The U.S. Supreme Court has issued its much-anticipated decision on class action tolling, deciding that the filing of a class action under the Securities Act of 1933 does not toll the statute of repose for an individual to bring the same claim or claims as the class action. The 5-4 decision in California Public Employees’ Retirement System v. ANZ Securities, Inc., No. 16-373, upends the current practice of opting out of securities class actions with significant implications for investors, effectively killing reliance on class action tolling in federal securities class actions. Justice Kennedy wrote the Court’s opinion, with Justices Roberts, Thomas, Alito, and Gorsuch joining; Justice Ginsburg wrote the dissent, with Justices Breyer, Kagan, and Sotomayor joining.
In 1974, the Supreme Court decided, in American Pipe & Construction v. Utah, that the filing of a class action tolls the statute of limitations for an individual to pursue the same claims. Based on that decision, individual plaintiffs could wait to file an individual complaint as the class action was litigated–the pendency of the class action complaint prevented the statute of limitations from running out on their claims. Once the case ended, or if class certification was denied, the statute of limitations would again begin to run, and plaintiffs could decide at that point whether and how to pursue individual claims. However, the Supreme Court had not addressed the issue of whether the filing of a class action complaint also tolled the statute of repose for an individual to bring the same claim or claims.
The federal securities laws have two limitation periods, a shorter limitation period that generally runs from the time when the plaintiff discovers the violation, and a longer limitation period that provides that actions cannot be brought more than a specific number of years after the date of the violation.
In this case, the Court deemed the longer limitation period, which provides that all claims under the Securities Act must be brought within three years of when the security was offered to the public, to constitute a statute of repose that “admits of no exception and on its face creates a fixed bar against future liability.” At oral argument, Justices Alito and Gorsuch expressed the opinion that the statutory language barring the filing of a new “action” after the statute of repose period had run compelled the Court to find that the filing of a class action did not toll the statute of repose for individual plaintiffs to file an action.
While Justice Breyer initially expressed some sympathy to this reading of the statutory language, he later suggested that the practical concerns troubled him, noting archly that in a class action with 300,000 putative class members, if all 300,000 opted out of the class action to prevent the statute of repose from running, “[y]ou’ll have to build a new clerk’s office” to house the “300,000 pieces of paper [coming] across your desk.” Justice Kagan expressed concerns with the impact on smaller investors, who, unlike sophisticated institutional investors with legal counsel, would not be aware of the need to file a protective action to prevent the statute of repose from running. Justice Ginsburg’s dissenting opinion noted that constitutional due process concerns require allowing class members the right to opt out of class actions, and the majority’s opinion “render[s] the right illusory,” given that “opting out cuts off any chance for recovery” where the statute of repose runs out and renders all opt-out actions untimely.
In the underlying case, after the filing of the class action, CalPERS filed an individual action and later opted out of the settlement of a securities class action against underwriters of securities issued by Lehman Brothers. The Second Circuit held that the class action had not tolled the statute of repose and therefore CalPERS’ filed its individual complaint too late.
In upholding the Second Circuit’s decision, the Supreme Court has opened the floodgates to investors filing individual actions to protect against the repose period running out on their claims. Those investors can no longer wait to see whether and how the class action proceeds before filing cases.