On June 27, 2013, the United States Court of Appeals for the Second Circuit issued its decision in Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc. ("IndyMac MBS").1 Addressing "an unsettled question of law," the Second Circuit held that the tolling doctrine established by the U.S. Supreme Court in American Pipe and Construction Co. v. Utah ("American Pipe")2 does not apply to the three-year statute of repose in Section 13 of the Securities Act of 1933 ("Securities Act of 1933"). In addition, the Second Circuit held that would-be members of a class action could not use the "relation back" doctrine of Federal Rule of Civil Procedure 15 to amend the class complaint and intervene in the action as named parties.
In reaching this conclusion, the Second Circuit is squarely in conflict with the Tenth Circuit. In Joseph v. Wiles,3 the Tenth Circuit previously held that the statute of repose applicable to the Securities Act of 1933 is subject to tolling under American Pipe. The Second Circuit has thus elevated to the circuit level a dispute over how to apply American Pipe tolling in the securities context that has split federal district courts for some time, and broadened a conflict that has previously split the circuit courts of appeals in cases that reach beyond the securities laws. In light of recent Supreme Court activity in seeking to resolve similar disagreements, particularly in the securities litigation context, this development may portend future review by that Court. In the meantime, the Second Circuit’s reasoning in reaching its decision may provide powerful protection for defendants seeking to invoke the statute of repose in securities cases.
The Supreme Court’s Decision in American Pipe
In American Pipe, the Supreme Court held that the commencement of a putative class action tolls the statute of limitations for all potential class members until a decision regarding class certification is made. The Court reasoned that permitting the statute of limitations to toll should help avoid the multiplicity of suits that might otherwise ensue if individuals feel compelled to file their own cases in order to preserve their claims before the statute of limitations could run. Following American Pipe, the Court in Crown, Cork & Seal Co. v. Parker, clarified that American Pipe tolling applied not only to putative class members who seek to intervene following denial of class certification, but also to those individuals encompassed by the putative class who later file their own actions.4
Recent Supreme Court Interest in the Statute of Limitation and the Statute of Repose Applicable to Federal Securities Claims
Although American Pipe was decided in the context of an antitrust case, the tolling rule established in that case is a general one. In recent years, the topic of tolling in the context of securities cases has twice reached the Supreme Court, though on neither occasion did the Court address the issue decided by the Second Circuit in IndyMac MBS.
In 2010, the Supreme Court in Merck & Co., Inc. v. Reynolds5 considered the issue of equitable tolling in the context of a claim under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act of 1934"). The Court held that "the [statute of limitations] period does not begin to run until the plaintiff thereafter discovers or a reasonably diligent plaintiff would have discovered ‘the facts constituting the violation,’ including scienter – irrespective of whether the actual plaintiff undertook a reasonably diligent investigation."6
In 2012, the Supreme Court rejected a broad tolling approach to the statute of limitations period for claims brought under Section 16(b) of the Exchange Act of 1934. In that case, Credit Suisse Sec. (USA) LLC v. Simmonds,7 the Supreme Court stated that courts should look at the statute’s text "as the most glaring indication" of congressional intent with regard to tolling the statute of limitations period in Section 16(b) claims. Without deciding whether Section 16(b) imposed a statute of repose not subject to tolling, the Court concluded that equitable tolling did not apply until the filing of the action.
The Growing Split of Authority Concerning the American Pipe Tolling Doctrine
As the Second Circuit observed in IndyMac MBS, there is a growing divide among the courts regarding the application of American Pipe tolling. In particular, courts have reached different conclusions about whether American Pipe tolling should be considered an equitable tolling doctrine, or whether the principle should be considered a "legal" tolling doctrine (i.e., statutory tolling) founded on Rule 23 of the Federal Rules of Civil Procedure. Prior to the Second Circuit’s decision, in cases decided across a spectrum of substantive law, the Tenth Circuit and the Federal Circuit found American Pipe to reflect a legal tolling doctrine, whereas the Fourth Circuit described it as an equitable tolling doctrine.8
The relevance of this issue in the context of considering a statute of repose is that a statute of repose is distinct from a statute of limitations – even though the terms may sometimes be used interchangeably. As the Second Circuit explained in IndyMac MBS, whereas a statute of limitations limits the availability of remedies and may therefore be properly subject to equitable considerations, a statute of repose "creates a substantive right in those protected to be free from liability after a legislatively-determined period of time."9
In IndyMac MBS, the American Pipe doctrine was invoked in an effort to toll the three-year statute of repose set forth in Section 13 of the Securities Act of 1933. The case involved putative class actions consolidated in the Southern District of New York and filed against IndyMac MBS, Inc., alleging violations of Sections 11, 12(a) and 13 of the Securities Act of 1933. Following dismissal of the case for lack of standing on the part of the named plaintiffs, six other persons claiming membership in the putative class moved to intervene, even though the three-year statute of repose had run on their claims. The district court denied the motions to intervene. Writing against a backdrop of disagreement among district courts on the application of tolling to the statutes of repose applicable to federal securities claims,10 the district court held that American Pipe tolling is an equitable doctrine and, therefore, does not apply to the statute of repose.11 The intervenors then appealed to the Second Circuit.
The Second Circuit’s Decision in IndyMac MBS
On appeal, the Second Circuit agreed that the IndyMac MBS intervenors could not use American Pipe tolling to extend the statute of repose under Section 13. As an initial matter, the Second Circuit observed that the Supreme Court itself stated in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson ("Lampf") that "the equitable tolling doctrine is fundamentally inconsistent with the 1-and-3-year structure" of Section 13.12 Thus, the Second Circuit concluded that if the American Pipe doctrine is properly classified as an equitable tolling doctrine, "then application of the rule to Section 13’s three-year repose period is barred by Lampf."13
Regardless, the Second Circuit decided that it "need not try to divine any hidden meanings in American Pipe," reasoning that even if American Pipe were read as establishing a legal or statutory tolling doctrine based on Rule 23 (as it was by the Tenth Circuit in Joseph v. Wiles), its application to Section 13 would be barred by the Rules Enabling Act ("REA").14 The REA forbids courts from using procedural rules to abridge, enlarge, or modify substantive rights. Relying on the Supreme Court’s recent decision in Wal-Mart Stores, Inc. v. Dukes,15 the Second Circuit recognized that "the Rules Enabling Act forbids interpreting Rule 23 to abridge, enlarge or modify any substantive right."16 Allowing a plaintiff to bring an action after the expiration of the statute of repose would do just that, in this case "necessarily" modifying the substantive right established by Section 13 of the Securities Act of 1933. Therefore, a legal tolling doctrine premised on Rule 23 cannot serve to toll the statute of repose set forth in Section 13.
The Second Circuit thus concluded that, whether American Pipe tolling is equitable or legal, it does not apply to the statute of repose set forth in Section 13 of the Securities Act of 1933.
Relation Back Under Rule 15(c)
The IndyMac MBS appellants also argued a related but distinct point that, despite the statute of repose, they may "relate back" their claims to a prior, timely complaint under Rule 15. The Second Circuit found that the intervenors could not prevail on this argument.
In this case, the intervenors had not been named plaintiffs in the original complaint, which had been dismissed for lack of jurisdiction based on the named plaintiff’s lack of standing. Thus, they could not now intervene with their claims in an effort to cure the prior case’s jurisdictional defect.
Possible Future Implications
The decision by the Second Circuit in IndyMac MBS provides defendants with a powerful argument against the expanded application of the American Pipe tolling doctrine in federal securities actions. Whether the basis for tolling the statute of repose is considered to be equitable or legal, the Second Circuit provides defendants in federal securities actions a roadmap to defeat stale claims brought under Section 13 of the Securities Act of 1933.
The IndyMac MBS decision also provides an interesting twist to an evolving circuit split and may help set the stage for the Supreme Court to clarify its holding in American Pipe. Squarely at odds with the Tenth Circuit’s decision in Joseph v. Wiles, IndyMac MBS itself provides an avenue for the Supreme Court to address the issue if the plaintiffs choose to file a petition for writ of certiorari. Not only would the Court be able to resolve the direct circuit conflict regarding application of American Pipe tolling to Section 13 of the Securities Act, the Court might take the opportunity to address the legal or equitable nature of the American Pipe tolling doctrine and thus clarify the issue for cases beyond the securities context.