On June 26, 2017, the Supreme Court issued its opinion in California Public Employees' Retirement System (“CalPERS”) v. ANZ Sec., Inc., No. 16-373, 2017 WL 2722415 (U.S. June 26, 2017), holding that the 3-year statute of repose set forth in § 13 of the Securities Act of 1933 is not subject to equitable tolling under the Court’s prior decision in American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974). The Court’s decision has several implications for securities class actions.
The CalPERS case arose from a putative class action brought against Lehman Brothers Holdings in 2008, which asserted violations of § 11 of the Securities Act of 1933 in connection with two securities offerings made by Lehman in 2007 and 2008. In 2011, CalPERS, which was a putative class member, filed its own suit alleging claims identical to those in the class action. Subsequently, when the class action settled, CalPERS elected to opt-out of the settlement class.
Defendants then moved to dismiss CalPERS’s suit, arguing that because the action was brought more than three years after the securities at issue had been offered to the public, it was barred by § 13’s 3-year time limit. The District Court agreed and so too did the Second Circuit Court of Appeals.
The issue before the Supreme Court was whether § 13’s 3-year time limit was subject to tolling under the Court’s prior decision in American Pipe. In that case, the Court had held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.” American Pipe, 414 U.S. at 554. Accordingly, if the American Pipe rule applied, CalPERS’s claims would not be barred because the class’s claims were timely filed.
In its 5-4 decision, the Supreme Court held that § 13’s 3-year time limit cannot be tolled under American Pipe. The Court based its decision upon its determination that § 13’s 3-year time limit is a statute of repose and not a statute of limitations and thus cannot be tolled based on the equitable principles underpinning the American Pipe decision. CalPERS, 2017 WL 2722415, at *6-12.
The Court found § 13’s 3-year time limit to be a statute of repose based on its consideration of several factors. The Court observed that, whereas statutes of limitations are designed to promote plaintiffs’ “‘diligent prosecution of known claims,’” statutes of repose “‘effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time.’” Id. at *6-7. Consistent with these distinct goals, the Court found it “evident” that § 13’s 3-year bar was a statute of repose, based on both its unqualified language, which created a “fixed bar against future liability,” and because the 3-year time limit ran from the defendant’s “last culpable act,” which is a hallmark of a statute of repose. Id. at *7. The Court added that its view was confirmed by the fact that, in addition to the 3-year time bar, § 13 included a 1-year time bar, which runs from when the “plaintiff discovers (or should have discovered) the securities-law violation.” Id. According to the Court, § 13’s two time bars “work together,” demonstrating that the 1-year time bar is designed to serve as a statute of limitations while the 3-year time bar operates as a statute of repose. Id.
Having determined § 13’s 3-year time limit to be a statute of repose, the Court readily found that it was not tolled by the rule announced in American Pipe. According to the Court, a legislature may provide “a particular indication” that a statute of repose is subject to extension. Id. at *8. Where such an indication is absent, however, the legislative judgment reflected in a statute of repose to protect a defendant against further liability “supersedes the courts’ residual authority and forecloses the extension of the statutory period based on equitable principles.” In short, “statutes of repose are not subject to equitable tolling.” Id. at *9. The Court proceeded to examine the tolling rule announced in American Pipe and found it “based on traditional equitable powers.” Id. at *10. Accordingly, the Court held that American Pipe’s “tolling rule does not apply to the 3-year bar mandated in § 13.” Id. at *11.
The CalPERS decision has a number of implications for securities class actions.
- Based on the Supreme Court’s rationale for precluding application of American Pipe’s equitable tolling rule, courts may hold that the 5-year time bar governing claims under § 10(b) of the Securities Exchange Act of 1934, set forth in 28 U.S.C. § 1658(b)(2), is not subject to equitable tolling. The Supreme Court has described § 1658(b)(2)’s 5-year time limit as a statute of repose. Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 650 (2010). Moreover, courts who anticipated the CalPERS decision have held, using reasoning similar to that employed by the Supreme Court, that American Pipe’s equitable tolling rule is inapplicable to § 1658(b)(2)’s 5-year time limit. See, e.g., SRM Global Master Fund Ltd. P'ship v. Bear Stearns Cos. L.L.C., 829 F.3d 173 (2d Cir. 2016), cert. denied, 2017 WL 2742913 (U.S. June 27, 2017).
- Large institutional investors included within the scope of a putative class action may choose to file protective actions to preserve their claims rather than wait to see if a class is certified or if they should exercise their opt-out rights. The majority opinion believed this concern “overstated” because no evidence was offered of increased protective filings in the Second Circuit since 2013, when it announced the rule affirmed by the CalPERS decision, and because district courts have “ample means and methods to administer their dockets.” CalPERS, 2017 WL 2722415, at *12. In contrast, the dissent predicted that the Court’s decision would “gum up the works of class litigation.” Id. at *16.
- As a possible alternative to protective filings, putative class members may seek to negotiate with defendants agreements to avoid their claims being barred under a statute of repose. Defendants will need to consider the risks and rewards of any such agreements, including the costs of litigating individual suits and the impact such suits might have on a potential settlement of all putative class members’ claims.
- The pace of litigation -- particularly, the speed with which a court hears a motion for class certification -- may change. Rule 23 of the Federal Rules of Civil Procedure directs that a determination of whether to certify a class be made at “an early practicable time.” Courts may conclude that, in determining what is a “practicable time,” consideration should be given to the time remaining under a statute of repose in order to protect putative class members’ claims.
- The terms of securities class action settlements may change. Such settlements often afford defendants a termination right tied to the number of class members who elect to opt-out of the settlement class. Based on the timing of the settlement and the relevant statute of repose, settling parties will need to consider whether such a provision remains necessary.