Monday’s U.S. Supreme Court decision in a closely watched securities case was the first class action in which newly appointed Justice Neil Gorsuch participated — and he didn’t disappoint.
Gorsuch joined the majority in the U.S. Supreme Court’s 5-4 decision in California Public Employees’ Retirement System v. ANZ Securities, in which the court ruled that the time period after which a defendant could no longer be sued by shareholders was a statute of repose that couldn’t be tolled.
The Calpers case involved the frame for investors to bring individual claims under the U.S. Securities Act of 1933 while a related class action was pending. The ruling was particularly significant to institutional investors, who often bring their own securities suits rather than participate in a class action.
But the case also was a barometer of how Gorsuch’s textualist approach to class actions would influence the court. Writing for the majority, Associate Justice Anthony Kennedy cited the “text, purpose, structure, and history of the statute” in siding with the defense.
“One of the interesting features of this case is how the majority approached the issue, with respect to the statute of repose, and tethered it to the statute,” said Susan Saltzstein, a partner at New York’s Skadden, Arps, Slate, Meagher & Flom.
The case was brought against the underwriters of Lehman Bros. after its 2008 bankruptcy. CalPERS, a pension fund that was a class member, opted out after the case settled, then filed its own suit. The U.S. Court of Appeals for the Second Circuit, parting with other circuits, dismissed the CalPERS case because it was filed after the three-year time period. Under the Securities Act, investors must file their case “one year after the discovery of the untrue statement or the omission,” but “in no event … more than three years after the security was bona fide offered to the public.”
Plaintiffs had relied on a 1974 decision by the Supreme Court called American Pipe & Construction v. Utah to toll the latter time period. But the Supreme Court found that American Pipe wasn’t applicable because it dealt with a statute of limitations. The act’s three-year limit, in contrast, was a statute of repose that could not be tolled because of its “congressional purpose to offer defendants full and final security after three years,” Kennedy wrote.
Plaintiffs attorneys said the ruling would invite more suits, flooding the courts.
“To fiduciaries of investors, it’s a major, major decision,” said Blair Nicholas, a partner at Bernstein Litowitz Berger & Grossman in San Diego, who filed an amicus brief in the case on behalf of 75 institutional investors. “They have to bring the claims because the institutional investors run the risk that their claims will not be protected in a securities class action.”
Associate Justice Ruth Bader Ginsburg, writing for the dissent, mirrored those concerns. She noted that the majority’s ruling would “gum up the works of class litigation” because defendants would have an incentive to “slow walk discovery and other precertification proceedings so the clock will run out on potential opt outs.”
Many investors will be forced to sue before they want to, said Dan Sommers, co-chairman of the securities litigation and investor protection practice group at Washington’s Cohen Milstein Sellers & Toll. “That is one of the real adverse consequences of the majority decision,” he said. “It’s needlessly forcing investors to make premature decisions about their participation in the case when up until now they were protected by the Supreme Court’s American Pipe ruling and made those decisions at an appropriate time to stay in the class or to opt out.”
Institutional investors will have to more closely monitor class actions to make those decisions, which will take more time and money, he said.
But the court found the burden to be “less onerous” than plaintiffs claimed. Plaintiffs could simply file a motion to intervene in the class action, or ask to be included as a named class representative.
Mark Foster, a partner at San Francisco’s Morrison & Foerster, said institutional investors with millions of dollars at stake already are watching class actions “with a mindful eye.” All they have to do now, he said, is “add something to their calendar as a reminder.”
As for the potential rise in cases, defense attorneys mirrored the court’s view that the prediction was overblown. In fact, the Washington Legal Foundation, which filed an amicus brief in the case, said the ruling would instead curb questionable practices of the plaintiffs bar.
“There is a cottage industry of plaintiffs lawyers who urge larger shareholders to ‘opt out’ of securities class-action settlements at the last minute to extort bigger settlement shares,” said Mark Chenoweth, the foundation’s general counsel, in a statement. “The Court today has reduced the returns for that practice, protected other class members, and ensured speedier settlement negotiations.”
Contact Amanda Bronstad at firstname.lastname@example.org. On Twitter: @abronstadlaw.