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When certification of a proposed class action is rejected due only to deficiencies in the named class representatives, courts must toll the statutes of limitations to allow different plaintiffs to bring identical claims, the 3rd U.S. Circuit Court of Appeals has ruled. In its 40-page opinion in Yang v. Odom, the court revived securities claims against former officers of World Access Inc., finding that a New Jersey federal judge erred in holding that the claims were filed too late. Third Circuit Judge D. Brooks Smith found that the lower court should have tolled the statute of limitations for two of the three proposed subclasses since a prior suit was rejected by a judge in the Northern District of Georgia only because of deficiencies in the proposed lead plaintiffs for those subclasses. “Tolling allows litigants whose individual lawsuits would have been timely with the benefit of tolling due to an earlier class action to aggregate their claims in a substantively identical class suit so long as the denial of certification in the earlier action was based solely on Rule 23 deficiencies of the putative representative,” Smith wrote in an opinion joined by visiting Senior U.S. District Judge Jan E. DuBois of the Eastern District of Pennsylvania. But in a partial dissent, 3rd Circuit Judge Samuel A. Alito said he would have revived the claims for only one of the three proposed subclasses because he believed that two of the subclasses were rejected by the Georgia judge for “defects in the class itself.” Alito warned that tolling must be strictly limited to instances in which class certification was denied solely on the basis of the adequacy of the named class representative lest the courts open the door to a potentially endless loop of litigation. “Without this restriction on tolling, lawyers seeking to represent a plaintiff class could extend the statute of limitations almost indefinitely until they find a district court judge who is willing to certify the class,” Alito wrote. According to court papers, the first suit was filed in Georgia in February 1999 on behalf of three subclasses of investors — those who purchased World Access securities in the open market between October 1998 and January 1999; those who exchanged securities issued by Telco Systems Inc. for World Access securities in a merger of those two companies; and those who exchanged securities issued by NACT Telecommunications Inc. for World Access securities in the merger of those two companies. The suit alleged that World Access executives violated securities laws by issuing materially false and misleading statements and by omitting to disclose material facts, and in World Access’ public filings related to the Telco and NACT mergers. In July 2002, U.S. District Judge Orinda D. Evans of the Northern District of Georgia denied class certification to all three subclasses after finding that the lead plaintiffs, or the subclass itself, failed to satisfy the requirements of Rule 23 of the Federal Rules of Civil Procedure. Soon after, three new plaintiffs filed a nearly identical suit in the District of New Jersey. When defense lawyers moved to dismiss the suit on statute of limitations grounds, the plaintiffs’ lawyers argued that the statute should be tolled under the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Co. v. Utah. U.S. District Judge Joel A. Pisano of the District of New Jersey disagreed, concluding that under the 3rd Circuit’s 2002 decision in McKowan Lowe v. Jasmine Ltd., which interpreted American Pipe, tolling is limited to intervenors — either as class representatives or as individuals — in the original suit, or to an individual plaintiff filing a new suit, but that it does not extend to the filing of a new class action. Now the 3rd Circuit has ruled that Pisano’s reading of McKowan and American Pipe was too narrow. “We can discern no principled basis for limiting the application of tolling in this way,” Smith wrote. “We hold that American Pipe tolling applies to the filing of a new class action where certification was denied in the prior suit based on the lead plaintiffs’ deficiencies as class representatives, but � does not apply where certification was denied based on deficiencies in the purported class itself,” Smith wrote. Smith focused on the reasoning of the Northern District of Georgia in its denial of class certification, and concluded that, for the open market and Telco classes, the denials of certification “were based solely on deficiencies in the putative representatives.” As a result, Smith reversed Pisano’s ruling and held that American Pipe tolling “applies to the class claims of the open market and Telco classes.” As for the NACT class, however, Smith found that the Northern District of Georgia’s opinion showed that class certification was denied for lack of numerosity — a class defect. “Therefore, the district court’s refusal to apply American Pipe tolling to this class was correct and we will affirm its ruling that the current class claims of the NACT class are time-barred,” Smith wrote. But in a partial dissent, Alito said he would have revived only the Telco class since he read the Northern District of Georgia decision as rejecting the open market class for failure to meet “the typicality, commonality, adequacy and superiority requirements” of Rule 23. Alito found that, in its rejection of the open market class, the Georgia court “found two fatal defects – lack of ‘commonality’ and ‘superiority’ — that, as the majority acknowledges, are generally used to describe class-based characteristics.” The majority, Alito said, focused on the specific wording of the Georgia judge’s decision, and her use of the phrase “failed � to meet his burden with regard to the typicality, commonality, adequacy and superiority requirements.” On the basis of that phrase, Alito said, the majority concluded that the Georgia judge “actually based her decision regarding the open market class solely on deficiencies of the class representative, not defects in the class.” Alito said it was “possible that the majority’s interpretation of Judge Evans’ opinion is correct and that she did not really mean to hold either that there are not ‘questions of law or fact common to the [Open Market Class],’ � or that class action treatment of the claims of that class would not be ‘superior to other available methods for the fair and efficient adjudication of the controversy.’” But Alito said he would opt for a “face value” reading of the Georgia decision. “The fact remains that she stated that the commonality and superiority requirements were not met, and there is no way for us to remand this matter to Judge Evans for her to clarify the precise basis of her ruling,” Alito wrote. “In cases like this, therefore, we have two choices. We can take at face value the grounds cited by the court that previously denied class certification, or we can look beyond the terms used by that court and attempt to determine whether the court really meant to base its decision on deficiencies of the representative or defects in the class,” Alito wrote. Alito said he would take the former approach, “because I believe that the alternative may lead to problems. Our circuit will attract actions in which courts in other circuits have denied class certification.” Even when the courts denying certification state that their decisions are based on defects in the class, Alito said, “the courts of our circuit will be asked to look behind the text of the opinions denying certification and to determine whether the authors of those opinions really meant to say or should have said what they did.” In a closing word of warning, Alito said, “We also should not underestimate the ability of lawyers representing would-be plaintiff classes to recharacterize rulings that, read literally, appear to be class based. I would, accordingly, adopt a rule that takes decisions denying class certification at face value.”

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