On May 24, 2017, the U.S. Court of Appeals for the Ninth Circuit held that securities fraud claims brought by plaintiffs in would-be class actions were not time-barred because the statute of limitations had been tolled during the period the plaintiffs were unnamed members of a proposed class in two prior lawsuits where class certification was ultimately denied. The Ninth Circuit’s decision highlights a divergence among federal circuit courts: Although it is well-settled that denial of class certification tolls the statute of limitations for subsequent individual claims, courts are divided as to whether that tolling applies to subsequent class actions.
In Resh v. China Agritech, Inc.,1 investor plaintiffs alleged that China Agritech violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by artificially inflating its stated revenue. The first putative class action was filed on February 11, 2011, and class certification was denied on May 3, 2012.2 A second putative class action was filed on October 4, 2012, with class certification denied in that case on September 26, 2013.3
Michael Resh filed a third putative class action on June 30, 2014. The United States District Court for the Central District of California dismissed the complaint as time barred, ruling that the statute of limitations to bring a class action was not tolled by the two prior lawsuits, even though the statute may have tolled with respect to the same plaintiff’s individual claims. In the court’s view, to hold otherwise “would allow tolling to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class certification on the basis of different expert testimony and/or other evidence.”4
On appeal to the Ninth Circuit, the defendants reiterated the danger of continual, ad infinitum class action attempts noted by the District Court, but the Ninth Circuit was not similarly swayed. Tracing the precedent set by the U.S. Supreme Court’s decisions of American Pipe & Construction Co. v. Utah and Crow, Cork & Seal Co. v. Parker, the Ninth Circuit observed that policy considerations led the Supreme Court to hold that tolling the statute of limitations for individual claims of unnamed plaintiffs in prior putative class actions supported the judicial efficiency and economy goals of class action litigation. Those very same policy goals, according to the Ninth Circuit, would only be vindicated by extending tolling to subsequent class actions as well. In addition, the Circuit Court pointed to another Supreme Court case in which it held that Rule 23 does not rely on any other statute and empowers a federal court “to certify a class in each and every case where the Rule’s criteria are met.”5 Essentially, in the Ninth Circuit’s view, there should be no practical difference between the tolling of subsequent class claims and individual claims so long as the requirements of Rule 23 are met.
Recognizing that other federal appellate courts have held the opposite6 and that its own precedent seemed to support those holdings,7 the Ninth Circuit distinguished these cases as having dealt with “preclusion-related principles.”8 The Circuit Court stated that its prior ruling in Catholic Social Services, Inc. v. INS stands for the proposition later reinforced and stated better by the Seventh Circuit: “that the overarching inquiry in determining whether prior class actions can toll future class actions is not the statute of limitations or the effects of tolling, but the preclusive effect of a judicial decision in the initial suit applying the criteria of Rule 23.”9 Based on the foregoing case law analysis and a broad overview of the ways in which the current judicial system can prevent any supposed duplicity or abuse, the Ninth Circuit expressly concluded that the statute of limitations is tolled during the pendency of class action suits for subsequent individual and class claims.
Opponents of this result,10 argue that allowing such tolling renders the statute of limitations moot and creates the risk—again, the basis for the District Court’s dismissal—that claims can be brought unceasingly into the future as different plaintiffs try again and again to achieve certification. Defendants rely on statutes of limitations to calculate and ascertain at what point in time they can expect to no longer be subject to legal claims, and the Ninth Circuit’s holding in this case would, if allowed to stand, seem to vitiate that practical benefit and create the risk of unending class litigation.
While potential defendants within the Ninth Circuit’s jurisdiction may have lost the bright-line precision afforded by the notion that the statute of limitations with respect to class claims is not tolled, they have not lost the ability to avoid the specter of future lawsuits. The heightened case-by-case analysis presented by claim and issue preclusion can afford similar definitiveness as the statute of limitations but will require greater legal knowledge and skill. In addition, because there is now a circuit split on this issue, there is a chance that the Supreme Court will take up the issue squarely raised by Resh.