SCOTUS Rules Equitable Tolling Does Not Save Successive Class Action Lawsuits

On June 11, 2018, the Supreme Court of the United States issued a landmark decision in China Agritech, Inc. v. Resh, addressing a split in the federal circuit courts of appeal, arising from differing applications of the equitable tolling rules articulated in two prior Supreme Court decisions, American Pipe & Construction Co. v. Utah (1974) and Crown, Cork & Seal Co. v. Parker (1983). In China Agritech, the Court examined whether, following denial of class certification in a putative class action, a would-be class member may commence a new class action beyond the time allowed by the applicable statute of limitations, “in lieu of promptly joining an existing suit,” as permitted in American Pipe, or filing an individual action, as permitted under Crown, Cork. The Court answered in the negative: equitable tolling does not apply to save subsequent class actions from the applicable statute of limitations.

Background

American Pipe

In American Pipe, the Court held that “the commencement of . . . [a] 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 American Pipe plaintiffs had sought to intervene in an existing putative class action that had been denied class certification for failure to meet the numerosity requirement of Federal Rule of Civil Procedure 23(c)(1). The would-be intervenor plaintiffs were denied intervention under Rule 24 on the grounds that, in the intervening time while the matter was pending before the district court, the statute of limitations had run.   The Court seemingly attempted to limit its ruling to would-be intervenors, explaining that denying them intervention, based merely on a decision that the class lacked numerosity, did not further the purposes of efficiency and economy that Rule 23 is intended to promote.

Crown, Cork

In Crown, Cork, the Court elaborated on American Pipe to explain that the tolling rule applies not just to would-be intervenors, but also to individual plaintiffs who bring subsequent, individual claims following a denial of class certification.

Following American Pipe and Crown, Cork, the federal circuit courts of appeals were divided as to whether an applicable statute of limitations is tolled not just as to intervenors in an existing suit or to individuals who seek to file a new lawsuit, but also to plaintiffs seeking to pick up the mantle of the failed class representatives in a subsequent class action.

China Agritech

In China Agritech, the plaintiffs who filed suit were the third set of plaintiffs to attempt to bring a class action on behalf of purchasers of China Agritech common stock. The successive complaints each alleged similar facts: that China Agritech engaged in fraud and misleading business practices causing the company’s stock prices to plummet. Theodore Dean, a China Agritech shareholder, filed the first case, asserting claims under the Securities Exchange Act of 1934, which has a two-year statute of limitations (the so-called Dean case). Dean filed suit in 2011 at the start of the two-year statute of limitations. In 2012, the district court denied class certification, finding that the plaintiffs had failed to establish that they could prove the necessary element of reliance on a class-wide basis. The case settled in September 2012.

In October 2012, before the statute of limitations had run, the plaintiff’s counsel filed a second class action (the so-called Smyth case) with a new set of plaintiffs and rectifying the pleading deficiencies noted by the court in the Dean case. The district court denied class certification in the Smyth case as well, on adequacy and typicality grounds. The Smyth plaintiffs settled their individual claims and dismissed their suit. In both Smyth and Dean, the plaintiffs provided statutorily required notice of the pendency of the suit to putative class members, as required by the Private Securities Litigation Reform Act of 1995.

In June 2014, one-and-one-half years after the statute of limitations had expired, Michael Resh filed a class action suit on the same grounds on which the prior cases were filed. Resh had not actively participated in either of the prior actions and was represented by counsel who had not appeared in those actions. The district court dismissed Resh’s complaint as untimely. On appeal, the Ninth Circuit Court of Appeals reversed, holding that the equitable tolling principles of American Pipe and Crown, Cork permitted the tolling of both individual and class claims during the pendency of a class action.

The Supreme Court’s Ruling

The Supreme Court reversed the Ninth Circuit’s judgment. In its opinion, the Court clarified that, under American Pipe and Crown, Cork, only individual claims, whether brought by intervenors or in subsequent individual lawsuits, are preserved by equitable tolling. The Court explained that tolling applies to individual claims because it allows for more efficient litigation. Without tolling, individuals would be forced to file protective cases during the pendency of a putative class action, which would be unnecessary if the class were later certified. However, the Court reasoned that new class cases are different in that the “efficiency and economy of litigation” are not furthered by the “maintenance of untimely successive class actions.” 

In the Court’s opinion, the efficiency and economy of litigation are better served if any competing class representative claims are asserted as early as possible after the commencement of the first action seeking certification. In particular, the Court explained that if all class cases are filed early, if the cases are certified, then the district court can select the best plaintiff and class counsel to represent the class. Conversely, if a court denies class certification, then that issue is litigated once for all class claims.  The Court rejected an alternate reading of American Pipe, stating that applying its reasoning to class claims would “allow the statute of limitations to be extended time and again; as each class is denied certification, a new named plaintiff could file a class complaint that resuscitates the litigation.”  Such a result would run afoul of Rule 23 and American Pipe’s emphasis on the need for efficiency and economy in litigation.

Practical Impact

The China Agritech decision may be welcome news for businesses facing potential class action lawsuits. In the employment context, however, it is uncertain whether it will provide a respite from successive litigation against employers. For example, unlike lawsuits brought under the Securities Exchange Act, which tend to arise from a single event or a series of common events that are fixed in time, many (but not all) claims in employment class actions tend to arise from allegations of common practices that may reoccur over the applicable statute of limitations period. In addition, most Rule 23 class actions, whether in the employment context or otherwise, do not include express, statutory notice requirements on putative class representatives such as those under the Private Securities Litigation Reform Act. Indeed, Justice Sotomayor’s concurring opinion notes that the China Agritech case was unique because of the specific statutes that governed it.

Only time will tell whether and how this decision will apply in the employment context, but it provides another arrow in the quiver to defend against the ever-pressing concern of class action lawsuits.