Authored by: Christine Hanley, and Robert Varian
On June 26, 2017, the U.S. Supreme Court issued a decision that will have a significant effect on securities class action litigation, changing the strategic calculus for both institutional plaintiffs and defendants. In California Public Employees' Retirement System v. Anz Securities, Inc., No. 16-373, 582 U.S. ___ (2017) , the Court held that American Pipe tolling does not apply to the 3-year statute of repose for private damage claims under the Securities Act of 1933. Thus, the filing of a class action complaint under Section 11 of the Securities Act of 1933 does not toll the three-year statute of repose for individual claims that may be brought by putative class members who later decide to opt out of a class-wide settlement.
CalPERS arose out of two public securities offerings issued by Lehman Brothers Holdings in 2007 and 2008. In September 2008, with Lehman in bankruptcy, a Section 11 class action was filed against Anz Securities and other underwriters to the offerings, alleging that the registration statements included material misstatements or omissions. The class action complaint was consolidated with other securities suits against Lehman into a single multidistrict class action in the Southern District of New York. CalPERS, an unnamed member of the putative class, subsequently filed a separate complaint alleging identical causes of action against the respondents in the Northern District of California in February 2011—more than three years after the offerings closed. CalPERS' individual suit was transferred to the Southern District of New York and consolidated with the multidistrict litigation. CalPERS opted out of the class only after the class action reached a settlement.
The issue before the Court was whether the three-year statute of repose for private claims under the 1933 Act was subject to equitable tolling under the American Pipe doctrine. Pursuant to Section 13 of the 1933 Act, suits brought under Section 11 are subject to a one-year statute of limitations and a three-year state of repose. The statute of limitations requires suits to be brought no later than one year after the plaintiff discovered or should have discovered the untrue statement or omission, but the statute of repose states that "[i]n no event" may a private securities plaintiff file a suit more than three years after the public offering. Respondents moved to dismiss CalPERS' individual suit as untimely under the statute of repose. CalPERS argued in response that the statute of repose was tolled during the pendency of the class action, relying on American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974). The trial court agreed with Respondents, and the Second Circuit affirmed, holding that American Pipe's tolling rule did not apply to statutes of repose. The Supreme Court granted certiorari to resolve a disagreement among the Circuits.
The Supreme Court affirmed the Second Circuit, holding that Section 13's three-year statute of repose was not subject to equitable tolling, thus rendering CalPERS' individual action untimely. The Court explained that legislatures enact statutes of limitations and statutes of repose to serve distinct purposes: "[s]tatutes of limitations are designed to encourage plaintiffs to pursue diligent prosecution of known claims," while "statutes of repose are enacted to give more explicit and certain protection to defendants" by serving as "a fixed bar against future liability." The Court found that Congress intended Section 13's three-year limitations period to be a statute of repose because, among other factors, it used the language, "[i]n no event," and was coupled with a shorter, one-year statute of limitations. Because statutes of repose are intended to establish an absolute temporal bar to liability, the Court held that they "override customary tolling rules arising from the equitable power of the courts." As a result, American Pipe, which relied on the equitable powers of the judiciary to toll a statute of limitations, did not apply to and could not equitably toll Section 13's statute of repose.
CalPERS will have a significant effect on the litigation of Section 11 class actions, as it will force putative class members to decide within three years of the relevant securities offering whether they will remain in the class or opt out to file an individual action with the goal of negotiating a more favorable settlement. For defendants and their D&O insurers, the decision to cut off the ability of institutional investors to opt out will simplify critical settlement decisions and reduce tail risk in many cases. Lower courts are also likely to apply CalPERS to Section 10(b) claims brought under the Securities Exchange Act, which are subject to a five-year statute of repose. See 28 U.S.C. § 1658(b). If the Court's decision in CalPERS is held to apply to Section 10(b)'s statute of repose, it will add a degree of certainty to defendants facing 10b-5 actions, both in terms of the number of opt-outs they can expect and their total liability.
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