“China Agritech” SCOTUS Case Will Turn on Justices’ Opinions of Class Actions

supreme courtDuring oral arguments this coming Monday in China Agritech, Inc. v. Resh (click here for WLF’s amicus brief) the U.S. Supreme Court ostensibly will be considering a technical issue regarding statutes of limitations: when should the doctrine of “equitable tolling” be applied to extend the deadline for filing a class action lawsuit? But how the justices determine the scope of that judge-made doctrine has little to do with applying well-established equitable doctrines in this area of the law (there aren’t any) and everything to do with how warmly they feel about class litigation as a vehicle for providing effective relief for large numbers of plaintiffs with small claims. The evidence suggests that the Court is far less enamored with class actions than it once was and will use China Agritech to cut back on their use.

In its 1974 decision in American Pipe and Construction Co. v. Utah, the Court held that the filing of a putative class action extends the deadline by which absent class members would otherwise be required to file their own individual claims. The Court concluded that class members could reasonably assume that their interests were being adequately represented in the initial class action and thus need not file their own separate lawsuits. It held that if the judge hearing the initial lawsuit ultimately denies a motion to certify a plaintiff class, the running of the limitations period for filing individual suits should be deemed to have been tolled until the date of denial. As a result, absent class members still have time to file their own lawsuit following the denial of class certification—even if the events giving rise to the suit occurred many years previously.

In China Agritech, the Supreme Court will decide what sort of lawsuit those absent class members are entitled to file. The U.S. Court of Appeals for the Ninth Circuit (in its decision below) ruled that equitable tolling should apply not only to the filing of individual claims but also to the filing of class claims. In other words, an individual plaintiff should be permitted to file a claim on behalf of all the other individuals who also were absent class members in the initial (uncertified) class action—and whose claims also would be time-barred but for application of American Pipe’s equitable tolling rule.

The Supreme Court can look to no statute or rule to help it determine whether to extend American Pipe in the manner advocated by the Ninth Circuit. The issue essentially boils down to an ad hoc determination by the justices regarding whether an extension would be “fair.” Arguing in support of the fairness of extending American Pipe, Respondents note that a suit by an individual plaintiff often is not economically viable. Thus, they argue, the right of an absent class member to file an otherwise-time-barred lawsuit won’t amount to much if he is not permitted to pull other absent class members into his lawsuit as a means of reducing the per-plaintiff costs.

Petitioners counter by asserting that there is nothing “fair” about providing a continued right-of-action to absent class members who sat on their hands even after class certification was denied. American Pipe excused their inaction while class certification was pending. But if they do not respond by filing their own claims following denial of class certification, Petitioners argue, there is no reason to keep their otherwise-tardy claims alive simply because some other plaintiff wishes to reduce his own costs by including them in his lawsuit.

Confronted with an issue that cannot be decided on the basis of any objective rules, the justices may well decide China Agritech based on whether they view class actions as an essential tool for dispensing justice or, as many critics contend, a device all too frequently used by the plaintiffs’ bar to extort funds from free enterprise. If so, that would be bad news for those seeking to extend the American Pipe rule; a majority of the Court in recent years has regularly ruled against class-action plaintiffs. Most recently, in CalPERS v. ANZ Securities, Inc., the Court held 5-4 that the American Pipe equitable-tolling rule does not apply to “statutes of repose” (i.e., limitations statutes that begin to run from the date of wrongdoing, not the date that the plaintiff discovers the wrongdoing). The Court thus barred tardy claims filed by absent class members who opted out of a certified class and sought to file their own lawsuits after the time specified in the applicable statute of repose had elapsed.

At Monday’s argument, a clear sign of trouble for plaintiffs will be questions focusing on the danger of serial class actions. If the Ninth Circuit’s ruling is upheld, there is a theoretical possibility that plaintiffs’ lawyers could file an infinite number of putative class actions until they finally find a judge willing to certify a plaintiff class. After each successive denial of class certification, lawyers could simply file another lawsuit on behalf of a new group of absent class members. If equitable tolling were applied, the claims of each new group would be timely, and the presence of a new group of named plaintiffs would mean that the defendant could not invoke preclusion doctrines as a basis for preventing consideration of a renewed certification motion.

Indeed, the Respondents in China Agritech are the third group of plaintiffs—all represented by the same set of lawyers—to file a putative class action (raising securities law claims) against the defendant. The district court denied class certification in the first two lawsuits, but the plaintiffs’ lawyers would not take “no” for an answer. Unless the Supreme Court accepts their pleas to expand American Pipe tolling, the two-year statute of limitations for filing securities claims will bar their class claims. Extensive questioning from the justices regarding why counsel felt compelled to file seriatim lawsuits would be a telltale sign that they have little sympathy for the plaintiffs’ claims.

Many class action critics argue that the certification of a large class imposes undue pressure on defendants to settle even insubstantial claims. That pressure is due both to the high costs of litigating certified claims and to the unwillingness of stockholders to chance even a slight risk of a crushingly large judgment. Those settlement pressures will only increase if defendants come to realize that even successful opposition to a class certification motion will not bring litigation peace—it will only result in a new lawsuit in which other members of the proposed class bring identical claims. For justices already wary of the utility of the modern class action, the tolling claims asserted by Respondents in China Agritech may be a bridge too far.

Also published by Forbes.com on WLF’s contributor page.

5 thoughts on ““China Agritech” SCOTUS Case Will Turn on Justices’ Opinions of Class Actions

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