United States: China Agritech: The Supreme Court Ends Class Action "Stacking"

This week, in the closely watched case of China Agritech v. Resh,1 the U.S. Supreme Court issued an important class action ruling, holding that the tolling principles announced in its earlier American Pipe decision2 do not allow absent class members to file follow-on class action lawsuits where the statute of limitations has otherwise expired on their claims.

As we have previously noted, the question of whether American Pipe tolling applies to subsequent class action filings, not just subsequent individual actions, is important because the answer dictates whether American Pipe tolling principles enable the filing of successive (stacked) class actions in a seemingly endless effort to finally achieve certification under Federal Rule of Civil Procedure 23.

Although some federal courts of appeal had previously held that American Pipe tolling is available for subsequent Rule 23 actions, the Supreme Court in China Agritech has now ruled unanimously that such cases were wrongly denied.3 "We hold that American Pipe does not permit a plaintiff who waits out the statute of limitations to piggyback on an earlier timely filed class action."4

Key Aspects of the Supreme Court's Reasoning and Holding

In our earlier report on oral argument in the case, we identified three critical issues on which the Supreme Court's decision would likely turn: (1) whether absent class members who waited until after certification was denied to seek to file their own class action would be viewed as acting diligently; (2) whether a decision on class action stacking could lead to anomalous results; and (3) whether the availability of American Pipe tolling should depend on the reason for a class certification denial. Indeed, the answers to these questions proved to be outcome determinative in China Agritech.

1. Plaintiffs Who Engage in Class Action Stacking Have Not Been Diligent.

The Supreme Court noted that while its 1974 American Pipe decision did not formally analyze the equitable tolling doctrine—which requires a plaintiff to show that some "extraordinary circumstance" prevented her from discovering her claim until after the expiration of the limitations period despite "diligent" pursuit of her rights5—an absent class member who promptly intervenes in a timely filed class action to assert his individual claims has been sufficiently diligent.6 By contrast, however, a would-be class representative who commences a new and untimely class action case "can hardly qualify as diligent in asserting claims and pursuing relief."7 This is especially true because Rule 23(c) encourages district courts to make class certification decisions at an early practicable time, and expressly permits them to take account of multiple class representative filings.8

2. Permitting Class Action Stacking Would Lead to Anomalous Results.

The notion of interpreting American Pipe to permit class action stacking troubled the Supreme Court. "Respondents' proposed reading would allow the statute of limitations to be extended time and again" and would permit "lawyers seeking to represent a plaintiff class to extend the statute of limitations almost indefinitely until they find a district judge who is willing to certify the class."9 Thus, the Supreme Court held that "endless tolling of a statute of limitations is not a result envisioned by American Pipe."10

On the other hand, however, the court was not persuaded by respondents' argument that a multiplicity of needless protective class action filings would occur without the availability of American Pipe tolling for class cases. Indeed, the court noted that in those circuits that have declined to extend American Pipe to class actions, there is no indication of a rash of protective class action filing as a result.11 The court also was unconcerned by the prospect of multiple class filings because they could aid a district court in making an early determination as to the appropriateness of class treatment, as well as which class representative was best.12 It noted that district courts are familiar with, and have ample tools at their disposal to manage, complex cases and multiple filings.13

Finally, the Supreme Court rejected respondents' overly broad view of its recent decisions in Shady Grove14 and Tyson Foods15 as supposedly compelling a reading that American Pipe tolling be available for subsequent class actions. Shady Grove held that a state law barring class actions of a particular type could not restrict the filing of a class action in federal court that otherwise satisfies Federal Rule of Civil Procedure 23. But the Supreme Court concluded that the China Agritech case presented the reverse situation. Instead of a state law that purported to trump the operation of Federal Rule 23, respondents' class claims would be untimely unless saved by the American Pipe tolling exception. 16 Likewise, unlike the attempted recourse to Rule 23 to abridge a substantive right that was suggested in Tyson Foods, respondents had no substantive right to bring claims outside the statute of limitations.17

3. The Availability of American Pipe Tolling in a Subsequent Class Action Does Not Depend on the Reason for the Underlying Class Certification Denial.

As reflected at oral argument, this issue was the most contentious. Despite its divisive nature, however, the majority decision expressly answered this question in the negative. Justice Sotomayor's separate concurring opinion—agreeing with the result but not with the majority's reasoning or analysis—expressly argued that this Private Securities Litigation Reform Act case had different attributes than other class cases, including a five-year statute of repose and a provision requiring notification of the commencement of a class action, such that Justice Sotomayor believed the Court's decision was broader than necessary. Likewise, Justice Sotomayor argued that while American Pipe tolling might not be appropriate if the denial of class certification was based on the suitability of the claims for class treatment, tolling should be available if certification was denied because of deficiencies with the lead plaintiff. Significantly, however, the majority opinion expressly rejected each of these arguments, explaining that its holding that American Pipe tolling does not apply to subsequent class action filings does not hinge on the reason for the underlying denial of class certification.18

Import of the Ruling

China Agritech resolves what had been a three-way split in the federal courts of appeal,19 with the Supreme Court definitively holding that American Pipe tolling does not apply to putative class members who bring subsequent, untimely class claims. In light of this ruling, pending class cases throughout the country that have relied on American Pipe tolling will likely be reexamined. Class action defendants who secure a class certification denial should have greater certainty that the class litigation will not become a multi-headed hydra.

Going forward, we may see more class cases that are filed with multiple named representatives, rather than single class representatives. Moreover, class counsel may be forced to become more cautious about selecting strongly suited lead plaintiffs, rather than settling for the first prospective plaintiff who responds to the attorney solicitation or otherwise demonstrates willingness to bring a claim. Finally, given the court's emphasis on Rule 23(c), we would not be surprised to see some courts pressing for early class certification determinations as long as they are practicable.

Footnotes

1 South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

2 Transcript of Oral Argument at 3, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

3 National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967).

4 Brief for the Petitioner at 35, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

5 Transcription of Oral Argument at 14, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018); See also COLO. REV. STAT. § 39-21-112(3.5), Colorado's reporting statue, which requires internet retailers to either report all sales made to the state's residents or to collect the tax.

Even more recently, some states have started to require online marketplaces like Amazon, Ebay, and Etsy to collect tax on behalf of the smaller vendors who use those platforms to sell their own goods. See JONATHAN BERR, WHO'S RESPONSIBLE FOR AMAZON SELLERS SALES TAXES? (Oct. 31, 2017). https://www.cbsnews.com/news/whos-responsible-for-amazon-sellers-sales-taxes/. Additionally, Amazon announced in January 2018 that it would comply with a subpoena to turn over third party vendor information to the Massachusetts Department of Revenue. See RYAN PRETE, AMAZON GATHERING MARKETPLACE SELLER DATA FOR MASSACHUSETTS (Jan. 23, 2018). https://www.bna.com/amazon-gathering-marketplace-n73014474546/.

6 Direct Mktg. Ass'n v. Brohl, 135 S. Ct. 1124, 1135 (2015).

7 S.D. CODIFIED LAWS § 10-64-2 (2016). (limiting the obligation to sellers with gross revenue from sales in South Dakota of over US$100,000, or 200 or more separate transactions, within one year.

8 Transcript of Oral Argument at 4, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

9 Id. at 16.

10 Id. at 4, 26.

11 Id. at 5. See also Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) (The Pike Balancing test requires a court to determine whether state regulations effectuating a "legitimate local public interest" impose a burden on interstate commerce that is "clearly excessive in relation to the putative local benefits." The "extent of the burden that will be tolerated will of course depend on the nature of the local interest involved, and whether it could be promoted as well with a lesser impact on interstate activities").

12 Transcript of Oral Argument at 21, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

13 Id. at 22.

14 Id.

15 Id. at 23.

16 Id. at 10.

17 Id.

18 Id.

19 Id. at 11.

20 Id.

21 Id. at 12.

22 Id. at 13.

23 Id. at 11.

24 Id. at 13.

25 Id. at 3.

26 Id. at 4.

27 Id. at 17.

28 Brief of United States Senators, et al Supporting Petitioner South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018). (Heidi Heitkamp is a United States Senator from North Dakota, Lamar Alexander is a United States Senator from Tennessee, Richard Durbin is a United States Senator from Illinois, and Michael Enzi is a United States Senator from Wyoming).

29 Quill Corp. v. North Dakota, 504 U.S. 298, 318 (1992). ("No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions... Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes").

30 Reply of Petitioner South Dakota, South Dakota v. Wayfair, Inc., No. 17-494, 2018 U.S. LEXIS 2211, (U.S. Apr. 13, 2018).

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