute of repose.” Dusek v. JPMorgan Chase & Co., 132 F.Supp.3d 1330, 1350 (M.D. Fla. 2015). On appeal, plaintiffs urged, among other things, the Eleventh Circuit to adopt the view of the Tenth Circuit in Joseph and recognize that American Pipe is a form of legal tolling that applies to the repose period for control person claims.

The Eleventh Circuit affirmed the lower court’s decision, concluding that the Second Circuit and Sixth Circuit’s positon was the right one in light of the Supreme Court decisions in Lampf and CTS.  More specifically, it concluded that American Pipe tolling is equitable in nature and cannot be used to toll a statute of repose.

Key Takeaways

  • Statutes of repose are intended to provide finality for class action defendants by placing an absolute temporal bar on securities claims.
  • Federal district courts remain divided as to whether tolling applies to statutes of repose. All three of the recent Federal Circuit courts to reach the issue have found no tolling. Only the Tenth Circuit has permitted tolling.
  • Rather than waiting to see whether a class action settlement is favorable—at which point claims may be barred by the statute of repose—opt-out plaintiffs may choose to preemptively file an individual action earlier, to ensure that their claims are timely.

Developments to Monitor

The Third Circuit is poised to address the same issue in the near future in an appeal captioned North Sound Capital LLC, v. Merck & Co. Inc., No. 16-8012.

Read the Dusek decision here.