In a landmark 5-4 ruling issued earlier this summer, the U.S. Supreme Court held that the filing of a putative class action does not toll the three-year statute of repose for opt-out claims brought under Section 11 of the Securities Act of 1933 (Securities Act), in California Public Employees' Retirement System v. ANZ Securities, 137 S. Ct. 2042 (2017). By refusing to apply the equitable tolling rule of American Pipe & Construction Co. v. Utah, 414 U. S. 538 (1974), to the Securities Act's statute of repose (Section 13 of the act), the court restored the statute's purpose to protect defendants "from an interminable threat of liability."
Five weeks later, on Aug. 2, the U.S. Court of Appeals for the Third Circuit revealed the broad impact of the Supreme Court's ruling by applying it to the five-year statutes of repose applicable to claims brought under Sections 10(b), 20(a) and 20A of the Securities Exchange Act of 1934 (Exchange Act) in North Sound Capital v. Merck, Nos. 16-1364, 16-1365, 16-1366, 16-1367, 2017 U.S. App. LEXIS 14170 (3d. Cir. Aug. 2). At least in the Third Circuit, defendants now have the ability to obtain dismissals of untimely opt-out actions, whether filed under the Securities Act or the Exchange Act.
Section 13's Three-Year Bar
Section 11 of the Securities Act, 15 U. S. C. Section 77k, gives investors who purchase securities pursuant to a public offering "a right of action against the issuer or designated individuals, including securities underwriters, for any material misstatements or omissions in a registration statement." Section 12(a)(2), 15 U.S.C. 77l(a)(2), provides a private right of action to those investors who claim to have purchased securities pursuant to a materially false or misleading prospectus or oral communication.
Section 13 of the act, 15 U.S.C. Section 77m, provides two time limits for bringing private actions under Section 11 and Section 12(a)(2). The first sentence of Section 13 contains a one-year bar: "No action shall be maintained to enforce any liability created under [Section 11 or Section 12(a)(2)] unless 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 ... ." The second sentence contains a three-year bar: "In no event shall any such action be brought to enforce a liability created under [Section 11 or Section 12(a)(2)] more than three years after the security was bona fide offered to the public ... ."
The Supreme Court's decision in ANZ Securities addresses Section 13's three-year bar.
ANZ Securities' Procedural Background
In 2007 and 2008, Lehman Brothers Holdings Inc. (Lehman) issued securities through a number of public offerings. California Public Employees' Retirement System (CalPERS) purchased Lehman securities in some of these offerings. In 2008, Lehman filed for bankruptcy, and a putative class action (Lehman class action or class action) was filed in the U.S. District Court for the Southern District of New York on behalf of purchasers of Lehman securities against various underwriters that participated in certain of the offerings (underwriters). The operative complaint in the class action alleged that the registration statements for the offerings included alleged material misstatements and omissions in violation of Section 11 of the Securities Act. Although CalPERS was not one of the named plaintiffs in the Lehman class action, it was a member of the putative class. The court consolidated the class action with other securities lawsuits against Lehman in a multidistrict litigation (Lehman MDL) in the Southern District of New York.
In February 2011—over three years after the relevant offerings took place—CalPERS filed a separate complaint against the underwriters in the U.S. District Court for the Northern District of California (CalPERS action), alleging "identical securities law violations" as alleged in the Lehman class action complaint. The Southern District of New York (district court) consolidated the CalPERS action with the Lehman MDL. Ultimately, the parties in the class action reached a settlement, but CalPERS opted out of the class in order to pursue its individual action.
The underwriters moved to dismiss the CalPERS action on grounds that it was untimely under Section 13's three-year bar. CalPERS opposed the motion, arguing that, under the Supreme Court's decision in American Pipe, the pendency of the Lehman class action filing tolled the three-year period and, alternatively, that the class action complaint "brought" the CalPERS action within the three-year period, and, therefore, the CalPERS action was timely filed. The district court granted the underwriters' motion to dismiss, and the U.S. Court of Appeals for the Second Circuit affirmed, holding that the tolling principle applied in American Pipe did not apply to Section 13's three-year bar, and rejecting CalPERS' alternative argument as well. Because there was a disagreement among the circuit courts about whether American Pipe's tolling rule applied to Section 13's three-year bar, the Supreme Court granted certiorari.
The Supreme Court's Decision
In a 5-4 decision, the Supreme Court affirmed the Second Circuit's decision. Justice Anthony Kennedy authored the majority opinion, in which Justices John Roberts, Clarence Thomas, Samuel Alito and Neil Gorsuch joined. Justice Ruth Bader Ginsburg wrote a dissenting opinion, in which Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan joined.
In its opinion, the court framed the question presented as follows: Whether Section 13 permits the filing of an individual complaint more than three years after the relevant securities offering, when a class-action complaint was timely filed, and the plaintiff filing the individual complaint would have been a member of the class but for opting out of it.
To answer the question, the court first examined the principal difference between statutes of limitation and statutes of repose: Statutes of limitations are designed to encourage plaintiffs to pursue diligent prosecution of known claims. In accord with that objective, limitations periods begin to run when the cause of action accrues—that is, when the plaintiff can file suit and obtain relief. In a personal injury or property-damage action, for example, more often than not this will be when the injury occurred or was discovered.
In contrast, statutes of repose are enacted to give more explicit and certain protection to defendants. These statutes effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time. For this reason, statutes of repose begin to run on the date of the last culpable act or omission of the defendant.
The court then determined that the following attributes of Section 13's three-year bar show that it is a statute of repose, not a statute of limitations: First, the three-year bar "reflects the legislative objective to give a defendant a complete defense to any suit after a certain period," stating in "clear terms" that "'in no event' shall an action be brought more than three years after the securities offering on which it is based." Second, the three-year bar "runs from the defendant's last culpable act ..., not from the accrual of the claim." Third, Section 13's pairing of a shorter statute of limitations (one year) with a longer statute of repose (three years) "is a common feature of statutory time limits," allowing for "the two periods to work together: The discovery rule gives leeway to a plaintiff who has not yet learned of a violation, while the rule of repose protects the defendant from an interminable threat of liability." Fourth, the legislative history of the three-year bar reveals that Congress shortened the time period from ten years to three years "to protect defendants' financial security in fast-changing markets by reducing the open period for potential liability."
The court explained that its conclusion that the three-year bar is a statute of repose was "critical" to its analysis because "the question whether a tolling rule applies to a given statutory time bar is one of statutory intent." While equitable tolling "often applies to statutes of limitations based on the presumption that Congress legislates against a background of common-law adjudicatory principles," the purpose and effect of a statute of repose, in contrast, "is to override customary tolling rules arising from the equitable powers of courts." Hence, "the court repeatedly has stated in broad terms that statutes of repose are not subject to equitable tolling."
Accordingly, the court held that the equitable tolling rule applied in American Pipe does not apply to Section 13's three-year bar. As the court explained, "the statute in American Pipe was one of limitations, not of repose; it began to run when the cause of action accrued." Thus, in American Pipe, the court held that "'the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.'" In ANZ Securities, however, the three-year bar at issue is a statute of repose. "Consistent with the different purposes embodied in statutes of limitations and statutes of repose, it is reasonable that the former may be tolled by equitable considerations, even though the latter in most circumstances may not."
The court also rejected CalPERS' alternative argument that its individual action was timely because the filing of the Lehman class action "brought" the CalPERS Action within the three-year period. The court explained that "the term 'action' ... refers to a judicial 'proceeding,' or perhaps to a 'suit'—not to the general content of claims." Taking CalPERS' argument "to its logical limit, an individual action would be timely even if it were filed decades after the original securities offering—provided a class-action complaint had been filed at some point within the initial tree-year period. Congress would not have intended this result."
Application of ANZ Securities to Exchange Act Opt-Out Actions
Within a few weeks of the court's decision in ANZ Securities, the Third Circuit issued a decision applying ANZ Securities to several opt-out actions filed against Merck & Co., Inc. for alleged violations of Sections 10(b), 20(a) and 20A of the Exchange Act. In the district court proceedings, the defendants had moved to dismiss all of the opt-out actions on grounds that they were time-barred under the five-year time periods set forth in 28 U.S.C. Section 1658(b) (for claims brought under Sections 10(b) and 20(a) of the Exchange Act) and 15 U.S.C. Section 78t-l(b)(4) (for claims brought under Section 20A). Although the district court agreed with the defendants that all of the five-year bars were statutes of repose, not statutes of limitations, it nonetheless applied American Pipe's equitable tolling rule and denied the defendants' motions to dismiss.
The Third Circuit granted defendants leave to file an interlocutory appeal and, after the Supreme Court issued its opinion in ANZ Securities, entered an order reversing the district court's decision and remanding the case with instructions to dismiss the opt-out cases as time-barred. Adopting the defendants' argument for dismissal, the Third Circuit explained that, under ANZ Securities, the equitable tolling recognized in American Pipe "'does not apply to the federal securities laws' statutes of repose.'" At least one other court has addressed the applicability of ANZ Securities to the five-year statute of repose that governs Section 10(b) claims, 28 U.S.C.Section 1658(b). As did the Third Circuit in North Sound Capital, the district court in Albers v. Commonwealth Capital, No. 6:16-cv-1713, 2017 U.S. Dist. LEXIS 99369, at *23-24 (M.D. Fla. June 27), held that, under ANZ Securities, equitable tolling does not apply to the Section 10(b) statute of repose. Implications
The court's decision in ANZ Securities will have a positive impact on class action defendants, who now have the ability to manage the risks of opt-out litigation and assess their exposure to such actions. Class members, on the other hand, no longer have the luxury of employing a "wait and see" strategy for deciding whether to opt out of a securities class action. Instead, they may need to decide earlier in the litigation whether to file an individual action or seek to intervene in the class action as a named plaintiff.
As for the impact of the court's decision on the mechanics of a securities class action, only time will tell.