Opinion analysis: Divided court holds firm on deadlines for investors opting out of securities class actions

Involving as it does a relatively technical question about class action procedures, California Public Employees’ Retirement System v. ANZ Securities did not look like a probable candidate for the final day of the term. But it was not until the last Monday in June that we finally received a 5-4 decision, with Justice Anthony Kennedy writing for the narrow majority.

The issue in the case involves the right to opt out of a class action: When representatives file a class-action proceeding, any of the members of the class are entitled to “opt out” and represent themselves. The question in this case is how statutes of limitations work in that situation. Does the filing of the main class action count as the filing for the individual that opts out or does the party that wants to opt out have to file its own complaint before the deadline? The Supreme Court has addressed a similar question before, in its 1974 decision in American Pipe & Construction v. Utah. The court held in that case that the class complaint did count as the claim of the individual claimants for purposes of statutes of limitation; specifically, it held that the class complaint “tolled,” or suspended, the statute of limitations so that the individual’s later complaint was timely.

The securities laws include two different kinds of filing deadlines. Specifically, for claims about misrepresentations in connection with the issuance of securities (under Section 11 of the Securities Act), Section 13 establishes two distinct deadlines: a one-year deadline running from the “discovery of the untrue statement” and an outside three-year deadline running from the date on which the statement was made. The U.S. Court of Appeals for the 2nd Circuit consistently has held that tolling under American Pipe applies only to the one-year deadline, not the three-year deadline. Applying that rule, it barred the action brought in this case by CalPERS – which opted out of a large class action brought against Lehman Brothers. The original action was brought in a timely manner, but CalPERS did not opt out of that action until more than three years after the challenged statements.

Kennedy’s opinion for the court affirms the 2nd Circuit’s decision, treating the case as directly governed by Kennedy’s 2014 opinion for the court in CTS Corp. v. Waldburger, which outlined a firmly bounded framework for analyzing statutes of limitation and statutes of repose. Repeatedly quoting from Waldburger, Kennedy explains:

Statutes of limitation are designed to encourage plaintiffs “to pursue diligent prosecution of known claims.” … In contrast, statutes of repose are enacted to give more explicit and certain protection to defendants. … For this reason, statutes of repose begin to run on “the date of the last culpable act or omission of the defendant.”

In this case, the opinion explains, the statute “in clear terms” bars any action more than three years after the offering, “admits of no exception[,] and on its face creates a fixed bar against future liability.” For the majority, then, the statute’s tie to “the defendant’s last culpable act [rather than] the accrual of the claim … is close to a dispositive indication that the statute is one of repose.”

Once the opinion has adopted the Waldburger framework and concluded that the three-year deadline is a statute of repose, the idea that tolling should extend the deadline has little chance of success. As Kennedy sees it, equitable tolling of a statute of repose is almost nonsensical: “In light of the purpose of a statute of repose, the provision is in general not subject to tolling,” especially “customary tolling rules arising from the equitable powers of courts. … The unqualified nature of [a statute of repose] supersedes the court’s residual authority and forecloses the extension of the statutory period based on equitable principles.” Turning to the specific tolling rule before the court, Kennedy notes that because the “tolling rule applied in American Pipe … was grounded in the traditional equitable powers of the judiciary,” it “does not apply to the 3-year bar mandated in § 13.” “[T]he object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity.”

The opinion acknowledges the practical concerns that CalPERS emphasized in its briefing – that a rule that bars tolling will force sophisticated litigants to file large numbers of separate protective complaints even before they decide to opt out – but takes the position that those concerns “likely are overstated,” pointing to the absence of “any recent influx of protective filings in the Second Circuit, where the rule affirmed here has been the law since 2013.”

The opinion closes with a coda offering a page of classic Kennedy prose, noting the strong interests on both sides of the case:

Tolling may be of great value to allow injured persons to recover for injuries that, through no fault of their own, they did not discover because the injury or the perpetrator was not evident until the limitations period otherwise would have expired. This is of obvious utility in the securities market, where complex transactions and events can be obscure and difficult for a market participant to analyze or apprehend. …The purpose of a statute of repose, on the other hand, is to allow more certainty and reliability. These ends, too, are a necessity in a marketplace where stability and reliance are essential components of valuation and expectation for financial actors.

Having made it clear to the reader that the court has taken note of those interests, the opinion closes by distancing itself from any obligation to resolve the tension between them. Thus, reiterating what the early pages had made clear, the majority describes the appropriate analysis as a “straightforward” application of a statute that “displaces the traditional power of courts to modify statutory time limits in the name of equity.” If anybody is going to take action to lessen the practical obstacles of class actions, it will have to be Congress.

The most obvious take on CalPERS is to file it as another in the continuing line of cases reflecting a general skepticism about the social value of large-scale class-action litigation. In case of doubt, the “tie” in those cases seems always to go to the class-action defendants. There surely is a bit of truth in that view, but on a broader jurisprudential front I would add just a note about the parallelism between the decision here and the recent decisions in Petrella v. Metro-Goldwyn-Mayer and SCA Hygiene Products v. First Quality Baby Products. The two earlier cases involved the statutes of limitations in intellectual property cases – Petrella under the Copyright Act and SCA Hygiene under the Patent Act. In both cases, the court rejected the use of laches to bar cases filed before the expiration of a statute of limitations in a federal statute. Although the earlier cases gave plaintiffs longer to sue (ensuring that they got the entire statutory limit) and this one makes it harder to sue (firmly holding plaintiffs to the statutory limit), all three of the cases show a court receding from the business of case-by-case equitable decisions about the timeliness of litigation. I will not be at all surprised to see more of these kinds of cases rising to the top of the court’s docket in the next few years.

[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, is among the counsel to the petitioner in this case. The author of this post, however, is not affiliated with the firm.]

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