Don’t be fooled: New SCOTUS grant in China Agritech isn’t about securities litigation
(Reuters) - Late Friday, the U.S. Supreme Court agreed to round out its term with seven new grants of review, including cases that present momentous questions about partisan gerrymandering and the constitutionality of routinely shackling prisoners before they’re tried. And then there’s China Agritech v. Resh, which seems to present yet another not-so-momentous opportunity for the Supreme Court to tinker with securities class action machinery.
Don’t be misled by the vehicle in China Agritech. The implications of this case will resound in all kinds of class actions – and will probably have more impact outside of the securities realm than within it. “This is a class action issue, not a securities litigation issue,” said Mark Perry of Gibson Dunn & Crutcher, counsel of record for the U.S. Chamber of Commerce in an amicus brief urging the Supreme Court to take the China Agritech case.
Yes, China Agritech involves a securities class action, specifically fraud claims that the China-based, U.S.-incorporated fertilizer manufacturer had minimal operations and existed mostly to ensnare unwitting investors. Last May, the 9th U.S. Circuit Court of Appeals held that even though the class action’s lead plaintiff filed his suit several years after the purported fraud was exposed, the case was not barred by the statute of limitations because two previous, unsuccessful securities class actions against China Agritech stopped the clock on fraud claims against the company.
So the real issue in China Agritech is time limits and successive class action litigation, not securities law. China Agritech, represented at the 9th Circuit and the Supreme Court by O’Melveny & Myers, argued in its petition for review that the 9th Circuit's decision is holding open the door to serial class actions, inviting “exactly the sort of endless, vexatious litigation Congress enacts statutes of limitations to prevent.” According to China Agritech, if the Supreme Court does not halt an appellate trend that began with the 6th Circuit’s 2015 decision in Phipps v. Wal-Mart, plaintiffs will be entitled to exert enormous settlement pressure on even the most successful of defendants by “stacking” class actions one after another.
As the company’s petition acknowledged, the Supreme Court held in 1974’s landmark ruling in American Pipe v. Utah that the filing of a class action tolls the statute of limitations for members of the proposed class. The court’s subsequent decision in 1983’s Crown, Cork & Seal v. Parker clarified that the clock begins ticking for potential plaintiffs with individual claims only when class certification is denied.
After the Crown Cork decision, several appellate courts, including the 1st, 2nd, 5th and 11th Circuits, issued decisions holding that the statute of limitations is tolled only for individual claims by plaintiffs who would have been members of the failed class action, not for successive class actions. The 7th Circuit was the first to question this accepted appellate wisdom, in a 2011 decision based on the circuit’s interpretation of preclusion of claims by members of uncertified classes. The Supreme Court’s holding in Smith v. Bayer contradicted the 7th Circuit’s view of preclusion, holding that absent class members of uncertified classes are not subject to preclusion, so I’m not counting the 7th Circuit ruling as the beginning of the circuit split over successive class actions.
That distinction instead belongs to the 6th Circuit in the Phipps case, a spinoff of the nationwide sex discrimination class action against Wal-Mart. In Phipps, the 6th Circuit read the Supreme Court’s Bayer ruling to reject class action defendants’ concerns about “stacking” class actions. “Wal–Mart warns us, like Bayer Corporation warned the Supreme Court in Smith, that our approach will allow serial class action litigation and force corporate defendants to settle to buy peace,” the 6th Circuit said in Phipps. “Wal–Mart claims that it is unfair to permit absent class members to stack one class action onto another … But representative claims are the nature of class actions, and the Supreme Court rejected similar concerns in Smith - as we do here.” (Wal-Mart’s lawyers at Gibson Dunn asked the Supreme Court to review the 6th Circuit decision but the court denied the petition.)
The China Agritech plaintiffs, represented at the Supreme Court by Wolf Haldenstein Adler Freeman & Herz and Lewis Brisbois Bisgaard & Smith, argued in their brief opposing Supreme Court review that the 9th Circuit, like the 6th Circuit in Phipps, was just following the Supreme Court’s line of analysis in the Bayer decision (and in the Supreme Court’s previous ruling in 2010’s Shady Grove v. Allstate on which plaintiffs can pursue class claims). The plaintiffs downplayed the split amongst the circuits on the question of whether American Pipe tolling applies only to individual claims by plaintiffs who would have been class members or to serial class actions, contending that since the Supreme Court clarified the preclusion issue in Bayer, the 6th and 9th Circuits have both concluded the statute of limitations is tolled for successive class actions.
One argument in the China Agritech shareholders’ brief is a good reminder of why the China Agritech case isn’t really about securities litigation but more broadly about tolling. The Supreme Court has already foreclosed stacked securities class action, the cert opposition brief said, with its ruling last June in CalPERS v. ANZ Securities. As you surely recall, the justices held in ANZ that American Pipe tolling does not apply to the statute of repose but only to the statute of limitations. Because federal securities laws include a statute of repose as well as a statute of limitations, the China Agritech shareholders said, investors can’t file endless securities class actions.
In fact, said Gibson Dunn’s Perry, the appropriate context for the justices’ grant of review in the China Agritech case isn’t the court’s well-documented futzing over securities class actions but what Perry has called a “largely unheralded revolution” in equitable tolling precedent from the justices. “What’s left after the recent revolution is equitable tolling (on the front end) and equitable estoppel (on the back end), but even these doctrines may be limited where Congress speaks clearly, as with a discovery rule or a statute of repose,” wrote Perry and David Schnitzer in a 2017 Class Action Litigation Report. If Perry is right, the Supreme Court’s grant of review in China Agritech is not good news for class action plaintiffs.
I left phone messages for China Agritech counsel Seth Aronson of O’Melveny and shareholder lawyer Matthew Guiney of Wolf Haldenstein but didn’t hear back.