The U.S. House of Representatives is scheduled to vote this week on the Fairness in Class Action Litigation Act, which is pretty much a business lobby wish list to restrict consumer and mass personal injury litigation. The bill’s leading sponsor, Virginia Republican and House Judiciary Committee chair Bob Goodlatte, did, however, offer one key change Tuesday in the proposed law.
As originally written, the bill prohibits judges from certifying class actions in which the lead plaintiff has a previous client relationship with class counsel. That directive, as Columbia law professor John Coffee wrote last month, seems to conflict directly with 20-year-old legislation intended to encourage institutional investors to take the lead in securities class actions. The amendment Goodlatte proposed on Tuesday resolves the conflict. It says the new bill’s bar on repeat plaintiffs doesn’t apply to securities class actions.
In other words, securities class actions are likely to emerge relatively unscathed from the congressional beat-down on consumer class actions and multidistrict litigation. Institutional investors – mostly state, municipal and private union pension and healthcare funds – will continue to lead fraud class actions to recover money for their investors.
Instead, institutional investors and securities lawyers should be paying attention to a case the U.S. Supreme Court will hear in April, California Public Employees’ Retirement System v. ANZ Securities, which will determine the scope of investors’ rights to opt out of class actions when they decide they’d rather litigate on their own. Specifically, the ANZ case presents the question of whether the filing of a class action allows investors to pursue their own claims even if investors bring individual suits after the expiration of the Securities Act’s three-year statute of repose.
Two amicus briefs filed this week in support of CalPERS – one from 75 institutional investors and another from 10 securities law professors – warn of dire consequences for investors and the court system if the Supreme Court sides against CalPERS. The result, the briefs said, will be thousands of protective filings by investors worried about preserving their right to sue – exactly the sort of duplicative and inefficient litigation that class actions are intended to curtail.
CalPERS’ Supreme Court counsel from Goldstein & Russell explained the conundrum in an elegant Feb. 27 merits brief. In the case before the justices, investors in Lehman Brothers debt offerings brought class action claims in 2008. CalPERS, which had bought millions of dollars of Lehman debt issued in 2007 and early 2008, was a member of the class and all of its potential claims were encompassed in the class action. But as the case dragged along, CalPERS decided in 2011 to file its own suit. When the class action finally settled, CalPERS opted out of the class, expecting to pursue the individual case it had already filed.
The 2nd U.S. Circuit Court of Appeals, however, ruled that CalPERS hadn’t filed its suit in time. The Securities Act, as you know, includes both a one-year statute of limitations and a three-year statute of repose. The Supreme Court held in 1974’s American Pipe v. Utah that the filing of a class action tolls the statute of limitations for claims by plaintiffs in the class. But the American Pipe decision didn’t specifically address whether the same tolling applies to the statute of repose, and in a 2013 decision in In re IndyMac, the 2nd Circuit concluded that it does not. Under the 2nd Circuit’s IndyMac precedent, CalPERS’ individual suit against Lehman defendants fell outside of the statute of repose. And to add insult to injury, because CalPERS opted out of the class action, it could not recover damages through the class either.
The 2nd Circuit’s analysis on American Pipe tolling and the statute of repose is as opaque and impenetrable as the wall President Trump said he wants to build along the Mexican border. The brilliance of CalPERS’ brief is that it suggests the Supreme Court need not bang its head against the Rules Enabling Act, equitable authority and substantive rights. In American Pipe, the brief said, the Supreme Court said the filing of a class action “brings the action for all members, whether named or not,” wrote Goldstein & Russell. The Securities Act’s statute of repose simply says no action may be brought against an issuer more than three years after the public offering. So according to CalPERS’ brief, if the justices apply their own American Pipe definition, they should conclude the pension fund brought its action, through the class complaint, within the law’s three-year window.
“The class action complaint … commenced all of CalPERS's claims against each respondent, and did so on CalPERS's behalf,” the brief said. “CalPERS's ‘action,’ i.e., its cause of action, was therefore ‘brought’ within three years of the date that the relevant securities were offered to the public … The fact that CalPERS then filed an individual complaint and opted out of the class did not ‘bring’ its ‘action’ – it merely transferred control over the existing action from the class representatives to CalPERS.”
There’s lots more to think about in the Goldstein & Russell brief, including the question of whether curtailing CalPERS’ opt-out rights is a constitutional due process violation. But I want to draw attention to the practical arguments CalPERS’ friends are making in this week’s amicus briefs.
Both the institutional investors and the law profs backing the pension fund assert that investors will have to expend immense time and money to file unnecessary individual suits if the Supreme Court upholds the 2nd Circuit. The institutional investors, who are represented by Bernstein Litowitz Berger & Grossmann, pointed out that funds are obliged to look out for the interests of their beneficiaries. Because class actions take such a long time to resolve, fund managers may not know for years whether their beneficiaries are better served by proceeding through the class or on their own. Yet if their right to bring an individual suit will expire regardless of ongoing classwide litigation, the brief said, they will have no choice but to file their own complaints or intervene in the class action. That’s a waste of time and money, the funds said – both theirs and the court system’s.
The funds cited one notable example, consolidated securities litigation against the Brazilian oil company Petrobras. That case is being litigated in Manhattan federal court, where the 2nd Circuit’s IndyMac precedent applies. As a result, the funds said, some 500 individual suits against Petrobras are being litigated alongside the securities class action, many of them filed simply to protect investors against running out of time to sue. “The burdensome multiplication of individual actions as a result of the 2nd Circuit’s refusal to apply American Pipe to securities actions is no mere specter, but a reality,” the funds’ brief said.
The professors’ brief attempts to quantify through an empirical study just how many securities class actions would be accompanied by tag-along individual suits if the 2nd Circuit’s analysis is upheld by the Supreme Court. (The study, which was conducted by Stanford law professor David Engstrom and Penn law professor Jonah Gelbach, appears in the March 2017 Stanford Law Review; Engstrom and Gelbach are among the profs who signed the amicus brief backing CalPERS.) The professors examined 86 Securities Act class actions filed between 2002 and 2009. Fifty-two of the class actions reached a ruling on class certification. In 73 percent of the cases in which there was a class certification decision, the decision came after the expiration of the three-year statute of repose.
The professors conducted a similar analysis of cases asserting claims under the Securities and Exchange Act (which has a five-year statute of repose), then extrapolated their results to the entire universe of securities class actions since 1996, about 4,355 cases. “Plaintiffs seeking to preserve their rights in the event of denial of class certification would have needed to file protective actions in as many as 1,175 cases,” the amicus brief said. “Had even a handful of potential class members in each case done so as the end of the relevant three- or five-year limitations period approached, total filings, whether interventions or separate lawsuits, would have easily numbered in the thousands. Class members who did not do so would have forever lost their right to seek redress had class certification been denied.”
Securities defendants have been assuring the Supreme Court ever since IndyMac that predictions of opt-out suits swamping trial dockets are an overblown canard. It’s going to be interesting to see what Victor Hou of Cleary Gottlieb Steen & Hamilton, Supreme Court counsel for the defendants in the CalPERS case, has to say about the funds’ and profs’ amicus briefs. I left him a phone message but didn’t hear back.