The Supreme Court of the United States recently reversed a ruling of the U.S. Court of Appeals for the Ninth Circuit, and clarified that American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), does not toll a subsequent class action after the statute of limitations expires.

A copy of the opinion in China Agritech, Inc. v. Resh et al. is available at: Link to Opinion.

As you may recall, American Pipe first stated the tolling rule that timely filing a class action “tolls the applicable statute of limitations for all persons encompassed by the class complaint.” Thus, under American Pipe, where a court declines to certify a class, individual members of the failed class could timely intervene in the pending case to assert their own claims. The Court clarified this ruling in Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), to state that a member of a failed class may also bring their own suit instead of intervening in the existing case.

This appeal involved a third class action brought by purchasers of the defendant’s stock alleging violations of the Securities Exchange Act of 1934, 48 Stat. 881, as amended, 15 U.S.C. § 78a, et seq (Securities Exchange Act, or SEA). The complaint contained materially identical allegations to the two prior complaints.

Specifically, the complaint once again alleged that the defendant’s allegedly fraudulent and misleading business practices caused the defendant’s stock price to fall when several reports shined a light on the misconduct. The SEA has a two-year statute of limitations that runs from the discovery of the facts that give rise to the violation and a five-year statute of repose. Here, the two-year limitation period began to run on Feb. 3, 2011, and the five-year repose period started on Nov. 12, 2009.

On Feb. 11, 2011, a shareholder filed the first putative class action complaint. Plaintiff’s counsel gave notice of the complaint in two “widely circulated national business-oriented publication[s],” as required by the SEA. The notice invited any putative class member to file a motion to serve as the lead plaintiff. The District Court ultimately denied class certification finding that the plaintiffs did not establish, as required to prove classwide reliance, that defendant’s stock “traded on an efficient market.” Plaintiff’s counsel informed the shareholders that the District Court denied certification and advised them that: “You must act yourself to protect your rights. You may protect your rights by joining in the current Action as a plaintiff or by filing your own action against [defendant].” The first putative class action settled in September 2012 and the District Court dismissed the suit.

Subsequently, on Oct. 4, 2012, plaintiff’s counsel timely filed a new complaint with new plaintiffs and new evidence to prove an efficient market. However, the District Court once again denied certification, finding that the plaintiffs failed to demonstrate typicality and adequacy, as required. The second putative class action plaintiffs then settled their individual claims and voluntarily dismissed the suit.

A year and half after the statute of limitation expired, new counsel who had not appeared in the prior actions filed the instant third class action suit on June 30, 2014 with a lead plaintiff that had not sought lead plaintiff status in either of the first two class actions. This time, the District Court found that the two prior cases did not toll the time file class claims, and dismissed the untimely case.

The plaintiffs appealed to the Ninth Circuit. The Ninth Circuit reversed, holding that: “[P]ermitting future class action named plaintiffs, who were unnamed class members in previously uncertified classes, to avail themselves of American Pipe tolling, would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” 857 F. 3d, at 1004.

This appeal followed.

The Supreme Court noted that “American Pipe and Crown, Cork addressed only putative class members who wish to sue individually after a class certification denial.” These decisions did not even hint “that tolling extends to otherwise time-barred class claims.”

The Supreme Court then held that “American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier, timely filed class action.” This is because the “efficiency and economy of litigation” that support tolling individual claims, “do not support maintenance of untimely successive class actions; any additional class filings should be made early on, soon after the commencement of the first action seeking class certification.”

The Supreme Court reasoned that it makes sense to delay individual claims until after a district court denies class certification because if the district court grants certification, “the claims will proceed as a class and there would be no need for the assertion of any claim individually.” Further, the Court noted, if the district court denies certification, “only then would it be necessary to pursue claims individually.”

However, the same efficiency does not hold true for class claims. Instead, the Court held, efficiency favors that competing class representatives assert their claims as soon as possible. This way, “the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel.” Further, the Court reasoned, if the district court denies certification, then it can make this decision “at the outset of the case, litigated once for all would-be class representatives.”

The Supreme Court found its holding consistent with Rule 23’s preference to preclude “untimely successive class actions by instructing that class certification should be resolved early on.” See Fed. Rule Civ. Proc. 23(c)(1)(A). The 2003 amendment to Rule 23(c) allows district courts to account for multiple class representative filings to afford “best possible representation for the class.”

The Supreme Court noted that the Private Securities Litigation Reform Act (PSLRA) also prefers grouping class-representative filings at the beginning of a case. The PSLRA requires notice of the class action “to draw all potential lead plaintiffs into the suit so that the district court will have the full roster of contenders before deciding which contender to appoint.”

The Supreme Court also rejected applying any equitable tolling to this situation because it requires plaintiffs to “demonstrate that they have been diligent in pursuit of their claims.” Any hopeful class representative that files suit after the statute of limitation expires cannot show the required diligence in pursuing their claims.

The Supreme Court was also concerned that extending American Pipe to toll successive class actions would allow new plaintiffs to endlessly extend the statute of limitations, as a new named plaintiff could always file a new class complaint to revive the litigation. The Court held that American Pipe did not envision this result. In contrast, the time to file an individual action after a class action concludes “is finite, extended only by the time the class suit was pending.”

The respondents argued that Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 559 U. S. 393 (2010), found that “a class action may be maintained,” id., at 398, if the plaintiff satisfies the requirements of Rule 23(a) and (b), and “Rule 23 automatically applies in all civil actions and proceedings in the United States district courts.” The Supreme Court disagreed because Shady Grove merely “held that a federal diversity action could proceed under Rule 23 despite a state law prohibiting class treatment of suits seeking damages of the kind asserted in the Shady Grove complaint.”

The Supreme Court held that the opposite is true here. The class action is untimely unless American Pipe’s equitable-tolling exception to statutes of limitations saves it. The Court held that Rule 23 does not revive class claims where individual claims are tolled.

The Supreme Court also swept aside the argument that its holding violates the Rules Enabling Act “by causing a plaintiff’s attempted recourse to Rule 23 to abridge or modify a substantive right” because “[p]laintiffs have no substantive right to bring their claims outside the statute of limitations.”

The Supreme Court rejected the notion that refusing to toll the limitation period for successive class suits will cause a “needless multiplicity” of protective class-action filings because no empirical evidence supports the argument. Instead, the Second and Fifth Circuits both long ago declined to entertain out-of-time class actions and there is no evidence in the record that this caused “a disproportionate number of duplicative, protective class-action filings.” See Korwek, 827 F. 2d 874 (CA2 1987); Salazar-Calderon, 765 F. 2d 1334 (CA5 1985).

The Court noted that American Pipe and Rule 23 promote efficiency and economy of litigation. The Supreme Court found that extending American Pipe to toll successive class actions does not serve these principles. In contrast, the Court held, declining to toll out-of-time class actions promotes efficiency and economy of litigation because it provides an incentive to putative class representatives to file suit well within the limitation period and to promptly seek certification.

Accordingly, the Supreme Court reversed the Ninth Circuit’s ruling, and remanded the case for further proceedings consistent with its opinion.