In a decisive victory for class action defendants, the U.S. Supreme Court held that a pending class action tolls the statute of limitations only for putative class members’ individual claims, and not for any “follow-on” class actions they file on their own. China Agritech, Inc. v. Resh. Thus, if the limitations period expires during the pendency of the first class action, a putative class member may file a subsequent individual suit, but not a class action. This decision is important because, among other things, it prevents class action plaintiffs from filing a potentially limitless series of class actions, after the limitations period has run, by claiming that the first suit “tolled” the limitations period indefinitely.
In China Agritech, the Court limited the so-called “American Pipe tolling doctrine,” under which the timely filing of a class action tolls the limitations period for all putative class members while the court considers class certification. If certification is denied, an absent class member may file an individual lawsuit, even if the limitations period expired during the first suit. American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974). The Court in China Agritech held that American Pipe extends only to subsequent individual suits, but “does not permit the maintenance of a follow-on class action past expiration of the statute of limitations.”
The Court (Ginsburg, J.) held that plaintiffs “have no substantive right to bring their claims outside the statute of limitations.” The Court noted that the American Pipe doctrine was based on efficiency concerns: without tolling, potential class members would file potentially unnecessary “protective” new lawsuits to preserve their individual claims, in the event the court in the first case denied class certification and the limitations period expired. But the Court held that these considerations do not apply to “untimely successive class actions”:
[A]ny additional class filings should be made early on, soon after the commencement of the first action seeking class certification. . . . With class claims, . . . efficiency favors early assertion of competing class representative claims. If class treatment is appropriate, and all would-be representatives have come forward, the district court can select the best plaintiff with knowledge of the full array of potential class representatives and class counsel. And if the class mechanism is not a viable option for the claims, the decision denying certification will be made at the outset of the case, litigated once for all would-be class representatives.
This decision is significant for several reasons.
First, it prohibits the potentially unending “stacking” of class action suits, whereby if class certification is denied in the first suit, the next class suit may be filed by an absent class member regardless of whether the limitations period expired, and if class certification is denied yet again, still a third class suit may be filed, and so on. Under the plaintiffs’ interpretation of American Pipe, “as each class is denied certification, a new named plaintiff could file a class action complaint that resuscitates the litigation.” That, in fact, is what happened in the underlying case: the case was filed after two prior attempts to certify a securities class action had failed. The Ninth Circuit, relying on American Pipe, allowed the plaintiffs to revive the case as a class action, even though the third suit was filed after the limitations period had expired.
Second, the decision means that putative class members — including institutional investors in securities fraud class actions — must carefully monitor pending class action suits in order to preserve their ability to file class suits of their own. Indeed, although Justice Sotomayor concurred in the judgment, she would have limited the holding to suits under the Private Securities Litigation Reform Act of 1995, and permitted American Pipe tolling for other types of class actions unless the denial of class certification was “for a reason that bears on the suitability of the claims for class treatment,” rather than “the deficiencies of the . . . class representative, or because of some other nonsubstantive defect.” Justice Sotomayor noted the “significant procedural requirements on securities class actions that do not apply” to other suits, including the process for early appointment of a lead plaintiff. Justice Sotomayor reasoned that because the plaintiffs here did not seek to be chosen as lead plaintiffs in either of the first two class actions, they “can hardly qualify as diligent in asserting [class] claims and pursuing relief.”
Finally, it remains to be seen whether the decision will precipitate more “protective” class action filings. The Court dismissed this possibility, noting that while several courts of appeals had declined to extend American Pipe to class actions, there was no evidence that these circuits “experienced a disproportionate number of duplicative, protective class action filings.” Furthermore, many class action plaintiffs’ lawyers already file duplicative class actions to attempt to secure a competitive advantage. But the decision in China Agritech certainly should discourage potential class representatives and their attorneys from allowing the limitations period to expire while they await a class certification ruling in the first lawsuit.