On June 26, 2017, the Supreme Court issued a 5-4 decision in California Public Employees’ Retirement System v. ANZ Securities, Inc., et al. (No. 16-373), holding that tolling does not apply, when a class action is pending, to the three year statute of repose for claims under Section 11 of the Securities Act of 1933. As the Court acknowledged, its decision raises the possibility of multiple “protective filings” of new lawsuits by nonnamed class members. And while not addressed by the Court, the opinion may portend the same result for claims under Section 10(b) of the Securities Exchange Act of 1934.
Section 11 provides a private right of action against issuers, underwriters and other parties for material misstatements or omissions in a registration statement. The 1933 Act states that “[n]o action shall be maintained to enforce any liability created under [Section 11] unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . . . In no event shall any such action be brought to enforce a liability created under [Section 11] more than three years after the security was bona fide offered to the public . . . .”
The ANZ case arose from the collapse of Lehman Brothers. When Lehman filed for bankruptcy in September 2008, class action litigation was filed against various underwriters, among others. CalPERS filed its own lawsuit in February 2011, and later opted out of the class action. The CalPERS lawsuit was filed more than three years after CalPERS’ purchases of the subject Lehman securities. The U.S. District Court dismissed CalPERS’ Section 11 claims as time-barred. In July 2016, the Second Circuit affirmed that decision.
The Supreme Court’s opinion was authored by Justice Kennedy. The decision centers on the distinction between statutes of limitations – which Justice Kennedy characterized as “designed to encourage plaintiffs ‘to pursue diligent prosecution of known claims’” – and statutes of repose, which Justice Kennedy described as reflecting “the legislative objective to give a defendant a complete defense to any suit after a certain period.” Justice Kennedy wrote that the three year time limit for Section 11 actions “admits of no exception and on its face creates a fixed bar against future liability.”
CalPERS argued, among other things, that the three year period was tolled during the class action, citing the 1974 decision in American Pipe & Construction Co. v. Utah. In American Pipe, the Supreme Court held that the commencement of a class action suspended the applicable statute of limitations in an antitrust case. Justice Kennedy distinguished that decision as “grounded in the traditional equitable powers of the judiciary,” and as solely related to a statute of limitations, expressly holding that “a statute of repose supersedes a court’s equitable balancing powers by setting a fixed time period for claims to end.” Justice Kennedy then rejected CalPERS’ argument that the absence of tolling could cause nonnamed class members to inundate district courts with individual “protective filings.” Justice Kennedy wrote that CalPERS had not offered evidence of any recent influx of such filings in the Second Circuit, and said that even if such filings did occur, the Court lacked the authority to rewrite the statute of repose or “to ignore its plain import.”
Justice Ginsburg dissented, joined by Justices Breyer, Sotomayor and Kagan. Justice Ginsburg wrote that CalPERS’ lawsuit –filed three years after CalPERS’ purchases but while the class action was still pending – “could not disturb anyone’s repose.” She said that “whether CalPERS stayed in the class or eventually filed separately, respondents would have known, within the repose period, of their potential liability to all putative class members.” Justice Ginsburg added that by virtue of the Court’s decision, “[a]bsent a protective claim filed within that period, [nonnamed class] 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.” She added that in light of the Court’s decision, when a repose period nears expiration, “it should be incumbent on class counsel, guided by district courts, to notify class members about the consequences of failing to file a timely protective claim.”
While Justice Kennedy surmised that “[a] simple motion to intervene or request to be included as a named plaintiff in the class-action complaint may well suffice” as a protective filing, such steps might prove ineffective where the present plaintiffs could object to such inclusion on any number of grounds. As such, with the Supreme Court now having provided clarity, it appears likely that defendants may be subject, at times, to parallel Section 11 litigation by nonnamed class members – particularly pension funds and other large investors – desiring to ensure the opportunity to prosecute their own claims. And, while the Court did not address the 1934 Act, that practice also may extend to claims under Section 10(b) of that act, particularly if a potential action nears the five year statute of repose for Section 10(b) claims.