Justices to Weigh Business Fear of ‘Stacked’ Class Actions

Perry Cooper Washington Reporter Steven Patrick Washington

By Perry Cooper

A class of shareholders seeking to sue a Chinese fertilizer company for securities fraud will tell the U.S. Supreme Court March 26 why the filing of prior related class actions should make its suit timely.

The Supreme Court has shown an appetite in recent years for class cases that only affect securities law.

But that’s not the expected outcome in this suit against China Agritech Inc.—the court’s ruling will affect class actions in all areas of the law, attorneys tell Bloomberg Law.

Letting the class action go forward after class certification was denied twice in similar cases “allows class actions to be stacked indefinitely,” the company argues in its merits brief.

Shareholders say their litigation shouldn’t be time-barred just because the classes weren’t correctly crafted in the prior cases.

Follow-on Class Actions

The case asks the court to consider whether its 1974 decision on class action tolling applies to subsequent class actions, not just individual suits.

The court said in American Pipe & Construction v. Utah that the filing of a class action tolls, or pauses, the statute of limitations for members of the proposed class.

The decision protects class members from having time run out on their individual claims until after class certification is denied. Once certification is denied, the clock starts again on their individual claims.

The federal appeals courts are divided on whether the statute of limitations is tolled only for subsequent individual suits or also for subsequent class actions.

The U.S. Court of Appeals for the Sixth Circuit allowed a follow-on class action to Wal-Mart Stores Inc. v. Dukes to proceed in Phipps v. Wal-Mart Stores Inc.

The Supreme Court said in Dukes that certification of a nationwide class of 1.5 million female employees wasn’t tenable. After that decision, the Phipps plaintiffs sued on behalf of women in a smaller region.

The Sixth Circuit said the statute of limitations on their claims was tolled while Dukes was pending, so the later class action was allowed to go forward.

The Ninth Circuit made a similar call in the case now before the Supreme Court. It allowed a third class action to proceed, even though the two-year statute of limitations on the securities fraud claims had run out while class certification was pending in the earlier two suits.

The investors allege China Agritech misled them by grossly inflating the company’s revenues.

No End in Sight

The Ninth Circuit’s rule means “there really is no end” for companies facing class actions, Richard A. Samp of the Washington Legal Foundation told Bloomberg Law.

WLF is a free-market oriented public-interest law firm based in Washington. It filed an amicus brief on behalf of China Agritech.

“Plaintiffs’ lawyers should not be permitted to flout the limitations period by filing class actions one after another ad finitum, until they can finally find a judge willing to certify their lawsuit for classwide treatment,” Samp said.

Companies facing a class action make a strategic decision to settle right away or litigate if they think they can beat class certification, he said. But that calculus changes when “winning on the class certification motion in the first case doesn’t accomplish anything.”

The risk of further class actions leads defendants to “pay extortion” by settling the case just to make it go away, he said.

But plaintiffs have to make sure they don’t lose the right to bring a class action just because it was wrong for class certification the first time around, plaintiffs’ attorney Jocelyn Larkin told Bloomberg Law.

Larkin is the executive director of the Impact Fund in Berkeley, Calif. She filed an amicus brief on behalf of plaintiffs in three Dukes successor cases.

When certification fails for some reason, “there are still victims out there with the need for a remedy,” she said. “A determination that the certification wasn’t good isn’t a determination that the claims don’t have merit.”

In Dukes, the Supreme court completely changed the law on class certification, she said. Plaintiffs should have the chance to present a class that meets the new criteria, even if the statute of limitations has run out, she said.

Wide Application

Samp and Larkin agreed the case will apply beyond securities law.

This situation is common in securities cases because they involve a finite group of shareholders and a large potential payout, Samp said.

But the decision in China Agritech will apply to all class actions. “The court obviously has to keep that in mind with what it decides here,” he said.

Seth Aronson of O’Melveny & Myers LLP in Los Angeles will argue for China Agritech.

David C. Frederick of Kellogg, Hansen, Todd, Figel & Frederick in Washington will argue for the investors.

The case is China Agritech, Inc. v. Resh, U.S., No. 17-432, oral argument 3/26/18 .

To contact the reporter on this story: Perry Cooper in Washington at pcooper@bloomberglaw.com

To contact the editor responsible for this story: Steven Patrick at spatrick@bloomberglaw.com

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