The Ninth Circuit’s Recent ‘Resh’ Decision: An Invitation to a Game of Musical Chairs in Class Action Litigation

The Greek myth of Sisyphus tells the story of a king punished by being forced to roll an immense boulder up a hill, only to watch it roll back to hit him, and to repeat the futile task for eternity. A recent decision by the U.S. Court of Appeals for the Ninth Circuit invokes that image in the class certification context. In Resh v. China Agritech, the court extended the American Pipe equitable tolling doctrine and held that there is no time bar preventing unnamed plaintiffs in a prior dismissed class action suit from bringing a new class action claim based on similar facts and circumstances, even after the trial court has denied class certification. Resh comes up in the context of securities class actions, but it has important implications for class action practice generally in the Ninth Circuit.

The Resh Decision

On May 24, 2017, the U.S. Court of Appeals for the Ninth Circuit held that claims brought by plaintiffs in would-be class actions were not time-barred by the statute of limitations because the limitations period was tolled while the plaintiffs were unnamed members of a proposed class in two prior lawsuits in which class certification was denied.

The basic allegation in each of the lawsuits was that China Agritech violated §§10(b) and 20(a) of the Securities Exchange Act of 1934 by artificially inflating its stated revenue. The first putative class action was filed on Feb. 11, 2011. Judge R. Gary Klausner in the Central District of California denied class certification, finding that the named plaintiffs had failed to establish the Rule 23(b) predominance requirement. A second putative class action was filed on Oct. 4, 2012 and assigned to Judge Klausner. The court again denied class certification, this time finding that the named plaintiffs in the second case failed to meet the typicality and adequacy requirements of Rule 23(a).

Michael Resh, acting as named plaintiff, filed a third putative class action on June 30, 2014. Judge Klausner dismissed the complaint, ruling that the statute of limitations to bring a class action was not tolled by the two prior lawsuits in which Resh was not a named plaintiff. The court noted that, had Resh brought his claim as an individual claim, it would not be barred. In the court’s view, permitting the class action would allow tolling to extend indefinitely as class action plaintiffs repeatedly attempted to demonstrate suitability for class certification on the basis of different evidence. Inevitably, plaintiffs appealed.

In discussing the rationale of its precursors, the Ninth Circuit explained that the same policy considerations of judicial efficiency and the ultimate economic goals of class action litigation underlying American Pipe required tolling in the case of later class claims. The Resh court further explained that Rule 23 cannot abridge any substantive right, including statutes of limitation. Rule 23 empowers a federal court to certify a class in any case in which its criteria are met, it follows that there is no real difference between the tolling of subsequent individual claims and later class claims for purposes of considering the appropriateness of a class for certification.

The Circuit Split

The Ninth Circuit’s decision is a divergence from the approach taken by both the Sixth and the Seventh Circuits. The Resh opinion acknowledges as much, but distinguishes the relevant case law as having dealt with “preclusion-related principles.” The split ultimately stems back to the Ninth Circuit decision in Catholic Social Services v. INS, where a change in the law eliminated subject matter jurisdiction over the claims of a class previously certified by the District Court. New plaintiffs brought a second putative class action while the first case was still pending. Catholic Social Services has since been interpreted by both the Sixth and the Seventh Circuits as standing for the proposition that the overarching inquiry in determining whether prior class actions can toll future class actions is not the statute of limitations or the effect of tolling, but rather the preclusive effect of a judicial decision in the initial suit applying the criteria of Rule 23. While preclusion arguments are not absent from Resh’s history, they have been left unaddressed. In opposing class certification in the second putative action, defendants asserted that plaintiffs were precluded from bringing any class claims based on denial of class certification in the first putative action. While the court agreed that the new named plaintiffs could be bound by the decision based on their affiliation with, and control over, the prior named parties in the first action, it declined to fully address the issue and instead based its denial of class certification on issues surrounding adequacy and typicality.

Resh’s Implications

Resh anticipates its critics. The underlying district court was explicitly wary of the possibility that allowing tolling would result in continual, and potentially infinite, class action attempts. The Ninth Circuit’s decision does little to assuage these fears, acknowledging that its “conclusion may be thought likely to lead to abusive filing of repetitive class actions, [but that] the current legal system is adequate to respond to such a concern.” The Ninth Circuit puts faith in the “ordinary principles of preclusion and comity” and the belief that rational plaintiffs’ counsel will have little incentive to re-litigate already dismissed class actions.

Despite the Ninth Circuit’s faith in the legal system, it is difficult to ignore the concerns of the district court: Tolling undoubtedly opens the door for unnamed plaintiffs to engage in a game of musical chairs, swapping out new named plaintiffs in order to overcome issues in achieving certification. To say that Resh may give plaintiffs another bite at the apple is putting it lightly. While there are no doubt genuine policy reasons to allow tolling in specific circumstances, there are similarly important policy considerations underlying the existence of a statute of limitations. The Resh decision seems to ignore one in favor of the other.

The future is not necessarily bleak. The circuit split may indicate a possibility that the Supreme Court will take up the issue. And, in the meantime, class action defendants are not doomed to follow in Sisyphus’ footsteps. Judge Klausner’s decision in Resh’s predecessor lawsuit makes clear that a successful preclusion based argument can keep the boulder at the top of the hill.

Nancy Harris is Of Counsel in the San Francisco office of Orrick, Herrington & Sutcliffe, and Amy Byrd is an associate in the firm’s Los Angeles office.

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