United States: Ninth Circuit Expands American Pipe Tolling To Subsequent Securities Class Action By Unnamed Class Members, But Leaves Related Comity And Issue Preclusion Questions For Another Day

The Ninth Circuit in Resh v. China Agritech, Inc., No. 15-55432, 2017 WL 2261024 (9th Cir. May 24, 2017), revived the third successive putative shareholder class action against a fertilizer manufacturer after the district court dismissed this last case as untimely. By reversing the lower court's holding that the case was time-barred, the Ninth Circuit expanded the American Pipe tolling rule (as further expanded by Crown Cork) to allow the individual claims of unnamed class members in a previously dismissed action to proceed as a subsequently filed class action, albeit with two important caveats.

We have previously blogged about American Pipe's holding, application, and expansion, ( here, here, here, and here). Under American Pipe, where class certification is denied, an unnamed class member whose claim might otherwise have expired under the applicable statute of limitations can benefit from the tolling for the period of the pendency of the class action claim in order to intervene in the remaining individual suit. 414 U.S. 538 (1974). The Supreme Court later extended this tolling principle in Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), to allow such unnamed class members to file new individual lawsuits as an alternative to intervention in the prior action.

The next question, after Crown Cork, was whether such unnamed class member, in using this tolling benefit to file a new action, could seek in that new action to represent a putative class, thus extending the tolling effect to other unnamed members of the putative class in the prior case as well. It was this question (framed by the court as "whether plaintiffs are time-barred from pursuing their suit as a class action") that the Ninth Circuit addressed in Resh. The Ninth Circuit has now held that American Pipe's tolling effect would apply, but that considerations other than timeliness could still foreclose such action.

Resh was the third putative shareholder class action against China Agritech for allegations of overstating revenue and artificially inflating its stock price. The first case asserted violations of the Security Exchange Act, the Securities Act, and SEC Rule 10(b)-5. The second action focused only on the Exchange Act violations. Both were timely filed under the Exchange Act's two-year limitation provision. However, the district court ultimately denied class certification. Thereafter, the named plaintiffs either settled their individual claims or voluntarily dismissed them with prejudice.

In the third Resh action, filed beyond the applicable statute of limitations, the plaintiffs alleged violations of Sections 10(b) and 20(a) of the Exchange Act. The district court dismissed the action as time-barred, reasoning that application of American Pipe tolling to this would-be class action would "allow tolling to extend indefinitely as class action plaintiffs repeatedly attempt to demonstrate suitability for class certification on the basis of different expert testimony and/or other evidence." Id. at *11.

The Ninth Circuit reversed. It noted that the Resh plaintiffs' individual claims under American Pipe were tolled during the pendency of the earlier class actions, and that Rule 23 empowers a federal court to certify a class in each and every case where the rule's criteria are met. The Ninth Circuit further explained that "permitting future class action named plaintiffs, who were unnamed class members in previously uncertified classes, to avail themselves of American Pipe tolling would advance the policy objectives that led the Supreme Court to permit tolling in the first place." Id. at 22. Such a rule "promotes economy of litigation by reducing incentives for filing duplicative, protective class actions . . . ." Id.

Rather than resolve issues raised by successive would-be class actions on tolling grounds, the Ninth Circuit believed the better approach would be to resolve such actions on principles of issue preclusion and comity. "[O]rdinary principles of preclusion and comity will . . . reduce incentives to re-litigate frivolous or already dismissed class claims, and will provide a ready basis for successor federal district courts to deny class action certification." Id. at 23. However, while the court held that the plaintiffs' class action complaint was not time-barred, the court declined to decide these issues, remanding the action to the district court to address them.

It therefore remains to be seen, should the Ninth Circuit's holding ultimately become the operable principle nationwide, whether the district court's concern about unlimited serial relitigation of class certification will be alleviated by application of either the comity or issue-preclusion principles. Indeed, we may learn more from this case on further review should the appellees seek and obtain certiorari in the Supreme Court, or on remand where it will be the plaintiffs' burden to "satisfy the criteria of Rule 23" and "persuade the district court that comity or preclusion principles do not bar their action." Id. at *23.

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