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 three-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 classwide settlement. Because courts have generally held that there is a five-year statute of repose under the Securities Exchange Act of 1934, we think it is likely that American Pipe tolling will be unavailable for any private securities claims under the 1933 and 1934 Acts.
CalPERS is likely to have a significant effect on future and pending litigation. The holding will force putative class members to decide within three years of the relevant securities offering whether they will remain in the class, obtain tolling agreements from all defendants, or as institutional investors with large holdings often do, 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 will simplify some critical settlement decisions and reduce tail risk in many cases. As to pending litigation, there may be existing cases where institutional investors have relied on the availability of American Pipe tolling to opt out of class actions and file individual complaints after the running of the respective statutes of repose, only to face dismissal of those claims now.
The CalPERS Case
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 respondent Anz Securities and other securities underwriters alleging that the registration statements included material misstatements or omissions. The class action complaint on behalf of all persons who purchased the securities, which included CalPERS, was consolidated with other securities suits against Lehman into a single multidistrict class action in the Southern District of New York.
In February 2011—more than three years after the 2007 and 2008 offerings closed, and while it remained a member of the putative class—CalPERS filed a separate complaint on its own behalf in the Northern District of California in which it alleged the same Section 11 violations asserted in the 2008 class action. CalPERS' individual suit was transferred to the Southern District of New York and consolidated with the multidistrict litigation. When a settlement was reached in the class action, CalPERS, "apparently convinced it could obtain a more favorable recovery in its separate suit," opted out of the class.
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 statute 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. Defendants 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 defendants, 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. In a 5-4 decision penned by Justice Kennedy, the Court held 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.
The Court rejected a number of counterarguments and concerns raised by Justice Ginsberg, who wrote a dissent joined by Justices Breyer, Sotomayor, and Kagan. Principally, the Court rejected the contention that it would "render the right [to opt out] illusory for CalPERS and similarly situated class members." The Court responded that the "privilege to opt out" did not exempt CalPERS or other unnamed class members from the statute of repose's mandatory time limit. In any event, the Court found CalPERS' concerns that its decision will cause unnamed class members to "inundate district courts with protective filings" overblown, as CalPERS did not offer evidence of an influx in protective filings in the Second Circuit, which implemented the no-tolling rule in 2013. The dissent's related contention that the Court's decision will incentivize defendants to "slow walk discovery . . . so the clock will run on potential opt outs" likewise did not sway the Court away from its legislative-intent-driven decision.
The decision in CalPERS resolves a split among the Circuits by respecting the bright-line rule Congress enacted for bringing claims under the 1933 Act. Defendants and their securities liability insurers will welcome the development as they will be able to evaluate fully and accurately their exposure to claims and liability based on claims filed within three years of an offering. CalPERS eliminates a significant tail risk in securities offerings where a timely class action has been filed, improving the ability of issuers, creditors, and new investors to identify, evaluate, and estimate potential liabilities in their risk assessment. The enhanced certainty should simplify and facilitate financings and offerings. Among the most significant beneficiaries will be risk managers and insurers identifying and evaluating continuing liability risks from previous events in pricing policies that cover securities liabilities on a claims-made basis.
CalPERS will impact securities litigation arising from public securities offerings. In many cases, large institutional investors with significant holdings and existing relationships with plaintiff securities lawyers opt out of securities class actions, often after the settlement die is cast as CalPERS did with the Lehman class action, to pursue richer settlement terms than those available to the class. Opt-outs seeking richer recoveries complicate securities settlements in a number of ways, but the most problematic is increasing uncertainty in predicting what a settlement will cost. Defendants settling a class action must account for opt-outs to ensure that there is sufficient insurance coverage to fund settlements. Defendants often negotiate triggers to terminate settlements where opt-outs exceed agreed-upon thresholds, and with their insurers, they adjust their settlement pricing and terms to the class to account for follow-on opt-out litigation. Now, in cases where settlements occur more than three years after the offering, as is often the case, CalPERS prevents institutional class members from filing new claims to seek richer payouts in reliance on American Pipe tolling, or using the threat of new claims to increase the settlement value to the class. Institutional plaintiffs may also increase their filing of "provisional" claims within three years or seek tolling agreements from defendants, although the Court denied that the Second Circuit had experienced the former trend.
Lower courts are likely to apply CalPERS to Section 10(b) claims brought under the Securities Exchange Act, an issue that was not decided by the Court in CalPERS. Private rights of action for securities fraud brought under Section 10(b) are subject to a two-year statute of limitations and a five-year statute of repose, which begins to run at the time of the violation. 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 Section 10(b) actions, both in terms of the number of opt-outs they can expect and their total liability.
CalPERS will ensure that defendants receive the benefit of the "repose" intended by Congress without the risk of equitable tolling. In so doing, it will alter the strategy and calculus of both plaintiffs and defendants in securities class action litigation, generally to the benefit of defendants and their insurers.