Seventh Circuit enforces important limit on class action tolling

As we have noted before, the tolling rule created by the Supreme Court in the American Pipe case–which tolls the statute of limitations for absent class members when a class action is filed–generates vigorous disputes over when stale or successive claims will be allowed.  The Seventh Circuit recently considered one such dispute in Collins v. Village of Palatine, holding that the statute of limitations is not tolled during the pendency of an ultimately successful appeal from the dismissal of a putative class action that had not been certified.

In Collins, the plaintiff sought to bring a class action alleging that a municipality’s practice of putting certain personal information on traffic tickets left under windshield wipers violated the federal Driver’s Privacy Protection Act.  Because his claim would otherwise have been untimely, the plaintiff invoked the American Pipe tolling rule based on two prior class actions filed by his lawyer.  In the first of those suits, the district court dismissed the suit before there had been any ruling on class certification.  The Seventh Circuit ultimately reversed, but on remand the district court granted summary judgment and the subsequent appeal was unsuccessful.  The plaintiff’s lawyer then filed a successor suit on his own behalf, which he dismissed when he filed the plaintiff’s suit.

The question on appeal was whether American Pipe tolling continued after the first case was dismissed with prejudice.  The Seventh Circuit concluded it did not.  The court first observed that the consensus view in the courts of appeals is that, under American Pipe tolling, the statute of limitations starts running immediately upon any of the following occurrences:

  • denial of class certification;
  • a choice by a class member to opt out;
  • voluntary dismissal of class claims; and
  • dismissal of an uncertified class action for lack of subject-matter jurisdiction.

The court saw no reason to create a different rule for dismissal of an uncertified class action with prejudice.  At that point, the absent class members are “on notice that they must take steps to protect their rights or suffer the consequences.”  “Continuing to toll the limitations period beyond the dismissal of a noncertified class claim would encroach more severely on the interests underlying statutes of limitations.”  And the court preferred “a unified rule that is clear and easy to enforce.”

Collins is an important reminder to defendants to push back against aggressive assertions of American Pipe tolling.  It also provides important protections against successive–and abusive–class actions filed long after the statute of limitations has expired.  Finally, it should save defendants from having to play an expensive game of whac-a-mole as plaintiffs’ lawyers file one class action after another in search of favorable plaintiffs and favorable courts.

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Congress votes to invalidate CFPB’s anti-arbitration rule

The anti-arbitration rule issued by the Consumer Financial Protection Bureau in July is now just one short step away from elimination.

The Senate tonight voted 51-50 (with Vice President Pence casting the deciding vote) to invalidate the CFPB’s rule under the Congressional Review Act (“CRA”). That vote follows the House of Representatives’ disapproval of the rule in July.

The last remaining step is the President’s signature on the legislation, which seems highly likely given the Administration’s statement today (pdf) urging the Senate to invalidate the rule.

The President’s approval will trigger two provisions of the CRA.

First, the rule “shall not take effect (or continue)” (5 U.S.C. § 801(b)(1)). In other words, the rule no longer has the force of law and businesses are no longer required to comply with its terms.

Second, the CFPB may neither re-issue the rule “in substantially the same form” nor issue a new rule that is “substantially the same” as the invalidated rule—unless Congress enacts new legislation “specifically authoriz[ing]” such a rule (5 U.S.C. § 801(b)(2)). The scope of this “substantially the same” standard has not been addressed by the courts, but it seems clear that at the very minimum the Bureau cannot issue (a) a new rule banning class action waivers; (b) an express ban of pre-dispute arbitration clauses; (c) a rule that has the practical effect of eliminating pre-dispute arbitration clauses; or (d) any other rule that imposes similar burdens on the use of arbitration.

Invalidation of the rule under the CRA also will moot the pending broad-based industry lawsuit against the CFPB challenging the legality of the regulation. (Mayer Brown represents the plaintiffs in the litigation).

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Supreme Court Considers Class Waivers in Employment Arbitration Agreements

The Supreme Court kicked off its October 2017 Term yesterday with a spirited oral argument in the three cases involving the enforceability of arbitration agreements in employment contracts.

As we have explained, these cases—Epic Systems v. Lewis, Ernst & Young LLP v. Morris, and NLRB v. Murphy Oil USA—present the question whether an arbitration agreement in an employment contract that requires bilateral arbitration, and prohibits class procedures, is invalidated by Section 7 of the National Labor Relations Act (NLRA), which gives employees the right “to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” According to the National Labor Relations Board, Section 7 protects employees’ right to seek relief on a class-wide basis, and therefore renders unenforceable arbitration agreements that bar class procedures—even though the Supreme Court has twice held that the Federal Arbitration Act (FAA) protects the enforceability of such agreements, in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013).

The four Justices who dissented in either Concepcion or Italian Colors (or both) aggressively defended the NLRB’s determination. When the dust settled, however, it was not at all clear that they will be able to attract a fifth Justice to their position.

First up at the lectern was Paul Clement, representing the three employers. He was immediately pummeled by assertions that his position required the Court to reject longstanding labor law precedent:

Justice Ginsburg: “the driving force of the NLRA was the recognition that there was an imbalance, that there was no true liberty of contract, so that’s why they said, in the NLRA, concerted activity is to be protected against employer interference.”

Justice Breyer: “I’m worried about what you are saying is overturning labor law that goes back to, for FDR at least, the entire heart of the New Deal.”

By framing the cases at the outset in labor law terms, these statements—and other similar comments by Justices Kagan and Sotomayor—reflected those Justices’ view that labor law concerns should be dominant in the Court’s resolution of these cases.

But, as the Chief Justice pointed out, the cases involve two federal statutes—the FAA as well as the NLRA. And the FAA expressly requires that arbitration agreements be enforced in accordance with their terms. Although the NLRA refers to concerted activities, it does so in a context, and with words, closely tied to union organizing and collective bargaining, not to litigation. As Deputy Solicitor General Jeffrey Wall explained (arguing for the United States as amicus curiae), “our simple point is this case is at the heartland of the FAA. It is, at best, at the periphery of the NLRA, on the margins of its ambiguity.”

In addition, as Clement put it, “for 77 years, the Board did not find anything incompatible about Section 7 and bilateral arbitration agreements, and that includes in 2010 when the NLRB general counsel looked at this precise issue.”

Clement and Wall each emphasized that the Supreme Court has repeatedly held—most recently in CompuCredit Corp. v. Greenwood—that the FAA’s rules for enforcing arbitration agreements can be displaced only when Congress in the text of a statute indicates its intent to preclude application of the FAA’s principles. Nothing in the NLRA mentions either litigation in court or class actions; nor does the NLRA’s text indicate any intent to displace the ordinary rules applicable to arbitration agreements.

Justice Sotomayor interjected that the Court has applied that test to decide whether Congress intended to prevent a federal cause of action from being arbitrated, and instead to be actionable only in court. But the question before the Court in these three cases is how to reconcile two federal statutes; the logical way to do that is to determine whether Congress in the NLRA superseded the FAA’s general rule that arbitration agreements should be enforced according to their terms. And the text of the NLRA contains not even a hint that Congress had litigation in mind, let alone that it intended to override the general rules associated with arbitration—a result that would be particularly odd in the labor context, where arbitration is ubiquitous.

That outcome does not require the Court to hold the NLRA inapplicable to litigation activity. Outside the arbitration context, without the congressional command embodied in the FAA, Section 7 could bar employer interference with concerted litigation activity by employees—just as the FAA requires the enforcement of agreements to arbitrate bilaterally, but states are free to bar waivers of class actions not included in arbitration agreements. That is exactly what the Supreme Court held in Concepcion, when it declared California’s Discover Bank rule—which invalidated as unconscionable agreements to waive class arbitration and class litigation—incompatible with the FAA when applied to arbitration agreements.

NLRB General Counsel Richard Griffin defended the Board’s position. He was met by skeptical questioning from the Chief Justice and Justice Alito, both of whom joined the majority in Concepcion and Italian Colors.

They wondered why the Board’s interpretation of the NLRA didn’t mean that other federal laws limiting concerted action through litigation, such as the requirements of Federal Rule of Civil Procedure 23, are displaced when employees attempted to engage in joint litigation. The answer—that those requirements are binding as “rules of the forum”—left it unclear why the FAA’s requirements may be overridden even though the FAA provides that, as to some fundamental attributes of arbitration, the parties’ arbitration agreement must be permitted to establish the “rules of the arbitral forum.”

That inconsistent approach was highlighted when the Chief Justice asked Griffin whether the NLRA permits enforcement of an arbitral rule making collective arbitration available only for claimant groups of 51 or more. Griffin said that such a rule could not be embodied in the arbitration agreement, but would be enforceable if it were a rule of the arbitral forum selected by the agreement. That concession (which was disclaimed by Daniel Ortiz, who argued on behalf of the employees in one case) seemed to undermine the Board’s position. As Clement and Wall put it, the NLRA prevents the employer from interfering with the rules of the forum, whether judicial or arbitral, and one of the fundamental attributes of arbitration—protected by the FAA—is that it is bilateral.

[Update: NLRB General Counsel Grifin sent a letter (pdf) to the Court on Tuesday afternoon disavowing his answers and adopting Ortiz’s position.]

One issue not addressed in the argument was the implications of the Board’s position for state laws seeking to undermine arbitration agreements. The Board’s theory is that, under the NLRA, arbitration agreements with class waivers are “illegal” and therefore unenforceable under a general contract principle that unlawful contracts are invalid. According to the Board, this “illegality” defense applied pursuant to the FAA’s “savings clause,” which permits the invalidation of arbitration agreements “upon such grounds as exist at law or equity for the revocation of any contract.”

But, as we explained in the amicus brief (pdf) we filed on behalf of the Chamber of Commerce, the savings clause saves state contract laws of general applicability from FAA preemption; the Court determines whether another federal law displaces the FAA by applying the “contrary congressional command” test. Moreover, Concepcion held that the savings clause does not “save” rules prohibiting waivers of class procedures, because such rules interfere with the bilateral nature of arbitration and thus “create[] a scheme inconsistent with the FAA.” Indeed, if the NLRB were correct, a state could simply declare all arbitration agreements illegal, and then assert that in refusing to enforce the agreements it was applying the neutral, generally-applicable state law principle that “illegal” contracts are void. To avoid that result, the FAA must be taken into account in determining whether a contract is “illegal”; failing to do so would create a huge gap in the statute’s protection of arbitration.

Justice Kagan tried to resuscitate the NLRB’s position by asking whether an arbitration agreement must be enforced if it provides that the employer will pay arbitration costs for male employees, but not for female employees. Wall explained that such an agreement would be unenforceable. The reason is simple: federal law outlaws such discrimination, and the application of that generally-applicable rule—whether as a matter of federal or state law—fits within the FAA’s savings clause because it does not target a fundamental attribute of arbitration.

The distinction is illustrated by the Court’s decision in Concepcion, which held preempted a California state rule barring enforcement of arbitration clauses with class waivers, even though framed as part of the general state-law principle that unconscionable contracts are unenforceable. States may apply general unconscionability principles to arbitration agreements—as the Court has recognized in decisions such as Marmet Health Care Center, Inc. v. Brown—but they cannot do so in a way that interferes with arbitration’s fundamental attributes.

Similarly, the FAA does not displace generally-applicable federal laws—unless such laws interfere with arbitration’s core features. For a federal law to accomplish the latter, Congress must evidence its intent to do so in the text of the statute, which it did not do in the NLRA.

Justice Kennedy—likely a critical vote in the case—pointed out during Griffin’s argument that three employees could “go to the same attorney and say please represent us, and we will share our information with you, we have three individual arbitrations.” Thus, the Justice explained, “they are proceeding concertedly. They have a single attorney. They are presenting their case. It is going to be decided maybe in three hearings.”

Griffin recognized that was permissible, but asserted that the NLRA goes further and protects the right to bring one arbitration rather than three.

Justice Kagan weighed in to support Griffin, stating “usually when you have a right, the fact that there is one way to exercise a right [that is permitted] does not make it ok if we’ve taken away another 25 ways of exercising the right. . . . [W]hen we think about the First Amendment, we don’t say we can ban leafleting because you can always write an op ed.”

But Justice Kagan took a somewhat different view in her dissenting opinion in Italian Colors. There, where the issue was whether the cause of action conferred by the antitrust laws could be “effectively vindicated” without class procedures, she stated that, in her view, the arbitration agreement was unenforceable because “as applied in this case cuts off not just class arbitration, but any avenue for sharing, shifting, or shrinking necessary costs.” The “the agreement could have prohibited class arbitration without offending the effective-vindication rule if it had provided an alternative mechanism” for coordination among claimants. In other words, the arbitration agreement in her view could be enforced as long as an avenue for joint action remained open—the very point that Justice Kennedy had made.

More fundamentally, the Board has already abandoned the position hypothesized by Justice Kagan during yesterday’s argument. It agrees that an individual employer can be required to arbitrate a claim, rather than sue in court, even if the claim is one for “mutual support” and therefore qualifies as concerted action under the Board’s interpretation of the NLRA. And it agrees that an employee can be required to utilize collective procedures in arbitration, rather than court. Those concessions necessarily rest on a recognition that the FAA background rules limit the scope of the “concerted action” that is protected by the NLRA (because of the absence of any express indication that Congress intended to override the FAA). And the Board advanced no principled reason why some of the FAA’s principles apply–such as the one that arbitral forums vindicate rights as effectively as judicial forums–but the principle preserving the right to bilateral arbitration does not.

Finally, a comment late in the argument by Justice Sotomayor illuminated the policy concerns underlying the legal issues in the case. She asked Clement “why employers would prefer an arbitration of 100 different claims, let’s say in the religious accommodation context, where half the arbitrators say you must honor . . . those 50 people’s religious claims and the other 50 arbitrators say no, you don’t have to. . . . [H]ow are employees and employees helped with such a system?”

Clement ran out of time before he could respond, but the answer is clear: all parties are helped when legal issues are decided on the merits.

That virtually never happens in class actions. As the Court itself has recognized, once a class is certified, the case is virtually always settled. Studies analyzing class actions bear this out: litigated class actions are as rare as snow in July.

The judicial proceedings that precede those settlements—decisions on the motion to dismiss and class certification—do not examine the merits of the underlying claim. On a motion to dismiss, the allegations of the complaint are taken as true; and class certification turns on Rule 23’s standards, which do not inquire into the merits of the claim.

Bilateral arbitration provides each side with a chance to test the merits of the underlying claim. If the employer loses multiple times, it is likely to settle the remaining cases. If the employees lose multiple times, other employees may decide to give up. But those decisions will be based on an assessment of the merits—not just the burdens of litigating the class action regardless of its merits. That means that employees whose claims prevail are likely to get much more in a settlement than those whose claims fall short, which is just how we’d want a dispute resolution system to operate.

The stakes in these cases are substantial—Ortiz stated that approximately 25 million employees are parties to agreements requiring bilateral arbitration. The Chief Justice then reframed that assertion, focusing on its implications for the enforceability of arbitration agreements: “So [a] decision in your favor would invalidate agreements covering 25 million employees.” In our view, the Board’s novel interpretation of the NLRA—one never advanced for most of the Act’s history—should not undermine parties’ long-standing reliance on the FAA’s protection of fair arbitration agreements.

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Making sense of the cascade of appellate decisions on ascertainability

We have repeatedly discussed in this space the ongoing debate among the federal courts about ascertainability—a red-hot topic in class action litigation these days. (For a more detailed look at our views on the ascertainability doctrine, see the amicus brief (pdf) that we filed on behalf of the National Association of Manufacturers in support of a pending cert petition.) That topic—and the debate among the lower courts—shows no sign of slowing down, as evidenced by new decisions issued by the Second, Sixth, and Third Circuits over the past two months. The central takeaway from these decisions is that while ascertainability is not a panacea for defendants facing consumer class actions, the doctrine (or variations on the ascertainability theme) should help defeat class actions in many circuits when class members cannot be identified without individualized inquiries.

Second Circuit Dresses Up Ascertainability In New Clothing

The Second Circuit’s decision in In re Petrobras Securities might seem on the surface to have cut back on the ascertainability doctrine, but what the opinion took away with one hand it gave with the other. In Petrobras, the Second Circuit vacated the district court’s certification of money-damages classes of purchasers of certain securities in “domestic transactions” for failing to apply Rule 23(b)(3)’s predominance requirement properly. But in the same opinion, the panel took the “opportunity to clarify the scope of the contested ascertainability doctrine,” stating that ascertainability lacks an “administrative feasibility” component and that the “ascertainability doctrine that governs in this Circuit requires only that a class be defined using objective criteria.”

As an initial matter, that statement seems hard to square with the Second Circuit’s earlier published decision in Brecher v. Republic of Argentina, in which the panel was “not persuaded” by the argument “that a class defined by reference to objective criteria is all that is required to satisfy ascertainability” (quotation marks and alterations omitted). Instead, the Brecher court held that “[a] class is ascertainable when defined by objective criteria that are administratively feasible and when identifying its members would not require a mini-hearing on the merits of each case” (emphasis added). A subsequent unpublished opinion by the Second Circuit, Leyse v. Lifetime Entertainment Services, LLC, took that language at face value in affirming a denial of class certification for lack of ascertainability where the plaintiff “had failed to show a sufficiently reliable method for identifying the proposed class to avoid ‘mini-hearing[s] on the merits of each case.’”

Yet the Petrobras panel concluded that Brecher’s language about administrative feasibility and individualized mini-hearings merely “conveyed the purpose underlying the operative requirements of definiteness and objectivity” in the class definition, rather than articulating independent components of the ascertainability requirement. (Emphasis the Court’s.) According to the Petrobras panel: “Our decision in Brecher did not create an administrative feasibility requirement, and we decline to adopt one now.”

Notably, there was no overlap among the judges on the Brecher and Petrobras panels. To the extent that the debate between the panels matters, en banc review in an appropriate case might make sense for the Second Circuit to clear up this newfound confusion in its precedents—unless the Supreme Court steps in first.

That said, the best understanding of Petrobras is that it found a different home for an administrative feasibility requirement. As the panel explained, difficulties in feasibly identifying class members may still lead to “fatal challenges” to class certification—but those challenges would take place under Rule 23(b)(3)’s predominance requirement instead. As the panel put it, “classes that require highly individualized determinations of member eligibility” risk running afoul of “the predominance requirement.” For that reason, the panel vacated the class certification order on predominance grounds, reasoning that identifying who purchased the challenged securities in “domestic transactions” may require “transaction-specific facts . . . not obviously susceptible to class-wide proof.” The panel held that the district did not adequately consider “the potential for variation across putative class members—who sold them the relevant securities, how those transactions were effectuated, and what forms of documentation might be offered in support of domesticity.” As the panel summarized, “[t]he predominance analysis must account for such individual questions, particularly when they go to the viability of each class member’s claims.”

Finally, the panel also rejected the district court’s belief that it was appropriate to sort out the domesticity of transactions post-certification, using “‘bureaucratic processes of determining who belongs to a Class’”—presumably meaning post-verdict claims processing by third-party claims administrators. The panel explained that such processes “do[] not obviate the need to consider the plaintiff-specific nature” of the inquiry into a transaction’s domesticity at the class certification stage, and further emphasized that “the possibility of post-certification procedural tailoring does not attenuate [district courts’] obligation to take a ‘close look’ at predominance when assessing the motion for certification itself.”

Readers might be forgiven for thinking that this approach to predominance sounds a lot like the strong form of ascertainability …

Sixth Circuit recognizes “class member identity concerns” as a basis for rejecting certification

The Sixth Circuit upheld the rejection of class certification in a TCPA case because identifying class members was not administratively feasible. Specifically, in a published opinion in Sandusky Wellness Center, LLC v. ASD Specialty Healthcare, Inc. (pdf), the Sixth Circuit agreed with the district court that a “junk fax” class action under the TCPA could not be certified because there were no fax logs that could be used to feasibly identify potential class members. As the district court had held, (1) the individualized inquiries necessary to demonstrate receipt of an offending fax meant that plaintiffs could not satisfy Rule 23(b)(3) predominance; and (2) in the alternative, the proposed class was not ascertainable “since identifying class members in the absence of fax logs was not ‘administratively feasible.’”

The Sixth Circuit upheld the denial of certification based on the district court’s “recognition of the difficulty in identifying class members without fax logs and with sole reliance on individual affidavits . . ., regardless of whether this concern is properly articulated as part of ascertainability, Rule 23(b)(3) predominance, or Rule 23(b)(3) superiority.” The panel saw “no need to add [its] own opinion to th[e] debate” over how best to “categorize[] class member identity concerns”: it was enough to say that district courts have discretion to deny class certification on the basis of such concerns.

Significantly, the panel rejected the plaintiffs’ argument that the use of affidavits by would-be class members attesting to receipt of an offending fax automatically provides a feasible way to prove membership in the class, deferring to the district court’s determination that the proposed affidavits would not provide a manageable way to identify class members. In our view such affidavits are never adequate on their own to avoid ascertainability problems—because due process entitles defendants to challenge an individual’s claim of membership in the class. Although the Sixth Circuit did not announce such a categorical rule—probably because it was unnecessary to do so in the case before it—its opinion gives defendants within the Sixth Circuit powerful arguments to challenge the use of such affidavits at the class certification stage.

Third Circuit reaffirms administrative feasibility requirement while overturning specific denial of class certification

Finally, and most recently, the Third Circuit vacated the district court’s denial of class certification in another TCPA “junk fax” case, City Select Auto Sales Inc. v. BMW Bank of North America Inc. (pdf). City Select involved faxes sent to car dealerships that advertised financing of BMW purchases. The defendants had a customer database of auto dealerships from which the allegedly offending faxes were generated, and the class definition was limited to dealerships included in that database. The existence of the database was established in the district court proceedings, but the database itself was not produced and made part of the record because the plaintiff agreed early in the case not to seek its production (and the plaintiff therefore lost a later motion to compel production before the magistrate judge at the class certification stage). The district court denied class certification solely on ascertainability grounds, concluding that even if the customer database would allow plaintiff “to identify the total universe of fax recipients, there is no objective way of determining which customers were actually sent the BMW fax.”

The Third Circuit vacated and remanded for the district court to re-evaluate ascertainability after production of the database and affording plaintiff a renewed opportunity to propose a method for ascertaining class members on a more complete record. The court made clear that its holding did not alter the Third Circuit’s two-part standard for ascertainability—over a concurrence by Judge Fuentes, who urged the court to join the Ninth Circuit and others in rejecting an administrative feasibility requirement. Thus, in the Third Circuit, a plaintiff must still show that “(1) the class is defined with reference to objective criteria; and (2) there is a reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition” (quotation marks omitted).

The City Select court reiterated that potential class members may not use affidavits, standing alone, to prove membership in the class, because there is no reliable and administratively feasible way of verifying the contents of the affidavits, short of a mini-trial on each claimant’s assertion of membership. But in this case, there was the possibility that “affidavits in combination with the Creditsmarts database” could satisfy ascertainability. In particular, the court noted that the record contained “significant circumstantial evidence that the faxes were sent to every customer in the database at that time.”

Accordingly, it was possible that little individualized fact-finding would be required to verify a claimant’s attestation that it received the offending fax, and the Third Circuit remanded for the district court to evaluate the issue on a more complete record. As the Third Circuit summarized, “[t]he amount of over-inclusiveness, if any, of the proposed records is a critical consideration.”

Some observers thought that City Select represented a retreat from the Third Circuit’s “strong form” of ascertainability, exemplified by Carrera v. Bayer Corp. But there’s a simpler explanation for the City Select decision: Facts matter. Here, the critical facts were that there was a database of potential recipients and (potentially) corroborating evidence that everyone in the database received the fax. If plaintiff is right about those facts, then there is nothing surprising about City Select.

* * *

One thing is certain: The courts of appeal and district courts will continue to debate whether there must be an administratively feasible way to identify actual class members before a class may be certified—whether described in terms of ascertainability, predominance, or something else. In addition, there is a possibility that the Supreme Court steps in—something we may learn in a matter of days. Stay tuned!

Update:  The Supreme Court denied cert in ConAgra Brands v. Briseno on October 10, 2017.

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Supreme Court Refuses To Allow Class Action To Extend Deadline For Filing Suit

Today, in CalPERS v. ANZ Securities, Inc. (pdf), the Supreme Court recognized a crucial limitation on the doctrine that allows a class action to toll the deadline for absent class members to bring their own separate individual suits. We’ve been following this issue in the CalPERS appeal for some time. (See our previous reports on this appeal.)

In a 5-4 decision authored by Justice Kennedy, the Court held that the American Pipe tolling doctrine does not apply to statutes of repose. As a result, the three-year statute of repose in the Securities Act of 1933 barred a suit that CalPERS had filed against the underwriters for certain Lehman Brothers debt securities more than three years after the securities were issued, but while a timely class action bringing similar claims was pending.

Even though lower courts had divided on the question and four Justices dissented, the majority’s reasoning follows fairly directly from established precedents. Consistent with Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, the Court easily determined that the three-year period allowed for suits under § 13 of the Securities Act is a statute of repose. That statutory provision “creates a fixed bar against future liability,” “admits of no exception,” and “runs from the defendant’s last culpable act” rather than “the accrual of the claim.” Tellingly, the majority observed, § 13 also contains a separate one-year statute of limitations.

The majority then explained that statutes of repose are not subject to equitable tolling, as CTS Corp. v. Waldburger held. “The purpose and effect of a statute of repose . . . is to override customary tolling rules arising from the equitable powers of courts.” Statutes of repose, the Court emphasized, reflect a legislative determination that “there should be a specific time beyond which a defendant should no longer be subjected to protracted liability.” The “unqualified nature of that determination . . . forecloses the extension of the statutory period based on equitable principles.”

The only remaining question was whether the class-action tolling rule established by American Pipe & Construction Co. v. Utah provides for equitable tolling. Looking to American Pipe itself, the Court had no trouble answering that question affirmatively: “The source of the tolling rule applied in American Pipe is the judicial power to promote equity.” Having concluded that § 13’s three-year period is a statute of repose, that statutes of repose cannot be equitably tolled, and that American Pipe provides for equitable tolling, the Court ruled that American Pipe tolling could not apply to § 13’s three-year period.

The points raised by CalPERS in opposition did not persuade the majority. American Pipe tolling, the majority concluded, could properly be restricted to statutes of limitations. Otherwise, individual suits filed after expiration of § 13’s repose period could expand a defendant’s litigation burdens and liability beyond that imposed by a timely class action. The importance of opt-out rights would not justify ignoring mandatory time limits set by statute. Any risk of burdensome protective filings by class members seemed overblown to the Court. And the word “action” in the operative portion of § 13 could not be read to mean a claim brought in a class action on a separate date by a separate named party in a separate suit.

Writing for the dissenters, Justice Ginsburg argued that tolling § 13’s repose period would not implicate any of the reasons for that period because the class action gave the defendants all the notice of liability that they needed. She also described risks that some class members could lose their rights to proceed individually and that protective filings by other class members would “gum up the works of class litigation.” Interestingly, she also urged class counsel and district courts to notify class members as the expiration of any repose period approaches.

The CalPERS decision continues a longstanding trend of taking statutes of repose seriously. The Court is right to do so. When a legislature enacts an unqualified statute of repose, it is telling litigants and courts that the threat of litigation must end on a date certain. Judge-made tolling rules should not second-guess that instruction. As the Supreme Court recognized, there is no good reason to take a different approach just because a class action is or was pending.

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Solicitor General weighs in against NLRB’s anti-arbitration rule

As many of our readers know, the Supreme Court will hear arguments next term in a trio of cases examining whether class waivers in employment arbitration agreements are enforceable under the Federal Arbitration Act. Many observers—including the two of us—believed that the issue had been settled by the Supreme Court’s decisions in AT&T Mobility LLC v. Concepcion (2011) and American Express Co. v. Italian Colors Restaurant (2013). But—as detailed on our blog—in 2012 the National Labor Relations Board concluded in the D.R. Horton case that Section 7 of the National Labor Relations Act (NLRA), which protects the ability of employees to engage in “concerted activities” (for example, union organizing), supersedes Concepcion (and by extension, American Express) and requires that employees be allowed to bring class actions (either in court or in arbitration).

Over the past several years, a circuit split has developed over whether the Board’s approach in D.R. Horton rests on correct interpretations of the FAA and NLRA, with the majority of courts rejecting the Board’s position. In January, the Supreme Court granted review in three cases—NLRB v. Murphy Oil USA, Inc., Epic Systems Corp. v. Lewis, and Ernst & Young LLP v. Morris—to resolve the split. Briefing on the merits is now underway. We filed our amicus brief on behalf of the U.S. Chamber last Friday, and—while we believe our brief makes compelling arguments (which we discuss below)—the big development in these cases was the amicus brief that the United States filed on Friday.

Significantly, the United States has changed its position since last October, when the DOJ represented the NLRB in filing the petition for certiorari in Murphy Oil. That petition was a full-throated defense of the D.R. Horton rule, consistent with efforts by a number of federal agencies during the Obama Administration to circumvent Concepcion by banning class waivers or banning predispute arbitration entirely. Last Friday, however, the United States broke with the Board’s position, filing an amicus brief in support of Murphy Oil and the other two companies.

As the government explained in its brief on Friday, the Solicitor General’s office has concluded that its earlier briefs got the issue wrong:

In Murphy Oil, this Office previously filed a petition for a writ of certiorari on behalf of the NLRB, defending the Board’s view that agreements of the sort at issue here are unenforceable. After the change in administration, the Office reconsidered the issue and has reached the opposite conclusion. Although the Board’s interpretation of ambiguous NLRA language is ordinarily entitled to judicial deference, courts do not defer to the Board’s conclusion as to the interplay between the NLRA and other federal statutes. We do not believe that the Board in its prior unfair-labor-practice proceedings, or the government’s certiorari petition in Murphy Oil, gave adequate weight to the congressional policy favoring enforcement of arbitration agreements that is reflected in the FAA.

While the United States’ brief is worth reading in full, here are some highlights:

  • “[T]he Court has made clear that statutory authorizations to pursue class actions in court for violations of particular federal laws is insufficient to override the FAA’s directive that agreements to arbitrate must be enforced.”
  • No one contends that the Fair Labor Standards Act—which is the basis for plaintiffs’ underlying claims—“overrides the FAA’s directive that their arbitration agreements should be enforced.”
  • “None of the specific rights enumerated in” Section 7 of the NLRA, which describes “concerted activities for the purpose of collective bargaining or other mutual aid and protection, “involves the conduct of litigation.”
  • “In no other context … has [Section 7] been construed to expand the availability of class or collective remedies beyond those that are authorized by the laws that directly address those issues.”
  • “Because the question is whether the NLRA contains a specific command from Congress precluding bilateral arbitration, the Board cannot supply the requisite clarity” needed to override the FAA “by gap-filling.”
  • “The Court’s decisions also make clear that, for purposes of determining the enforceability of the arbitration agreements at issue here, the right to pursue a collective action under [the FLSA] is a procedural rather than a substantive FLSA right.”
  • Even if it were permissible for the Board to interpret “residual language” (referring to “other concerted activities”) in Section 7 of the NLRA “to cover litigation conduct,” “it does not follow that the right to prosecute a collective action is a substantive NLRA right … if the Board’s reading is permissible, it is because the residual phrase can reasonably be construed to cover procedural matters as well as substantive ones.”
  • The “savings clause” contained in Section 2 of the FAA, which “permits courts to invalidate an arbitration agreement based on generally applicable contract defenses,” does not support using the Board’s interpretation of the NLRA to strike down arbitration agreements.
  • “Just as the savings clause was held not to encompass the state-law rule at issue in Concepcion”—which had held preempted the California rule declaring “class-action waivers contained in certain consumer contracts” unenforceable—“it does not encompass the analogous federal-law rule that the Seventh and Ninth Circuits derived from the NLRA” in Epic and Ernst & Young.

The United States’ brief, in short, endorses the view that Concepcion requires rejection of the D.R. Horton rule.

By contrast, the NLRB is expected to take a different approach. The Board’s brief is due on August 9. Unless the Board’s composition changes by that date, and the newly-constituted Board repudiates D.R. Horton in time—which is possible but not likely—the Board presumably will defend its current position.

This internecine disagreement is certain to garner attention; in fact, it already has.

But it is worth noting that disagreements between the Executive Branch and independent agencies in the Supreme Court are not unprecedented—particularly at the time of a change in Administrations. Two high-profile examples: in the “seven dirty words” case, FCC v. Pacifica Foundation, the Ford Administration had supported the FCC in the court of appeals, but filed an amicus brief in the Supreme Court arguing the FCC’s order violated the First Amendment. And in Dirks v. SEC, which set the rules for insider trading prosecutions, the Reagan Administration filed an amicus brief opposing the SEC’s position.

Most importantly, for the reasons we explain in our brief on behalf of the U.S. Chamber, the position taken by the United States in its amicus brief rests firmly on the Supreme Court’s precedents interpreting the FAA.

First, the Court has repeatedly held that any asserted conflict between one federal statute and the FAA exists only when the other federal statute contains a “contrary congressional command” overriding the FAA’s mandate that arbitration agreements be enforced according to their terms. Section 7 of the NLRA doesn’t mention arbitration at all; indeed, it doesn’t even mention class actions or joint litigation. That statute accordingly doesn’t include the requisite “contrary congressional command” needed to support the Board’s D.R. Horton rule.

Second, the “effective vindication” exception to the FAA’s requirement that arbitration agreements be enforced—most recently addressed by the Court in American Express—provides the Board’s rule with no support either. The arbitration agreements don’t bar claimants from bringing claims under the FLSA. Moreover, class and collective actions are a procedural mechanism, not a substantive right, and in any event, the NLRA does not confer a right to engage in class or collective actions.

Third, the FAA’s “savings clause” (discussed above) does not apply. The savings clause saves state contract laws of general applicability from FAA preemption; it does not apply to federal laws, which are subject to the Court’s “contrary congressional command” test. In any event, as noted above, Concepcion held that the savings clause does not “save” rules prohibiting waivers of class procedures, because such rules interfere with the bilateral nature of arbitration and thus “create[] a scheme inconsistent with the FAA.”

Fourth, there are powerful policy justifications for preserving employment arbitration agreements. Most workplace grievances are individualized and therefore could not be pursued as part of a class or collective action. Indeed, without individual arbitration, most of those claims could not be pursued at all, because litigation in court is frequently too expensive to serve as a realistic option for employees seeking to vindicate their rights.

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Supreme Court’s Decision In Bristol-Myers Squibb v. Superior Court Rejects Expansive View Of Specific Jurisdiction

We’ve previously blogged about Bristol-Myers Squibb v. Superior Court (“BMS”), in which the Supreme Court granted certiorari to review a decision of the California Supreme Court that adopted an unusual—and extraordinarily expansive—view of California courts’ power to exercise specific personal jurisdiction over a defendant.

We filed an amicus brief on behalf of the Chamber of Commerce of the United States of America, the California Chamber of Commerce, the American Tort Reform Association, and the Civil Justice Association of California, arguing that the California court’s holding conflicted with numerous Supreme Court decisions making clear that in order to invoke specific jurisdiction, a plaintiff’s claims must arise out of the defendant’s in-state conduct.  (The views in this post are ours, and not those of our clients.)

The case was argued in April, and the Court announced its decision today. The result is an 8-1 opinion rejecting the California Supreme Court’s approach and, in our view, recognizing important limits imposed by the Fourteenth Amendment’s due process clause on the ability of courts to adjudicate cases that aggregate the claims of plaintiffs from many jurisdictions.

The immediate impact of the decision is to limit the forums where nationwide mass actions in state court can proceed to those states in which the defendant is subject to general jurisdiction (usually the state of incorporation and principal place of business).  In addition, as we discuss below, the decision raises substantial questions about whether nationwide class actions can proceed in jurisdictions where a defendant is not subject to general jurisdiction.


The question presented in BMS involves specific jurisdiction, which is one of two forms of personal jurisdiction—the doctrine that permits a court to exercise its power over the “person” of a defendant. Specific jurisdiction empowers a court to adjudicate particular claims relating to a defendant’s conduct within or relating to the forum; in order to be subject to specific jurisdiction, the defendant must have established contacts with the forum, and the lawsuit must arise out of those contacts.

As the Supreme Court put it in Walden v. Fiore, its most recent decision on the scope of specific jurisdiction: “[f]or a State to exercise jurisdiction consistent with due process, the defendant’s suit-related conduct must create a substantial connection with the forum State.” That is why the BMS Court termed specific jurisdiction “case-linked”—in contrast to “all-purpose” general jurisdiction, which allows a court to “hear any claim against that defendant, even if all the incidents underlying the claim occurred in a different State.”

In BMS, 592 plaintiffs who reside outside California joined together with 86 California resident plaintiffs to sue BMS in California, asserting various product-defect claims based on their use of BMS’s blood-thinning drug Plavix.

BMS moved to dismiss the out-of-State plaintiffs’ claims for lack of personal jurisdiction, arguing that California lacked specific jurisdiction over these plaintiffs’ claims because none of the events relevant to their claim occurred in California: they did not take the drug in California, it was not marketed to them in California, and it was not designed or manufactured in California. But the California Supreme Court held that California courts could exercise specific jurisdiction over these claims. It took the position that specific jurisdiction does not require that a plaintiff’s claims “arise directly from the defendant’s forum contacts” or be causally linked to those contacts in any way. Instead, the court held, it was sufficient that the in-state and out-of-state plaintiffs’ claims were “based on the same allegedly defective product and the assertedly misleading marketing and promotion of that product” as part of a “common nationwide course of distribution.”

The Court’s Decision

The Supreme Court reversed the California Supreme Court by a vote of 8-1. Writing for the majority, Justice Alito emphasized that “specific jurisdiction is confined to adjudication of issues deriving from, or connected with, the very controversy that establishes jurisdiction.” If a state has no “legitimate interest” in particular claims, a defendant should not be forced to “submit[] to the coercive power” of the state with respect to those claims.

Justice Alito explained that specific jurisdiction therefore requires “a connection between the forum and the specific claims at issue.” “When there is no such connection,” he stated, “specific jurisdiction is lacking regardless of the extent of a defendant’s unconnected activities in the State.”

Applying that requirement, the majority held that California could not exercise specific jurisdiction over BMS with respect to the nonresidents’ claims. The nonresidents did not “claim to have suffered harm in” California, and “all the conduct giving rise to [their] claims occurred elsewhere.” Moreover, because specific jurisdiction cannot be based on activities “unconnected” with the claims at issue, “[t]he mere fact that other plaintiffs were prescribed, obtained, and ingested Plavix in California— and allegedly sustained the same injuries as did the nonresidents,” or that “BMS conducted research in California on matters unrelated to Plavix,” was irrelevant to specific jurisdiction.

Implications for Mass and Class Actions

The BMS decision reaffirms long-settled limits on personal jurisdiction.  It makes clear that lower courts may not loosen the rules governing “case-linked” specific jurisdiction in the wake of the Court’s decision in Daimler (reaffirmed last month in BNSF Railway Co. v. Tyrrell) emphasizing the strict limits on “all-purpose” general jurisdiction.

One issue left open by the decision is how much of a connection between a plaintiff’s claims and the forum state is required to permit the assertion of specific jurisdiction. The Court did not have to decide that issue because there was no connection at all between California and the claims of the non-California plaintiffs. But the question of what connection is required will certainly arise in the future.

We proposed one answer in a separate amicus brief for the Chamber supporting the cert petition in GlaxoSmithKline, LLC v. M.M. ex rel. Meyers, another case challenging a lower court’s broad assertion of specific jurisdiction. We explain that a court should:

  • Identify the defendant’s purposeful claim-related activity within the forum;
  • Determine whether that activity gave rise to the plaintiff’s claim; and
  • Assess whether the causal connection between the activity and the claim is sufficient to create the “substantial connection” that due process requires.

As part of the last inquiry, the court should consider both (a) whether the in-forum activity is sufficient to support the conclusion that the obligation underlying the suit was incurred there, and (b) whether permitting an assertion of specific jurisdiction based on that activity will intrude on the sovereignty of other States, because one or more States have a significantly greater connection to the underlying obligation than the forum State. The latter consideration is particularly appropriate in light of the BMS Court’s focus on the forum state’s “legitimate interest in the claims in question”—“[a]s we have put it,” the Court said, “restrictions on personal jurisdiction ‘are more than a guarantee of immunity from inconvenient or distant litigation. They are a consequence of territorial limitations on the power of the respective States.’”

Another issue likely to gain substantial attention is how personal jurisdiction applies in the class action context.(Justice Sotomayor flagged the issue in footnote 4 of her dissent.)  Some courts have held that as long as the forum State may exercise specific jurisdiction over the named plaintiffs’ claims, it automatically may also adjudicate the claims of the absent class members—even if it would not be able to exercise specific jurisdiction if the absent class members’ claims were asserted in a separate case. That reasoning is significantly undermined by today’s decision, which squarely held that “[t]he mere fact that other plaintiffs” could invoke case-specific jurisdiction in California—because they obtained and ingested the drug in California—“does not allow the State to assert specific jurisdiction over the nonresidents’ claims.”

The Supreme Court has repeatedly explained—both under the Rules Enabling Act (which is the basis for Federal Rule of Civil Procedure 23’s authorization of class actions) and (by extension) as a matter of due process—that the class action device cannot alter the substantive legal standards applicable to a claim, and in particular cannot deprive a defendant of defenses that would be available against absent class members. That principle, combined with the reasoning of today’s decision, provides class action defendants with powerful arguments to challenge class actions filed in states that cannot exercise personal jurisdiction with respect to absent class members’ claims. After all, if the nonresidents’ claims in BMS could not proceed on the theory that aggregation with the California residents’ claims through joinder established personal jurisdiction, it is hard to see how the combination of such claims in a class action (another form of joinder) could be treated differently.

A final issue left open by BMS is whether the Fifth Amendment’s due process requirement might apply differently to exercises of jurisdiction by federal courts. But this issue does not arise frequently. For the Fifth Amendment to apply, Congress must provide for expansive personal jurisdiction by authorizing nationwide service of process in a particular statute—and Congress rarely does this, as the Court explained in the BNSF decision last month in rejecting the argument that the federal statute there (the Federal Employers’ Liability Act) expanded federal courts’ power to exercise personal jurisdiction.

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Court refuses to certify 5-hour Energy false-advertising class action for lack of common proof

The U.S. District Court for the Central District of California recently issued an interesting decision (pdf) denying class certification in 15 consolidated consumer class actions against the maker of 5-hour ENERGY drinks.

In the consolidated cases, captioned In re 5-Hour Energy Marketing and Sales Practices Litigation, the plaintiffs allege that 5-hour Energy drinks were falsely advertised as providing hours of energy. The plaintiffs asserted claims under California, Missouri, New Mexico, New Jersey, New York, and Pennsylvania law, and sought certification of state-specific classes. On June 6, 2017, the court denied class certification because the plaintiffs had failed to show that their alleged state-law deception theory was commonly experienced by consumers. In class action vernacular, individual, not common, issues predominated in violation of Federal Rule of Civil Procedure 23(b)(3).

To follow the certification analysis, it is important first to understand that to prevail on their false advertising claims under the relevant state laws, the plaintiffs were required to show that the alleged false advertising – the label statements ‘five hour energy’ and ‘hours of energy’ – were materially important to the plaintiffs’ decisions to purchase 5-hour Energy.

To demonstrate that class treatment of their claims was appropriate, the plaintiffs needed to show – via class-wide common proof, not from individual inquiry of each consumer – that class members “possess the same interest and suffer the same injury” as the plaintiffs themselves. Here, that meant showing that the alleged false advertising materially impacted the purchasing decisions of reasonable consumers in the same manner as it allegedly had impacted the plaintiffs. As the court underscored, “[i]f the misrepresentation or omission is not material” to the purchasing decisions of “all class members, the issue of reliance [and causation] ‘would vary from consumer to consumer’ and the class should not be certified.”

To try to meet that burden, however, plaintiffs pretty much avoided what reasonable consumers thought, relying instead on the plaintiffs’ own impressions, on defendant’s impressions, on an expert’s opinion what ‘energy’ meant, and on FDA’s definition of ‘energy.’ The court rejected all that because none of it shed light on the objective reasonable consumers’ take-away of the word ‘energy’ or how the challenged statements impacted their purchasing decisions.

Defendants, on the other hand, submitted a survey of 5-Hour Energy purchasers. It showed that a meager 2.2% of them relied on the challenged statements in the manner that the plaintiffs had alleged and, even then, only during their initial purchase. Subsequent purchases were primarily driven by the consumers’ actual experiences with the product. The survey also confirmed that consumers made their initial purchases based on many different factors having nothing to do with the challenged label statements, such as a recommendation or the product’s location at the checkout stand.

On this record, the court concluded that individual issues surrounding whether the challenged label statements deceived consumers or were material to the purchasing decisions swamped any common issues. “The element of predominance is not satisfied because Plaintiffs have not shown that they are entitled to a class-wide presumption of materiality, and thus, cannot establish reliance or causation with common proof. Without a market survey documenting consumer preferences, Plaintiffs have not shown that the ‘five hour energy’ representation is material to consumers as compared to other factors . . . Plaintiffs also have not shown that there is a prevalent definition of ‘energy’ in the market. Without such evidence, Plaintiffs cannot show an entitlement to a class-wide presumption of materiality.”

The court’s decision is a helpful reminder to businesses targeted by false-advertising litigation – it’s not enough for the plaintiffs to have evidence that they themselves were deceived by the challenged statements or omissions. Rather, the plaintiffs must be able to show – using common proof – that class members also were deceived in the same manner. Otherwise, the class trial will inevitably break down into a series of mini-trials of individualized evidence regarding particular consumers’ purchasing decisions and whether they each relied on the challenged statements or omissions.

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Supreme Court rejects end runs around Rule 23(f) by use of “voluntary dismissal” tactic

Today’s decision by the Supreme Court in Microsoft Corp. v. Baker puts an end to a tactic used by plaintiffs in the Ninth Circuit to manufacture an immediate appeal of an order denying class certification. When a federal district court grants or denies class certification, Federal Rule of Civil Procedure 23(f) allows the losing party to ask the court of appeals for permission to appeal immediately. Otherwise, the parties must litigate the case to a final judgment—the named plaintiffs’ individual claims if certification has been denied, or the class claims if certification has been granted—to obtain appellate review of the district court’s class certification determination. But the Ninth Circuit created an exception to this rule by authorizing a plaintiff who has had class certification denied to dismiss his or her individual claims with prejudice and then file an appeal from that self-generated judgment.

After the oral arguments in Baker, it seemed likely that the Supreme Court would reject that exception. And that is exactly what the Court decided today. Much more interesting is how they got there: Although all eight participating Justices agreed on the outcome, they took different approaches to the question presented.

The majority, in an opinion by Justice Ginsburg, held that the “voluntary dismissal” tactic cannot create appellate jurisdiction because such dismissals do not result in a final judgment—which is what 28 U.S.C. § 1291 requires for an appeal as of right. The Court held:

“Plaintiffs in putative class actions cannot transform a tentative interlocutory order … into a final judgment within the meaning of § 1291 simply by dismissing their claims with prejudice—subject, no less, to the right to ‘revive’ those claims if the denial of class certification is reversed on appeal.”

The Court explained that the “tactic would undermine § 1291’s firm finality principle, designed to guard against piecemeal appeals, and subvert the balanced solution Rule 23(f) put in place for immediate review of class-action orders.”

Indeed, Justice Ginsburg’s majority opinion focused heavily on the “careful calibration” by the Rules Committee in crafting Rule 23(f). The Court found the circumvention of Rule 23(f) troubling for many reasons. The majority explained that, under the Ninth Circuit’s approach, “the decision whether an immediate appeal will lie resides exclusively with the plaintiff.” In answer to the respondents’ argument that plaintiffs might be loath to invoke the tactic because a “dismissal with prejudice” would kill the case on the merits (if the appeal of the denial of class certification loses), the Court explained the reality “that plaintiffs with weak merits claims may readily assume that risk, mindful that class certification often leads to a hefty settlement.” Moreover, the “one-sidedness of [the] voluntary-dismissal device”—which would “permit[] plaintiffs only, never defendants, to force an immediate appeal of an adverse certification ruling”—supported the Court’s view that Congress’s adoption of the “rulemaking process” was the right mechanism to “settle the matter” of when immediate appeals of such orders should be available.

The majority did not reach the question whether plaintiffs’ voluntary-dismissal tactic deprived the court of appeals of jurisdiction under Article III’s cases-and-controversies requirement.

But in an opinion concurring in the judgment, Justice Thomas (joined by Chief Justice Roberts and Justice Alito) concluded that, although the plaintiffs’ voluntary dismissal was technically a “final decision” within the meaning of Section 1291, there was no appellate jurisdiction because the Ninth Circuit lacked Article III jurisdiction over plaintiffs’ individual claims. The plaintiffs’ decision to “consent[] to the judgment against them” eliminated any adversity between the parties—both sides had agreed that the claims should be dismissed with prejudice. The fact that plaintiffs asserted an “interest in reversing the order striking their class allegations” was not enough, in the concurring Justices’ view, because “[c]lass allegations, without an underlying individual claim, do not give rise to a ‘case’ or controversy’” within the meaning of Article III. “Those allegations are simply the means of invoking a procedural mechanism that enables a plaintiff to litigate his individual claims on behalf of a class.” (emphasis added).

That conclusion speaks to a broader debate over whether a class action is more than the sum of its parts. The answer is “no”—as we have argued in prior blog posts and a number of briefs over the years. Justice Thomas’s concurrence in Baker shows that at least three Justices agree. In other words, a procedural right such as the ability to pursue class treatment of claims cannot—standing alone—amount to a concrete interest sufficient to create the standing needed to satisfy Article III’s case-or-controversy requirement.

That standing analysis also dovetails with a significant comment made by Chief Justice Roberts in his concurring opinion last year in Tyson Foods, Inc. v. Bouaphakeo. In Part II of that opinion (joined by Justice Alito), the Chief Justice explained;

“Article III does not give federal courts the power to order relief to any uninjured plaintiff, class action or not. The Judiciary’s role is limited ‘to provid[ing] relief to claimants, in individual or class actions, who have suffered, or will imminently suffer, actual harm.’ … Therefore, if there is no way to ensure that the jury’s damages award goes only to injured class members, that award cannot stand.”

In other words, absent class members who are not injured lack standing and therefore cannot recover from a litigated class action judgment in federal court. Or, as Justice Thomas puts it in Baker, “without an underlying individual claim,” there is no case or controversy.

Of course, a concurrence by three Justices is not binding authority. Yet the seeds are there. In Tyson Foods, Justice Kennedy’s majority opinion recognized that “the question whether uninjured class members may recover is one of great importance.” And it is also telling that the Baker majority (which included Justice Kennedy) declined to reach—or even address—the Article III issue addressed by Justice Thomas’s concurrence. The important question of whether Article III requires absent class members to have standing is one that the Supreme Court can and should address eventually, and there is strong reason to believe that the Court—now at full strength with nine Justices—will recognize that the same Article III standing rules apply to all plaintiffs, “class action or not.”

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Can Opt-Out Plaintiffs File Suit After Expiration of a Statute of Repose? Supreme Court Hears Oral Argument in CalPERS v. ANZ Securities

Yesterday afternoon, the Supreme Court heard oral argument (pdf) in CalPERS v. ANZ Securities, a case that asks whether a plaintiff asserting violations of Section 11 of the Securities Act of 1933 can file suit after the three-year outer limit for such suits has passed, if a class action encompassing the plaintiff’s claims was timely filed and remained pending. The answer to that important question, which has divided the federal courts of appeals, will tell defendants facing suit over the issuance of securities whether the Securities Act’s three-year repose period is a real protection against belated lawsuits or simply a limited protection that dissolves once a timely class action is filed. Yesterday’s argument suggested the Court, too, may be divided about how to resolve this debate.

CalPERS is an individual suit by a state pension fund against underwriters for certain debt securities issued by Lehman Brothers. The suit was brought more than three years after the issuance of the securities. But, at the time, a timely putative class action asserting similar claims was pending. CalPERS was dismissed, and the dismissal was affirmed, because the suit was filed outside the three-year period of repose established by Section 13 of the Securities Act and Second Circuit precedent (Police & Fire Retirement System of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013)) precluded any tolling of that repose period.

In the Supreme Court, CalPERS challenged that ruling on several grounds. It argued that its suit was not barred because the class action was timely and its suit simply followed from the claims raised in the class action. CalPERS also contended that the class action tolling rule for statutes of limitations established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), should apply to Section 13’s restriction on suits filed more than three years after issuance of the relevant securities—notwithstanding Supreme Court precedents holding that equitable tolling does not apply to statutes of repose (CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014)) and that the three-year restriction in Section 13 was a repose period inconsistent with tolling (Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991)). CalPERS finally asserted that, without tolling, opt-out rights would become illusory and courts would be flooded with suits by individual class members concerned about Section 13.

Defendants pointed to the contrary Supreme Court precedent. They noted that courts in the Second Circuit have not been inundated with protective suits. And they explained that applying tolling would incentivize big investors to free-ride off of class actions for years and then opt-out of settlements to claim a greater recovery than other investors.

Much of the oral argument focused on the meaning of the word “action” in the relevant part of Section 13—“In no event shall any such action be brought to enforce a liability created under [Section 11] more than three years after the security was bona fide offered to the public.” Justices Gorsuch and Alito pressed counsel for CalPERS on the argument that its individual suit should not be treated as a new “action” for purposes of Section 13 because it mirrored the previously filed class action. Justice Gorsuch made the textual point that traditionally “action” means “lawsuit” and is not the same as “claim.” Justice Alito seemed to doubt that Congress could have intended the less straightforward reading favored by CalPERS. Justice Breyer’s questioning of both sides also concentrated on whether “action” could somehow refer to a timely class action encompassing claims presented in a later individual suit by a class member.

Justice Kagan, meanwhile, suggested that the term “action” might have multiple meanings, making it appropriate to consider the practical consequences of defendants’ position. Chief Justice Roberts similarly asked about different “levels of repose,” raising the possibility that the repose period established by Section 13 merely precludes “new liability.” Based on this approach, an individual suit might not add to the potential liability asserted by the class action when the individual claims were part of the class action. As counsel for defendants pointed out, the approaches described by Justice Kagan and the Chief Justice cannot be squared with the text of Section 13, Supreme Court precedents in this area, or the reality that individual suits like the one filed by CalPERS are new suits by new parties that increase a defendant’s potential liability.

Another big topic focused on the practical consequences of enforcing Section 13’s repose period against individual suits despite a timely filed class action. Justices Sotomayor, Breyer, and Ginsburg all expressed concern about how defendants’ approach would work in practice. Of particular concern was the burden that lower courts might face when numerous individual putative class members file papers to protect themselves from the repose period. Counsel debated whether those concerns had merit, with respondents’ counsel noting that courts in the Second Circuit have not seen an epidemic of such filings.

Perhaps of greatest interest to class action observers more generally, Justice Kennedy worried that CalPERS’s position would invoke Rule 23 to override a legal right to repose (i.e., a substantive defense) in violation of the Rules Enabling Act. Justice Kagan, by contrast, worried that defendants’ position could undermine the opt-out right created by Rule 23. Justice Kagan also probed whether Section 13 actually is a statute of repose rather than a discovery-rule cut-off. And Justice Ginsburg asked whether American Pipe tolling was really equitable tolling.

With oral argument suggesting that the Justices could be closely divided, a confident prediction of how the Court will rule is not possible. But it would seem difficult for the Court to rule for CalPERS unless it departs from the plain meaning of Section 13 and retreats from its prior decisions in Waldburger and Lampf. We will see in June.

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