On April 17, 2017, the U.S. Supreme Court heard long-anticipated argument in California Public Employees’ Retirement System v. ANZ Securities, Inc., et al. (“ANZ”). ANZ tackles one of the key questions left open in the Supreme Court’s decision in American Pipe & Construction v. Utah: Does the filing of a class action within the time period established by a “statute of repose,” the statutory time limitation for filing claims, toll the claims of putative class members? Or, if the putative members decide to opt-out of the class action, do they have to file their own complaint before the statute of repose expires? American Pipe involved a similar question—in that case, the Court decided that class complaints tolled statutes of limitations for individual claimants. In the wake of the financial crisis, however, the Circuits developed a split of authority on whether the same should be true of statutes of repose.
In ANZ, the California Public Employees’ Retirement System (“CalPERS”) opted out of a class action suit and asserted its own securities claims against defendants after the operative statute of repose deadline. The plaintiff argued that its claims should be tolled based on American Pipe. The Second Circuit disagreed, holding that “American Pipe tolling does not affect the statute of repose embodied in [the applicable statute of repose].” The applicable statute of repose, Section 13 of the Securities Act of 1933, reads, in pertinent part:
In no event shall any such action be brought to enforce a liability created under section 77k or 77/(a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77/(a)(2) of this title more than three years after the sale.
The Second Circuit based its decision largely on precedent—the court considered this exact question in Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., in 2013. The Second Circuit reiterated its reasoning in IndyMac, stating:
First, if American Pipe is grounded in equity, its tolling cannot affect a legislatively enacted statute of repose. Second, if American Pipe establishes a ‘legal’ tolling principle grounded in Rule 23, to apply it to a statute of repose would violate the Rules Enabling Act by permitting a procedural rule to abridge the substantive rights created by statutes of repose.
CalPERS made several arguments attempting to distinguish the case at hand from IndyMac, all of which the Second Circuit rejected. Namely, CalPERS argued (1) that, unlike in IndyMac, the class action at hand was initiated by a named plaintiff with proper standing; (2) that “because it fell within the putative class before exercising its right to opt out, its claims were essentially ‘filed’ against the defendant within three years and therefore timely”; and (3) time-barring its claims violates the due process considerations behind Rule 23’s opt-out procedure.
In three short paragraphs, the Second Circuit rebuffed each argument, reasoning that: (1) “the inapplicability of American Pipe tolling to a statute of repose turns on the nature of its tolling and its ineffectiveness against statutes of repose, not whether the named plaintiffs have proper standing to assert claims on behalf of a class”; (2) “if it were true that a putative class member’s claims were essentially ‘filed’ in the putative class complaint, there would be no need for American Pipe tolling at all”; and (3) “[t]he due process protections of Rule 23 are directed at preventing a putative class member from being bound by a judgment without her consent.”
While the Second Circuit espouses the majority view, during oral argument, a few of the Supreme Court Justices seemed focused on CalPERS’ argument that denial of tolling would flood the federal docket with individual complaints filed just to preserve individual claims before the expiration of the statute of repose. During oral argument, Justice Breyer remarked:
[L]et’s imagine a class action involving 300,000 potential plaintiffs in the class, and imagine you’re the district judge, and imagine 300,000 pieces of paper coming across your desk. You’ll have to build a new clerk’s office.
Despite Judge Breyer’s relevant hypothetical, however, the Supreme Court has noted previously that the “critical distinction between statutes of limitations and statutes of repose is that a repose period is fixed and its expiration will not be delayed by estoppel or tolling.” Moreover, Judge Breyer’s “sky-will-fall prediction” is not well grounded. Speculating that an adverse ruling would lead to a “flood of ‘protective’ filings to preserve the timeliness of any potential individual claims . . . might have had some credence back when this Court first considered IndyMac. But IndyMac has now been the law of the Second Circuit (where the bulk of securities class actions are filed) since 2013, yet the sky has not fallen.” In fact, “[a]s of November 2016, only three out of 189 securities class actions (1.59%) filed in the Second Circuit since IndyMac had generated any opt-out litigation.”
Whichever way the Court comes down, this highly-anticipated decision will offer clarity to attorneys nationwide engaged in class action practice. Both plaintiffs and defendants will be able to better navigate the impact of statutory time limitations on class claims and attorneys will be able to advise clients with greater certainty regarding the likelihood and risks associated with putative class members opting out of class actions to file individual claims.