On March 26, the Supreme Court will hear arguments in China Agritech, Inc. v. Resh, a case which will further clarify statutes of limitation in class actions.
In 2011, company shareholders alleged fraudulent business practices and sued China Agritech in two successive putative class actions in 2011 and 2012. The plaintiffs alleged various securities law violations against the company and several individual defendants. Class certification was denied in both cases.
A third putative class action suit was brought by shareholder Michael Resh in 2014, alleging securities law violations arising from the same facts and circumstances as the first two cases. China Agritech moved to dismiss the complaint on the basis that it had been filed after the two year limitations period. Resh and the additional plaintiffs argue that under the precedent set in American Pipe & Construction v. Utah, the limitations period had been tolled on their claims during the pendency of the two prior class actions. The District Court rejected this contention, and the Ninth Circuit reversed. The Supreme Court will now hear arguments on whether the American Pipe tolling rule allows a previously unnamed plaintiff to bring a subsequent class action after the applicable limitations period has passed.
Christopher C. Murray of Ogletree Deakins will join us to give his impressions of the oral argument.
Christopher C. Murray, Shareholder, Ogletree, Deakins, Nash, Smoak & Stewart, P.C.
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Speaker 1: Welcome to the Federalist Society's Practice Group Podcast. The following podcast, hosted by the Federalist Society's Labor and Employment Law and Litigation Practice Groups, was recorded on Tuesday, February 27, 2018, during a live Courthouse Steps Teleforum conference call held exclusively for Federalist Society Members.
Laura Flint: Welcome to the Federalist Society Teleforum conference call. This afternoon, we'll be discussing the oral argument of China Agritech v. Resh, which was heard in the Supreme Court yesterday. My name is Laura Flint, I'm the Deputy Director of Practice Groups here at the Federalist Society. As always, please note that all expressions of opinion are those of the expert on today's call. Today we are happy to have with us Christopher C. Murray, shareholder at Ogletree, Deakins, Nash, Smoak & Stewart.
After remarks from Christopher, we'll go to audience question and answer. Thank you for speaking with us. The floor is yours.
Chris Murray: Great. Thank you. Well, as Laura mentioned, yesterday March 26th, the Supreme Court heard argument in China Agritech v. Resh, a case coming out of the 9th Circuit. That case involves the tolling of statutes of limitations on the claims of absent putative class members during the time a district court is deciding whether to certify a class action.
The fundamental question in this case is whether after district court has denied class certification, one of the absent class members may file his or her own new class action, even though the original statute of limitations has passed on the theory that the first putative class action tolled the statute of limitations under American Pipe. The Defendants in this case say that the American Pipe tolling only applies to putative class members individual claims, not to their ability to file entirely new class actions outside the original statute of limitations.
The Plaintiffs respond that there is no basis to limit American Pipe tolling only to individual claims and contend that all procedural mechanisms remain available to putative class members, including Federal Rule of Civil Procedure 23 as a result of the American Pipe tolling. In American Pipe, the Court held that unnamed members of an uncertified class could intervene in the individual suit that remained pending following denial of class certification if the original statute of limitations period had passed.
The Court held that "the commencement of the original class suit tolls the running of the statute of limitations for all purported members of the class who make timely motions to intervene after the Court has found the suit inappropriate for class action status". The Court identified a number of public policy reasons favoring such tolling. First, the Court noted that limitations periods serve the policies of insuring essential fairness to Defendants and a barring of Plaintiff who has "slept on his rights".
The Court reasoned that such policies are still vindicated even in a failed class action because the named Plaintiff commences a suit and thereby notifies the Defendant not only of the substantive claims being brought against them, but also the number and the generic identities of the potential Plaintiffs who might participate in a judgment. The American Pipe Court was also concerned that not permitting tolling on the claims of absent class members would frustrate the goal of Rule 23 to promote economy in litigation.
The Court feared that absent such tolling, potential class members would be induced to file protective motions to intervene or to join in the event that a class was later found unsuitable. The Supreme Court extended American Pipe nearly a decade later in Crown Cork & Seal v. Parker in 1983. Applying the same policy rationals, the Court made clear that American Pipe tolling allows an absent class member not only to intervene in the individual case that remains following a denial of class certification, but also to file his or her own new individual lawsuit.
Again, the Court expressed concern about the policy implications of not allowing such tolling. It observed that if the statute of limitations for new individual claims were not tolled, the result would be "a needless multiplicity of actions". Precisely the situation that Rule 23 and the tolling rule of American Pipe were designed to avoid. Again, the Court reasoned that such tolling was not inconsistent with the purposes of statute of limitations, because the commencement of a class suit already puts the Defendants on notice of adverse claims, the goals underlying statute of limitations would not be undermined by a broader tolling rule.
The Court concluded "once the statute of limitations has been tolled, it remains tolled for all members of the putative class until class certification has been denied. At that point, class members may choose to file their own suits or to intervene as Plaintiffs in the pending action." American Pipe and Crown Cork & Seal left unanswered the question whether absent class members in prior failed class actions may not only file out-of-time individual lawsuits following denial of class certification, but could they also file entirely new class actions and evoke Rule 23 themselves?
The Circuit Courts have addressed this issue in three different ways. At one end of the spectrum, the 1st, 2nd, 5th and 11th Circuits have all rejected American Pipe tolling for new class action suits. Those Courts read American Pipe and Crown Cork & Seal as applying tolling only to allow absent class members to file their own individual claims out-of-time following denial of class certification.
At the other end of the spectrum are the 6th, the 7th, and, now, the 9th Circuits. Those Circuits all allow successive putative class actions to be filed out-of-time based on American Pipe. Finally, the 3rd and the 8th Circuits have attempted to forge a middle path. They follow American Pipe tolling if class certification in the original class action was denied solely on the basis of the lead Plaintiff's deficiencies as class representatives and not because of the suitability of class claims for class treatment overall.
Turning now to the present case, Resh seems to illustrate very well the problems of what is referred to as class action stacking. This case is the third of three essentially identical securities class actions. The first two class actions were timely filed, the class certification was denied in both of them. The first case in the series of three was filed by Theodore Dean in February 2011.
In that case, Dean sought to represent a class of shareholders in China Agritech in suing the company, and several managers and directors, for various claims of alleged securities fraud. The fraud claims were premised, in part, on reports published earlier in February 2011, that appeared to provide notice of the alleged fraud.
On May 3, 2012, the District Court denied the Plaintiffs' Motion for Class Certification in that case. The Court found that the Plaintiffs had failed to establish the predominance requirement of Rule 23(b)(3). Reliance was a required element of the Plaintiffs securities fraud claims and the District Court found that the individual issues predominated because the Plaintiffs in the Dean action had failed to establish a fraud on the market presumption of reliance.
The fraud on the market theory requires a showing of market efficiency, which, in the view of the District Court, the Plaintiffs had not made. The Court, therefore, held that the Plaintiffs have to establish individualized reliance to support their claims defeating class certification. Following denial of class certification in that case, the individual Plaintiffs settled their claims in September 2012.
The second class action, in the series of three, was then promptly filed in October 2012. The named Plaintiff in that case was Kevin Smith, his class action Complaint was almost identical to that filed in the prior Dean case and was filed on behalf of the same putative class. The Smith class was timely filed and following transfer it ended up in front of the same District Judge who had decided the Dean action. The District Court again denied class certification.
On September 26, 2013, the Court held that the Smith Plaintiffs' personal claims failed the typicality requirement of Rule 23(a)(3) because they had some relationship with the named Plaintiffs in the prior Dean action that subjected them to a claim preclusion defense that was not available against unnamed class members. The Court further held that the Smith Plaintiffs and their counsel failed to meet the adequate representation requirement of Rule 23(a)(4).
The Court noted that the Plaintiffs had served only one Defendant 10 months after filing the case and following denial of class certification, the parties in that second case agreed to dismiss the action with prejudice with respect to the named Plaintiffs. Finally, the Resh case was then filed on June 30, 2014, over four years after the February 2011 report that apparently first provided notice of the alleged fraud.
Michael Resh, and several additional Plaintiffs, filed their putative class action based on the same facts and circumstances, and on behalf of the same would-be class as in the Dean and Smith actions, and the case was assigned to the same District Judge as the prior two cases. On December 1, 2014, the District Court granted the Defendants' Motions to Dismiss the case as barred by the Exchange Act's two-year statute of limitations. The Plaintiffs argued that their case was timely, because American Pipe tolled the statute of limitations during the pendency of the Dean and the Smith actions.
With tolling, 804 of the 1,243 days that had elapsed since release of the February 2011 report would be subtracted, meaning that only 439 days counted towards the two-year statute of limitations. The District Court disagreed, holding that under American Pipe, the statute of limitations was tolled for the individual claims of the named Plaintiffs but was not tolled for the Plaintiffs' would-be class action. On appeal, the 9th Circuit reversed, joining the 6th and the 7th Circuits in applying American Pipe tolling to class claims.
The Supreme Court granted cert on December 8, 2017 and, as noted earlier, heard oral argument yesterday. In oral argument, excuse me, Defendants' counsel noted that in the absence of American Pipe tolling for class actions, one could expect that multiple class actions would be filed and those class actions would be consolidated. The Court could then pick the best lead Plaintiff and best lead Plaintiff's Counsel. In response to this argument, Justice Sotomayor pressed Defendant's counsel regarding the policy underlying American Pipe, the desire not to force putative class members to file actions while the Motion for Class Certification covering them remained pending.
Justice Sotomayor suggested, "So your proposed regime is now encouraging the very thing that American Pipe was trying to avoid, which is to have a multiplicity of suits being filed and encouraging every class member to come forth and file their own suit." The Defendants' counsel responded effectively noting that, no, American Pipe and Crown Cork say we don't want you bringing your individual actions while the class action is pending, but that prior case law says nothing about bringing additional class actions at the time.
Justice Kagan also pushed the Defendants' counsel on the policy interest in avoiding numerous, and perhaps thousands, of individual actions. She noted that if it was reasonable for absent class members to wait during the pendency of the first class action to see whether the case would be certified, why wasn't it just as reasonable for them to wait and rely on a second class action to see if that case would be certified? Defendants' counsel, again, responded noting that the reasonableness of that reliance of absent putative class members depended on the whether the class action itself was timely filed.
He also argued that Rule 23's interests and the interests underlying the statute of limitations could best be reconciled by applying American Pipe tolling only to individual claims. He noted, "If we enforce a statute of limitations, Rule 23's interests would be served because we would have the classes coming forward early and those who want to lead the class, or feel they could do a better job than someone else, will come forth to the Court, make their case, present their class representative, and the Court can then decide which is the best way to proceed."
Defendants' counsel noted that would be a much more efficient way of proceeding and much more in line with Rule 23 than having seriatim shots at trying to get a class certified, which is exactly what we have here in the Resh case and its preceding cases. Defendants' counsel, yesterday, emphasized the theme that application of equitable tolling to absent class members' individual claims under American Pipe is appropriate because those individuals show diligence in pursuing their claims by coming to court after class certification has been denied; but, there's no reasonable ground to treat absent class members who stay absent as similarly diligent. They're exactly the type of Plaintiffs whom statute of limitations apply to, that is those who sleep on their rights.
Justice Alito seemed to pick up this point and asked, yesterday, "Are you asking for an exception to equitable tolling or are you arguing that those claims are not equitably tolled because there was not diligence with respect to them?" Defendants' counsel answered with the latter, "Your Honor, equitable tolling requires diligence in extraordinary circumstance and someone who sleeps on their rights and doesn't present her claim, those claims will expire when the statute of limitations expires. Someone who's just sitting back and doing nothing is not entitled to equity and we're not aware of any case in which someone who has slept on their rights was given equity."
Chief Justice Roberts asked if this meant that all absent class members would have to file individual claims following denial of class certification in order to gain the benefit of equitable tolling? Defendants' counsel answered, "Yes," but he also noted that the requirement each individual displayed diligence by taking individual action would not prevent individuals from filing joint claims or prevent courts from consolidating those individual claims later on.
Defendants' counsel also distinguished what American Pipe was concerned about, which was a class action pending and a bunch of individual claims being filed at the same time from the different scenario that would be presented here. Multiple class actions possibly being filed at the same time within the statute of limitations period. That latter scenario was not what American Pipe was concerned about, according to Defendants' counsel, and he suggested that scenario would actually be beneficial and certainly an improvement over the effect of the 9th Circuit's decision, which would be an endless train of class actions following one upon another.
It appeared to me that Plaintiffs' Counsel seemed to be on the end of some more challenging questioning than Defendants' counsel. Justice Ginsberg, for example, pushed back on Plaintiffs counsel's suggestion that individual Plaintiffs whose claims are tolled under American Pipe have a right to bring class actions under Rule 23. She noted that Rule 23 says nothing about tolling and that tolling is an equitable doctrine, in her words, "made up by the courts". She observed that courts decide if there's tolling, how long that tolling will be, and tolling questions are not resolved by the Federal Rules; rather, equitable tolling is court-made law, not rule-made law.
Justice Breyer also seemed troubled by the idea that an absent class member, someone who received, perhaps, multiple notices of class actions, and did absolutely nothing after receiving those cases, perhaps just tossing the notices unread into the trash, would benefit from potential non-stop equitable tolling as a result of other individuals filing class actions that possibly cover them. Justice Gorsuch got to the heart of the matter asking, "Can you stack them forever so that try, try again, and the statute of limitations never really has force in these cases? What do we do about that given the congressional judgment that there be a statute of limitations?"
In response, Plaintiffs' counsel, perhaps following the lead of the 9th Circuit's own decision, suggested that District Courts could exercise the principle of comity, deferring to prior District Courts decisions not to certify cases involving the same claims and, essentially, the same fact patterns. A number of Justices did not seem persuaded by that response. Justice Ginsberg, for example, questioned whether the comity principle was really just an effort to invoke claim preclusion under a different name.
Justice Alito suggested that comity was essentially an unenforceable concept. Justice Gorsuch asked if any District Court had ever been held to abuse its discretion by declining to follow another District Court's decision? To this, Plaintiffs' counsel had to concede, no. On rebuttal, Defendants' counsel addressed the theory that he as suggesting Rule 23 could not apply when an individual filed a claim following class certification.
Plaintiffs' counsel had attempted to cast Defendants as suggesting that somehow the Rules of Procedure became more limited when an individual filed his or her individual claim following denial of class certification and that person was being unfairly or somehow wrongly deprived of the opportunity to involve Rule 23 following denial of that original class certification.
But, Defendants' counsel responded, "We're not saying that Mr. Resh is not able to use Rule 23 in his individual action, he can; but, what he cannot do is use Rule 23 to revive claims that have been dormant and that are not untimely. If he wants to come into court and say, 'I've got a Rule 23 claim,' fine, bu the problem for him is that there is no one else left in the class because they have not filed their own claims and have not gained the benefit of equitable tolling."
Those would appear to be the highlights in the argument in the case from my perspective. Now, we'll wait for a decision, which is expected by June. Thank you.
Laura Flint: Let's go to audience questions. In a moment, you'll hear a prompt indicating that the floor mode has been turned on. After that, to request the floor, enter star then the pound key.
When we get to your request, you will hear a prompt, and then you may ask your question. We will answer questions in the order in which they are received. Again, to ask a question, please enter star then the pound key on your telephone keypad. While we wait for our first question, I'll ask one of my own. How do you think this case will be decided?
Chris Murray: Well, it seemed to me like the Plaintiffs' attorney, the individuals' attorney, was on the end of some tougher questioning yesterday from all across, I guess you would say, the ideological spectrum of the Court. I don't know that'll necessarily affect the result, but, I guess, if I had to lean one way or the other, I would lean maybe a little bit more towards the Defendants' side, or the company's side, on this case; but, you never know.
Laura Flint: Again, to ask a question, please enter star then the pound key on your telephone keypad. Our next Teleforum conference call is scheduled for tomorrow, Wednesday, March 28th. That call will be a Qualcomm litigation update and will feature Stewart Baker, part [owner 00:21:36] at Steptoe & Johnson and John Shu, attorney and legal commentator. Let's go to our first audience question.
Speaker 4: I'm wondering if you see any possibility that the Court would differentiate based on the grounds for denying class certification the first time around? If, for example, the class was denied on the grounds that the Plaintiff was not an adequate representative, that wouldn't necessarily be an indication that class certification was improper. Do you think the Court might rule that equitable tolling would apply and would allow an attempt to organize a second class if certification was denied on adequacy grounds?
Chris Murray: Thanks, that's a great question. Justice Sotomayor did raise that possibility during the argument. It did not seem to get a lot of traction with the other Justices. I thought it was an interesting issue when she raised it. It was also interesting, she raised that question with Plaintiffs' counsel and he actually provided probably more reasons for why the Court should not go in that direction than, perhaps, I'm not sure that Defense Counsel addressed that at all.
He noted that it would make the cases more complicated and that there might be a benefit from a bright line approach. That option did not seem to get a lot of traction during argument yesterday, although it was raised as one possibility.
Laura Flint: Again, to ask a question, please enter star then the pound key on your telephone keypad. Not seeing any questions, I'll ask one of my own. How you do think that the decision in this case will affect future class action certification, especially the number of class actions?
Chris Murray: Well, that's also a great question. If the Court goes in the direction of the Defendants on this case, it would certainly seem to encourage the filing of more class actions up front from multiple Plaintiffs so that individuals can preserve their right to pursue a class action rather than waiting to see whatever the first-filed class action, how that turns out.
I guess, on the flip side if the Court goes in the direction of the Plaintiffs in this case, then we'll probably also see a lot of class actions, but instead of them being filed up front, they'll be in a series. So, people will wait, see how the prior class action turns out, and probably what I would expect is that would be a preferred approach from the Plaintiffs' side, because you could wait, and see what happened in the prior case, and perhaps learn from it, and then adapt your strategy in the subsequent case.
I guess, the short answer is probably either way we're gonna see a lot of class actions either way, it just depends whether they'll all be filed at the same time or one after another.
Laura Flint: I'll make a final call for questions. Again, to ask a question, please enter star then the pound key on your telephone keypad. Reminder to keep an eye out for emails announcing upcoming telephone calls and to consult the full schedule of our upcoming calls on The Federalist Society's website, fedsoc.org.
Also available there are podcasts, previously recorded Teleforum calls you may have missed. Let's go to another audience question.
Bob Fitzpatrick: Hi, Bob [Fitzpatrick 00:25:37] here at DC. I came kind of late to the dance, so if this is stupid don't hesitate to say so.
Chris Murray: Well, if my answer is stupid, likewise.
Bob Fitzpatrick: Okay. There you go. Was there any discussion about, Case A is filed, the first case is filed, as a class action, and class certification is denied, and the District Judge articulates reasons for doing so. No appeal is taken from the denial of certification, so the issue doesn't go out to a Court of Appeals to bless it. Let's assume it's a putative national class action.
Then they file Case B and they go to a different part of the country where they think maybe they'll get a better result. District Judge in B says, "No," but doesn't say law of the case or some notion of that. It just strikes me that the failure to take an appeal seems to allow Plaintiffs to just seriatim judge shop, in effect. Anyway, did any of this come up in oral argument is my stupid question?
Chris Murray: No, that's a ... I don't recall any discussion of the effect of whether or not they took an appeal in the first case and I don't recall that coming up. There was some discussion about this idea that, for example, in your hypothetical, in Case B, whether that Judge in Case B would apply comity and follow the decision in Rule A, just standing alone as a District Court decision, even though there's not appellate decision enforcing that. The Justices seemed pretty skeptical that would happen very often or that would really be very effective at putting the brakes on the seriatim cases.
That it's really at the discretion of the District Court whether they exercise that discretion to apply comity and follow a prior District Court decision and that's basically unreviewable on appeal anyway. That it would just be a weak break on a multiplicity of class actions. I think that's maybe the closest I heard to that issue coming up and the Justices did not seem persuaded that would be a very effective way of preventing these cases from just going on forever and ever.
Bob Fitzpatrick: If I could just ask one other, with apologies. Justice Ginsberg has always been the Justice that the others turn to on civil pro issues. Did she seem to have a view in this case and what was it?
Chris Murray: Sure. She pushed back on the Plaintiffs' theory that the Court's prior decision in Shady Grove somehow guaranteed that Plaintiffs would be able to invoke Rule 23 at any stage of the case. That if a Plaintiff was an absent class member in an earlier case, filed an individual action, that person would then be able to invoke Rule 23 under Shady Grove. Justice Ginsberg did push back on that.
She said, "I don't see where you're getting that from Rule 23. Rule 23 has nothing to do with equitable tolling or the principles of tolling." I guess, that's probably the closest I heard to her kind of exercising ... Commenting on her knowledge or using her knowledge of the Rule 23 or the Federal Rules to reign in some of that argument from Plaintiffs' counsel on that issue. That's the closest, I think, I heard on that.
Bob Fitzpatrick: Thanks a lot. Appreciate it.
Chris Murray: Sure. Thank you.
Laura Flint: I'll make a final call for questions. Again, to ask a question, please enter the star then the pound key on your telephone keypad.
Not seeing any questions from the audience, do you have any final remarks?
Chris Murray: No, just thanks a lot for inviting me to be here today and appreciate everyone who asked questions or listened in. Thank you.
Laura Flint: On behalf of the Federalist Society I want to thank our expert for the benefit of his valuable time and his expertise today. We welcome listener feedback by email at email@example.com. Thank you all for joining us, we are adjourned.
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