(Article from Securities Law Alert, June 2017)
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On May 24, 2017, the Ninth Circuit held that the American Pipe tolling doctrine permits plaintiffs to bring a new class action after the expiration of the statute of limitations if they were unnamed plaintiffs in a timely-filed putative class action, even if class certification was denied in the prior action on substantive grounds and the new action asserts similar class claims. Resh v. China Agritech, 2017 WL 2261024 (9th Cir. 2017) (Fletcher, J.).[1] In Korwek v. Hunt, 827 F.2d 874 (2d Cir. 1987), the Second Circuit considered this same question and held that American Pipe “does not apply to permit a plaintiff to file a subsequent class action following a definitive determination of the inappropriateness of class certification.”[2]
Pursuant to the American Pipe tolling doctrine, “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.” American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). The American Pipe Court held that “unnamed members of an uncertified class could intervene as individual plaintiffs in the individual suit that remained even if the statutory limitations period had passed.” Resh, 2017 WL 2261024. In Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), “the Supreme Court extended American Pipe to permit tolling not only for individual intervention in the named plaintiffs’ original suit, but also for individual filing of entirely new suits.” Resh, 2017 WL 2261024. The Ninth Circuit found that American Pipe and Crown, Cork & Seal left “open the question [of] whether such plaintiffs may bring a new suit as a class action.”
Relying on its prior decision in Catholic Social Services v. INS, 232 F.3d 1139 (9th Cir. 2000), the Ninth Circuit found that “the availability of a subsequent class action . . . depend[s] on the operation of preclusion and preclusion-related principles” and not general tolling principles. In Catholic Social Services, the Ninth Circuit held that unnamed members of a timely-filed putative class action could bring a class action after the expiration of the statute of limitations where certification was vacated in the prior class action based on an intervening change in the law. The Catholic Social Services court explained that the case before it did not involve “a statute of limitations question” but “rather, a question of whether plaintiffs whose individual actions are not barred may be permitted to use a class action to litigate those actions.” 232 F.3d 1139. The Ninth Circuit in Resh found the Catholic Social Services holding was not limited only to “certain categories of class action denials,” such as those based on the deficiencies of a class representative. 2017 WL 2261024. Rather, the Resh court determined that Catholic Social Services applies equally to cases in which class certification was previously denied based on a substantive deficiency in the class itself.
The Resh court found the Supreme Court’s decision in Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010) “confirmed” this interpretation. The Shady Grove Court held that “for purposes of class certification,” courts must “look only to the criteria of Rule 23 and not to ‘some other law.’” Resh, 2017 WL 2261024 (quoting Shady Grove, 559 U.S. 393). The Resh court reasoned that “[t]here is nothing in the certification criteria of Rule 23 that tells us to look to whether the statute of limitation has, or has not, been tolled.”
The Resh court concluded that “permitting future class action named plaintiffs, who were unnamed class members in previously uncertified classes, to avail themselves of American Pipe tolling would advance the policy objectives that led the Supreme Court to permit tolling in the first place.” The Resh court reasoned that this “rule creates no unfair surprise to defendants because the pendency of a prior class suit has already alerted them ‘not only [to] the substantive claims being brought against them, but also [to] the number and generic identities of the potential plaintiffs who may participate in the judgment.’” Id. (quoting American Pipe, 414 U.S. 538). The Resh court explained that this “[t]he rule also promotes economy of litigation by reducing incentives for filing duplicative, protective class actions.”
To the extent this rule might “lead to abusive filing of repetitive class actions,” the Resh court stated that “the current legal system is adequate to respond to such a concern.” The court explained that “if it is clear that a proposed class is not viable under Rule 23, as evidenced by an earlier federal court decision, potential future plaintiffs (or, more precisely, their attorneys) will have little to gain from repeatedly filing new suits.” The court reasoned that “[a]ttorneys who are going to be paid on a contingency fee basis, or in some cases based on a fee-shifting statute, at some point will be unwilling to assume the financial risk in bringing successive suits.”
Moreover, the Resh court found that “ordinary principles of preclusion and comity will further reduce incentives to re-litigate frivolous or already dismissed class claims, and will provide a ready basis for successor federal district courts to deny class action certification.”[3]
[1] In Resh, the named plaintiffs had been unnamed members of two previously uncertified classes. Class certification was denied in the first action for failure to demonstrate market efficiency for purposes of the fraud-on-the-market presumption of reliance. Certification was denied in the second action based on the named plaintiffs’ failure to meet Rule 23(a)(3)’s typicality requirement and class counsel’s failure to meet the requirement of Rule 23(a)(4). The named plaintiffs in the Resh action contended that the denial of certification in the first action “was based upon the particular lead plaintiffs’ experts’ deficiencies rather than any suitability of the claims for class treatment.” Resh v. China Agritech, 2014 WL 12599849 (C.D. Cal. Dec. 1, 2014). The district court found the Resh plaintiffs were essentially “argu[ing] that class certification was denied not because the claims were not suitable for class certification, but rather, because the plaintiffs failed to establish that the claims were not suitable for class certification.”
[2] Many courts have agreed with the Second Circuit’s approach in Korwek. See, e.g., Yang v. Odom, 392 F.3d 97 (3d Cir. 2004) (“[T]his Court agrees with the Korwek line of cases insofar as they refuse to toll limitations periods for substantively identical class actions in which the earlier putative class was denied certification because the substantive claims were inappropriate for class treatment. Our review of the case law of the Circuits which have addressed the issue reveals them to be unanimous on this point.”).
[3] The Resh court found the Supreme Court’s decision in Smith v. Bayer Corp., 564 U.S. 299 (2011) instructive on this point. In Smith, the Supreme Court held that class certification in a federal suit did not bar class certification in a parallel state court suit because the named plaintiffs in the state court suit were only unnamed members of the class in the federal court suit. In response to defendants’ concern regarding the “serial relitigation of class certification,” the Court suggested that “traditional principles of stare decisis and comity, combined with the possibility of removal under the Class Action Fairness Act or consolidation by the Panel on Multidistrict Litigation, were adequate to the task of protecting defendants.” Resh, 2017 WL 2261024 (discussing Smith, 564 U.S. 299).