WASHINGTON (CN) – Supreme Court precedent on extending the time to file a class action is not applicable in the securities setting, the justices ruled 5-4 Monday.
Referred to generally as “American Pipe tolling,” the practice takes its name from the Supreme Court’s decision on the 1974 decision American Pipe & Construction Co. v. Utah.
CalPERS, short for the California Public Employees’ Retirement System, contends that the precedent should be considered in determining whether a case it filed in New York is barred by the three‐year statute of repose contained in section 13 of the Securities Act of 1933.
ANZ Securities is the lead defendant named in the CalPERS case, which is part of sprawling litigation over the bankruptcy of Lehman Brothers.
After U.S. District Judge Lewis Kaplan dismissed CalPERS’ case, the Second Circuit affirmed last year, holding firm to its position that American Pipe tolling does not affect the statute of repose embodied in section 13.
The federal appeals court said it saw no reason to distinguish CalPERS’ case from its 2013 ruling Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS Inc.
In affirming that decision this morning, the Supreme Court was split 5-4 on party lines.
“The purpose of a statute of repose is to create ‘an absolute bar on a defendant’s temporal liability,’ and that purpose informs the assessment of whether, and when, tolling rules may apply,” Justice Anthony Kennedy wrote for the majority. “In light of the purpose of a statute of repose, the provision is in general not subject to tolling. Tolling is permissible only where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances.”
Justice Ruth Bader Ginsburg attacked this logic, however, in a strongly worded dissent.
“Today’s decision disserves the investing public that §11 was designed to protect,” she wrote, joined by Justices Elena Kagan, Sonia Sotomayor and Stephen Breyer. “The harshest consequences will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period. Absent a protective claim filed within that period, those members stand to forfeit their constitutionally shielded right to opt out of the class and thereby control the prosecution of their own claims for damages. Because critical stages of securities class actions, including the class-certification decision, often occur years after the filing of a class complaint, the risk is high that class members failing to file a protective claim will be saddled with inadequate representation or an inadequate judgment. The majority’s ruling will also gum up the works of class litigation. Defendants will have an incentive to slow walk discovery and other precertification proceedings so the clock will run on potential opt outs. Any class member with a material stake in a §11 case, including every fiduciary who must safeguard investor assets, will have strong cause to file a protective claim, in a separate complaint or in a motion to intervene, before the three-year period expires. Such filings, by increasing the costs and complexity of the litigation, ‘substantially burden the courts.’”
The majority argued meanwhile that statutes of repose are intended to override customary tolling rules arising from the equitable powers of courts.
“By establishing a fixed limit, a statute of repose implements a ‘legislative decision that as a matter of policy there should be a specific time beyond which a defendant should no longer be subjected to protracted liability,’” Kennedy wrote, quoting precedent “The unqualified nature of that determination supersedes the courts’ residual authority and forecloses the extension of the statutory period based on equitable principles. For this reason, the court repeatedly has stated in broad terms that statutes of repose are not subject to equitable tolling.”
Kennedy spent four pages cutting through the pension group’s counter-arguments, which he called implausible.
“It appears that, in petitioner’s view, the bringing of the class action would make any subsequent action raising the same claims timely,” the opinion states. “Taken to its logical limit, an individual action would be timely even if it were filed decades after the original securities offering — provided a class-action complaint had been filed at some point within the initial 3-year period. Congress would not have intended this result.”
Mark Foster, an attorney who specializes in securities law for the firm Morrison & Foerster, noted in a statement that Monday’s decision will have little real-world impact but practical-world implications.
“This peace of mind is good for being able to calculate exposure in terms of not only settlements or adverse judgments, but also expenses,” Foster said, highlighting the costs that arise when a company must defend itself, its directors and officers, and even its underwriters.
One change Foster predicted is closer monitoring of investment portfolios.
“Savvy plaintiff’s firms will likely reach out to their institutional investor clients to monitor portfolios to assess the viability of filing potential claims going forward,” Foster added.
Another practice that Foster attributed to savvy plaintiffs is reaching private agreements with defendants.
“It is an easy solution to get around any time bar issues,” he said.
Emphasizing that institutional investors seldom get involved in filing securities actions, let alone opt-out actions, Foster said Monday’s decision will not diminish their rights in any way.
For the small group involved in these actions, they “will either need to move to intervene or be added as lead plaintiff in pending cases, as the court suggested, or they can set up a reminder on their calendars to assess whether they have a claim that needs filing,” Foster said.
“If anything, this creates a business generation opportunity for the plaintiffs’ bar, which is likely to gladly approach institutional investors to monitor portfolios for the filing of such potential claims at no charge,” he added.