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U.S. Supreme Court’s Decision in China Agritech May Limit The Availability of Class-Action Tolling For Litigants That File Suit Before Class Certification

On June 11, 2018, the U.S. Supreme Court issued its opinion in China Agritech, Inc. v. Resh, 138 S. Ct. 1800 (2018).  The China Agritech decision resolved a circuit split, finding that the statute of limitations for a follow-on class action is not tolled under American Pipe.  Currently, a related circuit split exists on the question whether class action tolling is available for litigants that file opt-out lawsuits prior to a decision on class certification.  Currently, the Second Circuit permits tolling in those circumstances, while the Sixth Circuit does not.

The reasoning of the China Agritech decision suggests that the U.S. Supreme Court would agree with the Sixth Circuit and hold that class action tolling is unavailable for opt-out plaintiffs that file suit prior to a decision on class certification.

Second Circuit Decision in Worldcom

In WorldCom Sec. Litig., 496 F.3d 245 (2d Cir. 2007), the Southern District of New York had held that opt-out plaintiffs that bring suit before class certification is decided could not benefit from American Pipe tolling. As the court of appeals explained, the district court reasoned that “the justification for the doctrine was to avoid the filing of numerous suits by individual class members as a safeguard to preserve their option of proceeding by individual action. With the benefit of American Pipe tolling, class members could wait until after certification was resolved before deciding whether to file their individual suits. According to the district court's reasoning, class members who filed individual suits before the certification decision were not entitled to have their claims tolled, because such individual suits were precisely what the American Pipe tolling doctrine sought to avoid.” Id. at 251.

The Second Circuit disagreed with the district court:  while “[t]he district court may be correct that its conception of the American Pipe rule would reduce the number of individual suits filed by class members,” reducing individual suits was a byproduct, not the purpose, of the rule.   Rather, “the American Pipe tolling doctrine was created to protect class members from being forced to file individual suits in order to preserve their claims. It was not meant to induce class members to forgo their right to sue individually” Id.

Sixth Circuit Decision in Wyser-Pratt

Wyser-Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d 553 (6th Cir. 2005), involved direct action fraud claims against Telxon and PwC while discovery was underway in class action suits against both defendants.  The district court granted a motion to dismiss the fraud claims on statute of limitations grounds, finding that American Pipe tolling did not apply because the direct action plaintiff Wyser-Pratte brought suit before a class certification decision in the class actions against Telxon and PwC.

The Sixth Circuit held that by bringing suit prior to a decision on class certification, Wyser-Pratt forfeited the benefit of class action tolling: “[t]he purposes of American Pipe tolling are not furthered when plaintiffs file independent actions before decision on the issue of class certification,  but are when plaintiffs delay until the certification issue has been decided.” Id. at 569.  Notably, in reaching its decision the Sixth Circuit relied on the Southern District of New York’s decision in Worldcom that was subsequently reversed by the Second Circuit.

Supreme Court Decision in China Agritech

China Agritech, Inc. v. Resh, 138 S. Ct. 1800 (2018) deals with a related, but not identical issue—the application of American Pipe tolling to successive class actions.  On that question, Justice Ginsberg (writing for an eight justice majority, with Justice Sotomayor concurring in the judgment), found that “American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails. But American Pipe does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.” Id. at 1804.

Justice Ginsberg’s opinion, like the district court in Worldcom and the Sixth Circuit in Wyser-Pratt, focused on the policy justifications behind American Pipe tolling: “[t]he watchwords of American Pipe are efficiency and economy of litigation, a principal purpose of Rule 23 as well. Extending American Pipe tolling to successive class actions does not serve that purpose. The contrary rule, allowing no tolling for out-of-time class actions, will propel putative class representatives to file suit well within the limitation period and seek certification promptly.” Id. at 1811. The opinion did not mention Worldcom or Wyser-Pratt.

After the China Agritech decision, practitioners in the field have suggested that since China Agritech stresses judicial efficiency as the animating basis for American Pipe tolling, the Court would be likely to side with the Sixth Circuit.  That is also suggested by the language of the decision: “American Pipe tolls the statute of limitations during the pendency of a putative class action, allowing unnamed class members to join the action individually or file individual claims if the class fails.” Id. at 1804 (emphasis added).