On June 26, 2017, the United States Supreme Court issued its opinion on California Public Employees’ Retirement System v. ANZ Securities, Inc., No. 16-373, ruling that actions involving securities offerings and sales are subject to a three-year statute of repose, which is an absolute deadline that cannot be tolled. The Court’s opinion was based upon its interpretation of the interplay between Sections 11 and 13 of the Securities Act of 1933 (the Securities Act). Justice Anthony Kennedy delivered the opinion of the Court, in which Chief Justice John Roberts and Justices Clarence Thomas, Samuel Alito and Neil Gorsuch joined. Justice Ruth Bader Ginsburg filed a dissenting opinion, in which Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined.

Background

In 2007 and 2008, the California Public Employees’ Retirement System (CalPERS), a public pension fund, acquired securities issued by Lehman Brothers Holdings Inc. through a series of public securities offerings. In 2008, a putative class action, of which CalPERS was a part, was filed against various financial firms in the Southern District of New York alleging liability under Section 11 of the Securities Act for material misstatements or omissions in the registration statements relating to the Lehman Brothers securities offerings.

In February 2011, more than three years after the Lehman Brothers securities offerings, CalPERS filed a separate complaint against the various financial firms in the Northern District of California. CalPERS’ individual complaint alleged the same violations as those cited in the class action. The financial firms moved to dismiss the separate complaint filed by CalPERS on the grounds that the action was untimely since it was brought more than three years after the Lehman Brothers offering. CalPERS argued that the three-year period should be tolled as a result of the class action filing. The trial court, the US Court of Appeals for the Second Circuit and ultimately the Supreme Court ruled against CalPERS, holding that the principle of tolling was inapplicable to the three-year time limit imposed by Section 13.

The CalPERS Decision

Section 11 of the Securities Act generally provides that purchasers of securities in a registered offering shall have a right of action against the issuer, the underwriter of the securities and certain other individuals for any untrue statement of a material fact in, or a material omission from, a registration statement. The civil liabilities imposed by Section 11 are limited by Section 13 of the Securities Act, which requires any such action to be brought by a claimant within a specified time period. In part, Section 13 provides that any Section 11 action must be brought “within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” Importantly, the second sentence in Section 13 imposes an additional time limit on any action under Section 11 by providing that “[i]n no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public ....”

The Supreme Court’s decision in the CalPERS case was based upon the majority’s view that the three-year time limit set forth in the second sentence in Section 13 constitutes a statute of repose rather than a statute of limitations. In the decision, Justice Kennedy distinguished the two categories of time limits as follows: statutes of limitations are designed to encourage plaintiffs “to pursue diligent prosecution of known claims,” while statutes of repose explicitly protect defendants by effecting “a legislative judgment that a defendant should be free from liability after the legislatively determined period of time.”

The majority of the Justices were not persuaded by the various arguments that CalPERS presented in favor of tolling the three-year period. For example, CalPERS argued that filing the class action complaint within three years should also satisfy the statutory time limit with regard to any future suit filed by individual parties that comprise the class because the defendants were effectively on notice that each individual member could bring an action. CalPERS also argued that by declining to allow for tolling, the Supreme Court’s decision will create inefficiencies in the courts by inducing members of a class action to file duplicative individual cases.

The dissenting Justices were sympathetic to CalPERS’ equity-based arguments, and warned that the majority’s ruling would jeopardize the Constitutional right of individual investors (particularly unsophisticated class members) to opt out of a class settlement because class certification decisions often are not made until two to three years after securities class actions are filed. As a result, the three-year period of repose could easily pass before such investors were asked to decide whether they wanted to opt out of a class settlement. But the majority held that the plain language in Section 13 makes it evident that the three-year time limit is a statute of repose, which cannot be extended by a court on the basis of equitable principles. As a result, actions under Section 11 must be brought within three years of the issuer’s bona fide offer to the public.1

Looking Ahead

The Supreme Court’s decision in the CalPERS case will likely have a significant impact on how plaintiffs pursue civil actions under Section 11 of the Securities Act. While issuers and underwriters will benefit from the firm three-year time limit, it is likely that any class action under Section 11 will be accompanied by an increased number of identical individual actions. And both class counsel and the district courts may well heed the admonition of the dissenting Justices that class members should be notified of the “consequences of failing to file a timely protective claim.”