Supreme Court Considers an Expansion of Class-Action Tolling
On March 26, 2018, the Supreme Court heard argument in China Agritech, Inc. v. Resh (No. 17-432), a case in which the justices will determine whether a plaintiff whose otherwise untimely claim has been tolled by the rules articulated in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) and Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983) may bring a putative class action, or is limited to filing an individual claim. In American Pipe and Crown, Cork, the Supreme Court held that the filing of a class action complaint tolls the statute of limitations for persons that fall within the proposed class definition until the court denies the motion for class certification. In American Pipe, this rule rendered timely the claims of plaintiffs who sought to intervene in the pending action after the court denied class certification, 414 U.S. at 561, and in Crown, Cork, the Court held that tolling applied to plaintiffs who initiated individual actions after the district judge issued the decision denying class treatment, 462 U.S. at 354.
The relevant factual background in Resh is relatively simple. Reports circulated in early 2011 that China Agritech, Inc. (“China Agritech”), a fertilizer company incorporated in Delaware and with its principal place of business in China, had fraudulently misstated its revenue and earnings. Two sets of plaintiffs brought two timely, sequential class actions alleging violations of the securities laws. In each case, the judge denied the plaintiffs’ motion for class certification, the first for failure to demonstrate that common questions predominated over individual ones (Federal Rule of Civil Procedure 23(b)(3)), and the second on the grounds that the lead plaintiffs failed to demonstrate that their claims and defenses were typical of the class (Federal Rule of Civil Procedure 23(a)(3)) and that they would “fairly and adequately protect the interests of the class” (Federal Rule of Civil Procedure 23(a)(4)).
In June 2014, a third action was filed based on the same facts and seeking to represent the same class. The district court dismissed the action for failure to state a claim, on the ground that the statute of limitations had lapsed. The plaintiffs had argued that the pendency of the two earlier putative class actions had tolled the statute of limitations according to the rules of American Pipe and Crown, Cork. The district court disagreed, but the Ninth Circuit reversed.
Before the Supreme Court, both parties contended that this case entailed only a straightforward application of the rules already established in American Pipe and Crown, Cork. China Agritech argued that equitable tolling principles require a plaintiff to demonstrate that he or she has exercised due diligence and that extraordinary circumstances exist. A person who falls within the class definition contained in the initial complaint demonstrates diligence by, first, relying on the class representatives to protect his or her rights and, second, intervening or filing an individual action after the denial of a class certification motion. According to China Agritech, in this case, while the individual claim of a would-be lead plaintiff is equitably tolled, those of the absent class members are not. China Agritech further argued that an individual seeking named-plaintiff status in a class action does not exercise diligence by waiting until after the failure of a certification motion to come forward; rather, a person who wants to represent a class should come forward early in the life of the litigation. China Agritech also contended that no extraordinary circumstances justified the delay.
In contrast, the would-be lead plaintiffs argued that the class-action claims remain timely because the limitations period was suspended for all asserted members of the class while earlier class-certification motions were pending. Respondents suggested that the rationale for allowing equitable tolling to benefit subsequent class actions is simple: any person that fell within the class definition of the initial complaint has a timely claim, and he or she may use any of the procedural rules available to any other litigant. Indeed, according to respondents, any other holding would violate the Rules Enabling Act, as use of Rule 23 cannot abridge any substantive rights. At oral argument, both Chief Justice Roberts and Justice Gorsuch indicated that they agreed that China Agritech seemed to ask for an exception to Rule 23. Respondents further argued that, according to American Pipe, absent class members demonstrate diligence simply by relying on any pending putative class actions. Additionally, they argued that allowing an individual plaintiff whose claim is otherwise equitably tolled allege claims on behalf of a class furthers the judicial economy rationale of Rule 23, and extraordinary circumstances are therefore present. Justice Sotomayor acknowledged this point, and suggested that Rule 23 evinces a preference for class over individual adjudication, and against duplicative filings, whether styled as individual or class actions.
The parties also disagreed sharply about the policy outcomes flowing from their proposed rules. According to China Agritech, the rule proposed by respondents would eviscerate the statute of limitations. Respondents argued that the Court had addressed and rejected these concerns in Smith v. Bayer Corp. 564 U.S. 299 (2011), which held that a denial of a motion for class certification does not have preclusive effect with respect to absent class members. Rather, according to respondents, principles of stare decisis and comity, as well as the rational interest of class counsel in not seeking to continually relitigate a meritless case, will prevent the statute of limitations from extending indefinitely.
Though the substantive claims in Resh involve the securities laws, the holding will impact any future class litigation—including antitrust class actions. We will provide an update when the Court issues its decision.