American Pipe ruling does not apply to successive class claims

OCTOBER 2017 TERM

Once a class complaint is filed in federal court, putative class members do not need to protect themselves from the statute of limitations by bringing their own individual claims. They can wait because a doctrine recognized in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), tolls the statute of limitations from the date a class action complaint is filed to the date the district court denies the named plaintiff's class certification motion. But suppose a putative class member, after the class certification motion is denied, asserts the claim as a new "successive" class claim: Does this same tolling doctrine apply? The U.S. Supreme Court, in China Agritech, Inc. v. Resh, 2018 DJDAR 5561 (June 11, 2018), recently answered this question in the negative. In doing so, it offered key insights on the competition arising from multiple class-action filings by would-be class representatives and a district court's role in managing this competition.

China Agritech arose from a series of putative class actions alleging federal securities fraud, which has a two-year statute of limitations. The first action was filed shortly after the limitations period began and, as required by the Private Securities Litigation Reform Act, the named plaintiff notified other putative class members, inviting them to seek appointment as lead plaintiff. After limited pretrial practice, the district court denied plaintiff's class certification motion, precipitating dismissal. Also within the limitations period, different plaintiffs brought a second class action, this time with new class certification evidence, and complied with the PSLRA notice requirements. The district court denied class certification (on different grounds), again prompting dismissal. An investor who had not previously sued or sought appointment as lead plaintiff filed the third putative class action a year and a half after the limitations period had ended.

The district court dismissed it as untimely, holding that the two earlier pending class complaints did not toll the time to initiate class claims under American Pipe. The 9th Circuit disagreed. In its view, extending American Pipe's tolling doctrine to class claims eliminates the incentive absent class members would otherwise have to file their own "protective class suits" before the limitation period expires, thus promoting American Pipe's "economy of litigation" objective.

The Supreme Court reversed. It held that a putative class member cannot commence a successive class action beyond the applicable statute of limitations period. As the court explained, American Pipe concerned only absent class members' efforts to litigate their own individual claims and so "economy of litigation" favored an approach that did not encourage the filing of individual claims before the class certification ruling. American Pipe tolling achieves this: Only after the class motion is denied does the need to assert an individual claim arise. In contrast, class claims inherently compete with each other and so efficiency favors their "early assertion" to enable district courts to assess "the full array of class representatives and class counsel" and decide class certification at the "outset of the case, litigated once, for all would-be class representatives." Tolling the limitations period to allow successive class claims undermines this goal.

The court found support for its decision in Federal Rule of Civil Procedure 23's requirement that district courts decide the class certification question at "an early practicable time." It identified further support in the PSLRA's lead plaintiff-appointment procedures that facilitate the selection of lead plaintiff at the outset of a putative securities class action by providing the district court "with the full roster of contenders before deciding which contender to appoint." (The court made clear, however, that its holding applied to all claims, not just securities claims.) Ultimately, the court's desire to cabin American Pipe stemmed largely from its concern that the limitations period might otherwise never lapse.

The court also found no reason to believe timely "protective" class-action filings might increase as a result of its ruling. Regardless, the court described such filings as "not necessarily 'needless'" because they "may aid a district court in determining, early on, whether class treatment is warranted, and if so, which of the contenders would be the best representative." Although the court acknowledged that dueling "protective" class claims filed in different district courts at different times "might not line up neatly," it pointed to the "ample tools" district courts have to manage multiple filings, "including the ability to stay, consolidate, or transfer proceedings."

Before China Agritech, in the 9th Circuit and others, a putative class member could take a wait-and-see approach regardless of the statute of limitations and, in the event class certification was denied, learn from the named plaintiff's mistakes by filing a new class claim with new or refined arguments and evidence to support class certification. With the limitations period effectively tolled perpetually, this subjected defendants to the prospect of serial efforts by would-be class representatives to certify a class. No longer. China Agritech insists that the battle to certify a class and select the class representative occur early and decisively. As a result, we can expect district courts to more closely manage and examine competing class-action filings with a view towards deciding the class certification question once and for all and (if granting class certification) selecting not just an adequate representative but "the best" among those vying for the spot.