Stanford Securities Litigation Analytics data to feature in an upcoming US Supreme Court case

Jason Hegland

We are extremely proud to announce that Stanford Securities Litigation Analytics provided data used in a brief written by David Engstrom (faculty, Stanford Law School) for the US Supreme Court on class certification, which has now been selected to be heard by the USSC. Below is an excerpt from the Argument Summary of the brief. If you would like to read the entire brief, please send us an email and we will provide a copy.

At issue in this case is a procedural tool of vital importance to class action practice under Federal Rule of Civil Procedure 23: American Pipe’s rule that the filing of a class action complaint protects potential class members from the running of limitations periods. In American Pipe, this Court wisely rationalized class action law and policy under Rule 23, promoting judicial economy in the adjudication of class action claims while protecting the rights of putative class members. Because it would serve both of these crucial ends, American Pipe’s protective rule should be construed to apply to the three-year limitations period in § 13 of the Securities Act.

American Pipe variously described its protective rule as “commencing” the action on behalf of all potential class members; as “suspending” the limitations period on their behalf; and as “tolling” that limitations period. Regardless of which of these labels attaches, it is plain what this Court did in American Pipe and why it did it. For Rule 23 to operate as designed, potential class members must be protected in their ability to make meaningful decisions about how to pursue their rights, including whether to intervene or file an independent action if class certification is denied. If absent class members did not enjoy protection under American Pipe, they would be compelled to take protective action, either intervening or filing independent lawsuits, in order to avoid being subsequently time-barred. The result would be wasteful and burdensome protective filings, a significant drain on federal court resources, and, most important of all, curtailment of rights.

As petitioner has ably explained, the Second Circuit’s decision cannot be reconciled with either the Court’s decision in American Pipe or the text and structure of § 13. There is no relevant semantic difference between § 13’s one- and three-year limitations provisions. See Pet. at 28-30. And given that the American Pipe rule is thoroughly entwined with Rule 23, as evidenced by the Court’s careful analysis of Rule 23’s structure and purpose in American Pipe itself, its application to § 13’s three-year limitations period cannot possibly be a judicial exercise of equitable discretion. See Pet. at 25-27. Amici endorse each of these plain textual and doctrinal grounds for reversing the Second Circuit’s decision below.

Yet the Second Circuit also ignored on-the-ground litigation realities and, in particular, the efficiency costs of its refusal to apply American Pipe to § 13’s three-year limitations period. Empirical evidence suggests these costs will be large – with estimates reported below showing that the Second Circuit’s position could yield protective filings in well more than half of securities class actions that reach a court order on class certification and at least one-quarter of all filed securities class actions. The Second Circuit’s decision, if allowed to stand, will thus undermine “a principal purpose” of the American Pipe rule: to promote the “efficiency and economy of litigation.” Chardon v. Fumero Soto, 462 U.S. 650, 659 (1983) (quoting American Pipe, 414 U.S. at 553).

The Second Circuit likewise ignored the disruptive and distortive effect of its decision limiting American Pipe’s reach on class action practice under the securities laws, particularly the suppression of Rule 23’s vitally important opt-out mechanism. That threat is even deeper because the Second Circuit’s decision will create perverse incentives for litigants to delay pre-trial proceedings for as long as possible in order to extinguish the rights of potential class members who might seek to go it alone. In short, the Second Circuit’s refusal to apply American Pipe’s protective rule to § 13’s three-year limitations period achieves the worst of all worlds: a flurry of wasteful filings in district courts across the country by sophisticated investors with the capacity to know about and monitor the litigation, and lost rights for everyone else.

Finally, the Second Circuit did not just ignore the policy implications of its decision. It also ignored the Court’s instructions in American Pipe itself when it held, in the alternative and with no analysis beyond its prior conclusion that § 13’s three-year limitations provision creates a “substantive” right, that applying American Pipe’s rule would violate the Rules Enabling Act. This is surprising, for the American Pipe Court rejected just such an argument and then specifically instructed that the validity of applying American Pipe cannot be assessed via a narrow- gauge focus on the limitations provision at issue or whether that provision embodies a “substantive” or “procedural” policy choice. Instead, the validity of applying American Pipe, the Court directed, turns on whether its application would be “consonant with the legislative scheme.” 414 U.S. at 558. The Second Circuit’s failure to heed this instruction – or, indeed, to engage in any recognizable inquiry at all in finding an Enabling Act violation – underscores the pressing need for this Court’s guidance. In fact, had the court asked whether applying American Pipe’s protective rule would be “consonant” with Congress’s securities litigation scheme, it could not have held the way it did.

For all of these reasons, the Court should act, and act now, to resolve the urgent question of American Pipe’s reach.