Expert Q&A on Tolling of Securities Claims After Calpers

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Expert Q&A on Tolling of Securities Claims After CalPERS

In California Public Employees’ Retirement System v. ANZ Secs., Inc. (CalPERS), the US Supreme Court confirmed that the three-year limitations period for bringing claims under the Securities Act of 1933 (Securities Act) is a statute of repose that is not subject to tolling under American Pipe & Construction Co. v. Utah, which tolls applicable statutes of limitations for class members’ claims that have been asserted in a timely filed class action. Practical Law asked John Clarke and Andrew Escobar of DLA Piper LLP (US) to explain the significance of the CalPERS decision, including the implications for potential opt-out claimants, and what open questions remain.

JOHN J. CLARKE, JR. ANDREW R. ESCOBAR PARTNER PARTNER DLA PIPER LLP (US) DLA PIPER LLP (US) John is co-chair of the firm’s Corporate and Securities Andrew focuses his practice on securities, complex Litigation practice. He represents clients in complex commercial, class action, and real estate litigation. He litigation and internal investigations involving financial has experience in all phases of federal and state court institutions, securities and financial instruments, litigation in multiple jurisdictions, including expert and structured transactions, accounting issues, and lay discovery, dispositive motions, trials, and appeals. corporate governance disputes.

12 August/September 2017 | Practical Law © 2017 Thomson Reuters. All rights reserved. What were the principal issues in the Supreme Court’s Section 12(a)(2)) (137 S. Ct. at 2052). This means defendants in ruling in CalPERS? Securities Act class actions will have more certainty concerning In a 5-4 opinion authored by Justice Anthony M. Kennedy, the their potential exposure to individual claims of putative class majority in CalPERS reiterated the distinction between statutes members once the three-year repose period has expired. of limitations and statutes of repose and held that American Pipe In addition, the Supreme Court’s holding in CalPERS resolves tolling is an equitable doctrine that cannot be used to extend a circuit split on whether American Pipe tolling is available to a statute of repose (137 S. Ct. 2042, 2049-52 (2017) (citing extend a statute of repose. In a decision issued in 2000, the American Pipe & Const. Co. v. Utah, 414 U.S. 538, 558-59 (1974), Tenth Circuit held that American Pipe tolling could be used CTS Corp. v. Waldburger, 134 S. Ct. 2175, 2182-83 (2014), and to extend a repose period, but more recent decisions from Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, the Second, Sixth, and Eleventh Circuits disagreed (compare 363 (1991))). Joseph v. Wiles, 223 F.3d 1155, 1168 (10th Cir. 2010) with In re The Supreme Court explained that statutes of limitations are Lehman Bros. Sec. & ERISA Litig., 655 F. App’x 13, 15-16 (2d Cir. designed to encourage plaintiffs to pursue diligent prosecution 2016); Stein v. Regions Morgan Keegan Select High Income Fund, of known claims and, as a result, they begin to run when a cause Inc., 821 F.3d 780, 792-95 (6th Cir. 2016); Dusek v. JP Morgan of action accrues. By contrast, statutes of repose set an end date Chase & Co., 832 F.3d 1243, 1248-49 (11th Cir. 2016)). The that serves as an absolute bar to liability once the legislatively CalPERS decision is likely to be cited by defendants seeking prescribed time period has elapsed. dismissal of a wide variety of late-filed claims in which a statutory framework includes a statute of repose, and not only in Claims brought under the Securities Act, like the Section 11 cases involving claims arising under the Securities Act. claim at issue in CalPERS, are subject to the limitations periods set out in Section 13 of the Act. The Supreme Court in CalPERS On a broader note, CalPERS is significant because it is one of determined that Section 13 contains both: the first cases to be argued before Justice Neil M. Gorsuch, who joined the majority opinion. His focus during oral argument on A statute of limitations. Plaintiffs must bring Section 11 the plain language of Section 13 might be an early indicator of a claims “within one year after the discovery of the untrue strict construction approach to issues of statutory interpretation. statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” Search Three-Year Statute of Repose for Alleged Securities Act § 11 A statute of repose. Plaintiffs may not bring Section 11 claims Violations Not Subject to Equitable Tolling During Pending Class “more than three years after the security was bona fide offered Action: Supreme Court for more on the CalPERS decision. to the public.” (137 S. Ct. at 2047-50 (citing 15 U.S.C. § 77m).) Does the CalPERS decision reflect a departure from The Supreme Court considered and rejected a series of arguments precedent focused on preserving a plaintiff’s privilege for permitting tolling of the repose period, including that: to opt out? A refusal to apply American Pipe tolling would eviscerate class The petitioners argued in CalPERS that denying American Pipe members’ right to opt out of a pending class action. tolling would deprive absent class members of their right to opt Strict enforcement of the repose period would multiply the out of a class. The majority opinion disagreed, reasoning that number of individual actions asserting claims already pending its holding was instead a reminder that class members must in a class action resulting in inefficiencies and higher litigation exercise their opt-out rights within mandatory time limits set by expenses. statute. (137 S. Ct. at 2053.) (137 S. Ct. at 2053-54.) The purpose of the opt-out right is to afford class members due A dissenting opinion authored by Justice Ruth Bader Ginsburg process. In the context of a class action brought under Federal discussed these and other reasons for disagreement with the Rule of Civil Procedure 23(b)(3) (including most securities class majority’s ruling (137 S. Ct. at 2056-58). actions), putative class members have the right to be excluded from the class and therefore not to be bound by any subsequent class judgment. This due process interest is fully protected Search Securities Litigation: Defending Against Untimely Claims for more on the differences between a statute of limitations and a statute as long as the absent class member is “provided with an of repose. opportunity to remove himself from the class by executing and returning an ‘opt out’ or ‘request for exclusion’ form to the court.” (Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985).) Why is the CalPERS ruling significant? In securities litigation, the plaintiff that first filed the class The decision makes clear that the statutory repose period in complaint must publish notice of the class action within Section 13 of the Securities Act affords “full and final security” 20 days after filing to comply with the requirements of the against new suits asserting Securities Act claims filed more than Private Securities Litigation Reform Act (PSLRA) (5 U.S.C. three years after a securities offering (or the sale of a security § 78u-4(a)(3)(A)(i)). Class members then might seek lead pursuant to an offering, in the case of claims arising under plaintiff status or, in the alternative, exercise their right to be

excluded from the class and file their own lawsuit. This early For example, defense counsel might seek to challenge whether, notice and lead plaintiff procedure distinguishes securities class after the repose period has expired: actions from other types of federal class actions. The prompt Named plaintiffs can amend otherwise timely claims to add a notice protects the due process rights of class members by plaintiff in an effort to cure standing issues. informing them of the existence of the case and affording them A court can grant class certification. an early chance to opt out. Unnamed class members can join in class relief.

Search Securities Litigation: Mapping a Strategy for Defending Against Fraud Claims for more on the PSLRA. Search Securities Litigation: Class Actions Arising from IPOs for more on securities class actions, including common challenges and defenses to plaintiffs’ claims. Since CalPERS, some commentators have expressed concern that the decision might impede or eliminate investors’ ability to opt out of a class settlement reached after the statute of The petitioners in CalPERS argued that unnamed class repose has expired. As a technical matter, class members members will inundate district courts with protective still will be permitted to opt out of such a settlement, but in filings following the Supreme Court’s decision. Do you those circumstances an investor will be barred from filing its agree that federal courts should prepare for an influx of own lawsuit. While this result might seem harsh, an investor new protective filings? concerned with preserving its option to file an individual suit can There is an open question whether CalPERS will lead to an still do so, but it must do so before the repose period has passed. increase in the number of individual (or “opt-out”) actions. At a minimum, the decision should lead institutional investors with What open questions remain for plaintiffs hoping to large potential claims to pay more careful attention to the three- rely on American Pipe tolling following the CalPERS year anniversary of challenged securities offerings. decision? In 2016, the median time elapsed from the filing of a federal For claims subject to the three-year repose period in Section 13 class action complaint to a decision on class certification was of the Securities Act, the CalPERS decision definitively resolves approximately two and a half years, and the median time from the American Pipe tolling issue. In class actions asserting some filing to settlement was just under three years for all but the most different types of claims, however, whether a limitations period complex cases. Given these timeframes, the CalPERS holding amounts to a statute of repose could be an open question. might force investors with larger potential claims to decide In addition, tolling of a statute of repose might be available for whether to initiate their own action or to intervene in a pending claims “where there is a particular indication that the legislature class action, before having critical information, such as whether: did not intend the statute to provide complete repose but The class will be certified. instead anticipated the extension of the statutory period under The class action will be settled and, if so, at what value. certain circumstances.” For example, the Supreme Court in The class complaint will survive a motion to dismiss. CalPERS noted that the Employee Retirement Income Security Act of 1974 (ERISA) provides for a six-year statute of repose for The CalPERS dissent warns that the majority’s decision “impels fiduciary breach claims except that, in the case of fraud, the courts and class counsel to take a more active role in protecting six-year period does not begin to run until the plaintiff discovers class members’ opt-out rights” and that the potential for an the violation. Closer questions of this type of “legal” tolling increase in timely protective filings will, in turn, increase the might arise where the legislature enacts a general tolling rule cost and complexity of the class litigation. Even if this concern in a different part of a code, such as a “rule that suspends were valid, the majority concluded that the Supreme Court time limits until the plaintiff reaches the age of majority,” and could not rewrite the plain language of Section 13. At the same CalPERS does not purport to resolve those questions. (137 S. Ct. time, the majority believed this concern was “overstated” given at 2050 (citing 29 U.S.C. § 1113).) the absence of any significant increase in opt-out cases in the Second Circuit, where the rule affirmed in CalPERS has been in What impact, if any, is the CalPERS decision likely to effect since 2013. (137 S. Ct. at 2054, 2058.) (Commentators have on ongoing securities litigation? have pointed to the Petrobras litigation in the Southern District The most obvious impact of the decision for pending securities of New York as one example of a case in which there have been litigation is that any actions filed in reliance on American Pipe dozens of individual actions filed, but it is not clear that this was tolling after the repose period expired (three years for claims a result of Second Circuit rulings on American Pipe tolling rather under the Securities Act or five years for claims under the than other case-specific factors.) Securities Exchange Act of 1934 (Exchange Act)) will be subject Studies pre-dating the CalPERS decision suggest that the to dismissal as time-barred. We are aware of at least one strongest predictor for the filing of opt-out cases following the pending Securities Act case that falls within this category. commencement of a securities class action is the potential More difficult to predict is whether the CalPERS holding will be amount of damages or a settlement that might be obtained for extended to other defense arguments in securities class actions. the class, with opt-out cases occurring much more frequently

14 August/September 2017 | Practical Law © 2017 Thomson Reuters. All rights reserved. when class actions suggest the possibility of greater recoveries. for securities claims other than those arising under the The CalPERS opinion will not have any direct impact on that Securities Act. For example, 28 U.S.C. § 1658(b) provides for issue. (See, for example, Amir Rosen and others, Cornerstone a five-year statute of repose for fraud-based federal securities Research, Opt-Out Cases in Securities Class Action Settlements, claims, including those arising under Section 10(b) and 2012-2014 Update, at 3.) Rule 10b-5. We expect the bar against American Pipe tolling will apply to this five-year statute of repose, as well as to the three- If there is a rise in opt-out litigation as a result of the decision, year statutes of repose governing claims under Sections 14(a) defendants (and insurers) will face increased costs of defense and 18(a) of the Exchange Act. and, potentially, settlement. In those circumstances, not only would there be an additional party involved in settlement negotiations, but the opt-out plaintiffs might also have Search US Securities Laws: Overview and Securities Litigation: Liability Provisions Under the Securities Act and the Securities claims not available to the class (for example, claims under Exchange Act for more on the federal securities laws. Section 18(a) of the Exchange Act, which require individualized proof of reliance). Justice Kennedy recognized this dynamic in the majority opinion, observing that “[t]he emergence of Do you anticipate that the CalPERS decision will impact individual suits … may increase a defendant’s financial liability; timeliness determinations in cases that do not involve for plaintiffs who opt out have considerable leverage and, as a the federal securities laws? result, may obtain outsized recoveries” (137 S. Ct. at 2053). The reasoning of the majority in CalPERS should apply in any circumstance in which class claims are subject to a statute How might the CalPERS decision impact the timeliness of repose. Indeed, CalPERS itself looked to precedents of claims under other provisions of the federal securities involving different statutory schemes, including CTS Corp. v. laws, such as Section 10(b) of the Exchange Act and its Waldburger, which concerned a provision in the Comprehensive implementing regulation, Rule 10b-5? Environmental Response, Compensation, and Liability Act The CalPERS holding will almost certainly be applied by (CERCLA). The CalPERS decision could have far-reaching lower courts to bar American Pipe tolling of statutes of repose implications outside of the securities realm.

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