Takeaway: In Resh v. China Agritech, Inc., No. 15-55432, 2017 WL 2261024 (9th Cir. May 24, 2017), the Ninth Circuit stretched the tolling principles of American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), to new lengths, ruling that unnamed plaintiffs in two prior would-be securities class actions could bring a third class action based on the same underlying events. But defendants facing successive class actions still have preclusion and “comity” arguments to attempt to shut down these cases.

The Resh court recounted the history of the prior class actions. In the first case, the district court denied certification because the named plaintiffs failed to establish a fraud on the market theory, thereby facing insurmountable individualized reliance issues. Following the Ninth Circuit’s affirmation of the denial of certification, the named plaintiffs continued to litigate individually and ultimately settled their claims. Then a new plaintiff filed a nearly identical class action complaint on behalf of the same would-be class in federal court in Delaware, which promptly shipped the case back to the same Central District of California judge who had handled the first case. The district court again rejected class certification, this time finding a lack of typicality under Rule 23(a)(3) and inadequacy of representation under Rule 23(a)(4). The parties then dismissed the second case with prejudice as to the named plaintiffs.

A few months later, a third set of plaintiffs initiated yet another class suit based on the same facts. This time the (same) district judge dismissed the case with prejudice and without leave to amend based on the applicable two-year statute of limitations for securities law violations. While the district court recognized that under American Pipe and Crown, Cork & Seal, the limitations period would have been tolled as to individual claims of the class members until class certification had been denied, the Supreme Court had not extended tolling to an entirely new class action. And two Ninth Circuit decisions – Robbin v. Fluor Corp., 835 F.2d 213 (9th Cir. 1987), and Catholic Social Services, Inc. v. INS, 232 F.3d 1139 (9th Cir. 2000) – militated against any such extension of tolling. The district court added that extending tolling in these circumstances “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.”

The Ninth Circuit panel reversed. In its view, the decision in Robbin refusing to extend tolling to a subsequent class action had been “modified” by Catholic Social Services. Based on its reading of Catholic Social Services, the ability to file a subsequent class action turns entirely on preclusion rather than tolling: “[W]e did not write that the availability of a subsequent class action depended on general tolling principles. Thus, availability depended on the operation of preclusion and preclusion-related principles.” Resh, 2017 WL 2261024, at *7. The Resh court sought to reinforce this interpretation by citing three recent Supreme Court cases.

In Shady Grove Orthopedic Associates, P.A. v. Allstate Insurance Co., 559 U.S. 393 (2010), the Supreme Court refused to limit eligibility for class treatment under Rule 23 to claims authorized by “some other law,” because Rule 23 authorizes a district court to certify a class in every single case that satisfies Rule 23 criteria. Viewing the statute of limitations as “some other law,” the Resh court reasoned that Shady Grove dictates a limitations statute cannot be applied to dismiss a putative class action. 2017 WL 2261024, at *7.

The Supreme Court in Smith v. Bayer Corp., 564 U.S. 299 (2011), addressed parallel class actions in federal and state court. Bayer held that even after a federal court had denied class certification, it could not enjoin the state court from certifying a class in the parallel state lawsuit. In so ruling, Bayer explained that the named plaintiffs in the state case had been unnamed members of the uncertified class in the federal action, such that they would not be subject to preclusion arising from the federal denial of class certification. The Resh court further noted that Bayer stated in dicta that where sequential class actions had been filed in federal court, the Supreme Court “‘would expect federal court to apply principles of comity to each other’s class certification decisions when addressing a common dispute.’” 2017 WL 2261024, at *8 (quoting Bayer, 564 U.S. at 317).

In the third case, Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036 (2016), the Supreme Court observed that “[i]n a case where representative evidence is relevant in proving a plaintiff’s individual claim, that evidence cannot be deemed improper merely because the claim is brought on behalf of a class.” Resh, 2017 WL 2261024, at *8 (quoting Tyson Foods, 136 S. Ct. at 1046). The Tyson Foods court based its reasoning on the Rules Enabling Act, which precludes Rule 23 from abridging any substantive right. In the Resh panel’s view, Tyson Foods at least implicitly supports the conclusion that “the statute of limitations does not bar a class action brought by plaintiffs whose individual actions are not barred.”

Based on this analysis, the Ninth Circuit ruled that allowing “unnamed class members in previously uncertified classes” to bring a subsequent class lawsuit “would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” Id. As to the potential for “abusive filing of repetitive class actions, the current legal system is adequate to respond” because (1) attorneys operating on contingency “at some point will be unwilling to assume the financial risk in bringing successive suits” and (2) “ordinary principles of preclusion and comity will further reduce incentives to re-litigate frivolous or already dismissed class claims, and will provide a ready basis for successor federal district courts to deny class action certification.” Id. at *9. The Resh court thus remanded for the district court to consider the Rule 23 factors and whether “comity or preclusion principles” should bar class certification. Id.

The Resh court’s reasoning ignores the practical impact of extending tolling to successive class actions. Attorneys representing plaintiffs who file successive class claims do have something to gain – specifically, greater fees by way of settlement because it will be more difficult and expensive for defendants to present a preclusion (or comity) defense than a limitations defense. Stay tuned to learn whether the en banc Ninth Circuit or the Supreme Court weighs in on this unprecedented extension of the American Pipe/Crown Cork tolling doctrine.