Yang v. Odom

Opinions of the United
2004 Decisions States Court of Appeals
for the Third Circuit
12-15-2004
Yang v. Odom
Precedential or Non-Precedential: Precedential
Docket No. 03-2951
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
Case No: 03-2951
__________
PEDRO YANG; CAROL JACKSON; PETER S.KELSCH,on
behalf of themselves and all persons similarly situated;
JASON THOMPSON; RAYM OND T. CRUM P,
v.
STEVEN A. ODOM; MARK GERGEL; HENSLEY E.
WEST; MARTIN D. KIDDER; STEPHEN J. CLEARMAN
(D.C. Civil No. 02-cv-05968)
JAM ES BARBERIAN; JOSEPH KINOSIAN;
KAREN KINOSIAN
v.
STEVEN A. ODOM; MARK GERGEL; HENSLEY E.
WEST; MARTIN D. KIDDER; STEPHEN J. CLEARMAN
(D.C. Civil No. 03-cv-00725)
Jason Thompson and Raymond T. Crump,
Appellants
On Appeal From The United States District Court
For The District Of New Jersey
(District Court No. 02-cv-05968)
District Court Judge: The Honorable Joel A. Pisano
__________
Argued June 16, 2004
__________
Before: ALITO, SMITH, Circuit Judges and DUBOIS,
District Judge*
(Filed December 15, 2004)
Allyn Z. Lite, Esq.
Lite DePalma Greenberg & Rivas, LLC
Two Gateway Center, 12th Floor
Newark, New Jersey 07102
*
Honorable Jan E. DuBois, Senior District Judge for the
Eastern District of Pennsylvania, sitting by designation.
2
Robert M. Kornreich, Esq.
Carl L. Stine, Esq. (Argued)
Wolf Popper LLP
845 Third Avenue
New York, New York 10022
Counsel for Appellants
J. David Dantzler, Jr., Esq. (Argued)
J. Timothy Mast, Esq.
Thuy N. Vu, Esq.
McKenna Long & Aldridge LLP
303 Peachtree Street, Suite 5300
Atlanta, Georgia 30308
William B. McGuire, Esq.
Marianne M. DeMarco, Esq.
Tompkins, McGuire, Wachenfeld & Barry
Four Gateway Center
100 Mulberry Street
Newark, NJ 07102
Counsel for Appellees
______________________
OPINION OF THE COURT
______________________
3
SMITH, Circuit Judge.
Pedro Yang, Carol Jackson, and Peter Kelsch, one
member of each of three would-be subclasses in this class
action, on behalf of themselves and similarly situated
individuals, appeal the District Court’s refusal to toll the
applicable statute of limitations during the pendency of a prior,
substantively identical suit. Absent tolling, this second suit is
time-barred.
The Northern District of Georgia denied class
certification to all three subclasses in the earlier class action
because it found the original lead plaintiffs, or the subclass
itself, deficient under Rule 23 of the Federal Rules of Civil
Procedure. In this suit, filed in the District of New Jersey,
Plaintiffs argue that under American Pipe & Construction Co.
v. Utah, 414 U.S. 538 (1974), the statute of limitations should
have been tolled during the pendency of the prior class action.
The District Judge in New Jersey disagreed, concluding that
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. Because we can discern no
principled basis for limiting the application of tolling in this
way, we will affirm in part and reverse in part. 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 that
4
American Pipe tolling does not apply where certification was
denied based on deficiencies in the purported class itself.
I.
On January 7, 1999, the first of 22 class action
complaints against World Access, Inc. (“WAXS”) 1 and certain
of its former officers and directors 2 was filed in the United
States District Court for the Northern District of Georgia. These
actions were consolidated as In re World Access, Inc. Securities
Litigation, 1:99-cv-43-ODE (N.D. Ga.).
The In re World Access Consolidated Amended
Complaint included claims under Sections 11 and 15 of the
1
On April 10, 2001, WAXS filed a notice of bankruptcy
petition and automatic stay of proceedings. All litigation against
WAXS itself, therefore, was suspended and the class action
continued against only the individual defendants.
2
The individual defendants in the action included the
following persons who were WAXS officers and/or directors
during the class period: Steven A. Odom, Chairman and Chief
Executive Officer; Mark Gergel, Chief Financial Officer and an
Executive Vice President; Hensley E. West, President, Chief
Operating Officer and Director; Martin D. Kidder, Principal
Accounting Officer, Controller, Secretary to the Board of
Directors and a Vice President; and Stephen J. Clearman, a
Director.
5
Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §§
77(k) and 77(o), Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. §§
78j(b) and 78t(a), and the rules and regulations promulgated
thereunder, including Securities and Exchange Commission
(“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5. The complaint
alleged that the defendants issued materially false and
misleading statements and omitted from disclosure material
information concerning the products, revenues, earnings, and
inventory and sales practices of WAXS, and that the plaintiffs
relied on the misstatements and omissions to their detriment.
The complaint identified three distinct subclasses related to how
each came into possession of WAXS stock during the class
period: (1) the NACT merger class (“NACT”), (2) the Telco
merger class (“Telco”), and (3) the Open M arket class.
On July 21, 2000, the plaintiffs moved for class
certification and for approval of lead plaintiffs. On March 29,
2001, the Northern District of Georgia appointed William B.
Tanner, Cari Thompson, and John W. Brothers as the lead
plaintiffs for the Open Market, NACT, and Telco classes,
respectively. In that same order the court directed the lead
plaintiffs to file a joint motion for class certification. The lead
plaintiffs filed their renewed class certification motion on April
18, 2001. The defendants agreed to stipulate to class
certification. However, on July 26, 2001, the Northern District
of Georgia rejected the stipulation, finding that the parties had
failed to make an appropriate showing that the requirements of
6
Rule 23 had been satisfied.
The lead plaintiffs renewed their motion for class
certification on January 9, 2002, which the defendants did not
oppose. On July 1, 2002, in an order addressing each of the
subclasses in turn and citing deficiencies in each, the Northern
District of Georgia denied the plaintiffs’ renewed motion for
class certification with prejudice. The plaintiffs’ motions for
reconsideration and for interlocutory Eleventh Circuit review
were denied, and the action continued in the Northern District
of Georgia on behalf of five individual plaintiffs.3
On December 17, 2002, Yang, Jackson, and Kelsch, one
would-be member from each of the three subclasses of the
purported class which was denied certification by the Northern
District of Georgia, initiated this substantively identical class
action in the District of New Jersey (“District Court”) against
the same defendants. 4 In their brief to this Court, Plaintiffs-
3
During argument before this Court, Defendants’ counsel
reported that the Northern District of Georgia had granted
summary judgment in the defendants’ favor on the individual
plaintiffs’ claims. See In re World Access, Inc. Secs. Litig., 310
F. Supp. 2d 1281 (N.D.Ga. 2004).
4
The District Court consolidated the Yang action with one
brought by James Baberian and Karen Kinosian, and appointed
Jason Thompson and Raymond Crump as lead plaintiffs for the
consolidated action.
7
Appellants, who were not parties to the earlier suit, explain that
they filed this class action rather than intervene in their
individual capacities in the then-pending action in the Northern
District of Georgia, because “given the size of their losses, it
was not economically feasible to prosecute the action on an
individual basis.” They further acknowledge that they did not
seek to intervene as class representatives in the Georgia action
“because the Eleventh Circuit (unlike the Third Circuit in
McKowan, 295 F.3d 380) has refused to toll the statute of
limitations [which] barred claims as untimely.”
On March 13, 2003, Defendants moved to dismiss the
complaint pursuant to Rule 12(b)(6), arguing, inter alia, that this
action is barred by the one-year statute of limitations for federal
securities fraud claims imposed by 15 U.S.C. § 77m. On June
2, 2003, the District Court granted the motion to dismiss, ruling
that the prior action did not toll the statute of limitations for
future class actions, and thus use of the class action mechanism
is time-barred. Crucial to its conclusion, the District Court
reasoned that this Court’s opinion in McKowan Lowe v.
Jasmine, Ltd., 295 F.3d 380 (3d Cir. 2002), “limits the breadth
of the American Pipe tolling exception to subsequent claims
filed by intervenors, and does not toll the statute of limitations
for a new action filed in a different district court.” Yang v.
Odom, 265 F. Supp. 2d. 469, 474 (citing American Pipe &
Construction Co. v. Utah, 414 U.S. 538 (1974)). Plaintiffs
challenge this holding.
8
II.
The District Court had jurisdiction pursuant to 28 U.S.C.
§ 1331. This Court has jurisdiction pursuant to 28 U.S.C. §
1291.
This Court undertakes plenary review of the District
Court’s Rule 12(b)(6) dismissal on statute of limitations
grounds. See Lake v. Arnold, 232 F.3d 360, 365 (3d Cir. 2000)
(“This plenary review extends to the District Court’s choice and
interpretation of applicable tolling principles and its conclusion
that the facts prevented a tolling of the statute of limitations”).
A motion to dismiss pursuant to Rule 12(b)(6) is properly
granted if, “accepting all well pleaded allegations in the
complaint as true, and viewing them in the light most favorable
to plaintiff, plaintiff is not entitled to relief.” In re Burlington
Coat Factory Secs. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997)
(quotations and citations omitted).
III.
Claims arising under § 77k of the Securities Act are
subject to a one-year statute of limitations period. 15 U.S.C. §
78m. This period begins to run either upon “discovery of the
untrue statement or the omission, or after such discovery should
have been made by the exercise of reasonable diligence.” Id.
The District Court found that the statutory period began to run
on January 5, 1999, the date WAXS announced that its fourth
9
quarter earnings would fall significantly short of projections.
The Yang plaintiffs do not challenge that finding on appeal and
concede that absent tolling, the limitations period would have
expired before they filed their complaint in the District Court.
Where tolling applies, it begins on January 7, 1999, the
date that the first of the In re World Access suits was filed in the
Northern District of Georgia. Defendants argue that “the
limitations period began to run again on July 26, 2001, the date
that the district court in Georgia first denied the plaintiffs’ class
certification motion.” Under this argument, the statute of
limitations would have expired on July 24, 2002, almost five
months before the present complaint was filed in the District of
New Jersey. Among other cases, Defendants cite Crown, Cork,
& Seal Co., Inc. v. Parker, 462 U.S. 345, 354 (1983), in support
of this contention, but Crown, Cork & Seal goes no further than
to state that tolling continues “until class certification is denied.”
Id. at 354.
This Circuit declared in Edwards v. Boeing Vertol Co.,
717 F.2d 761 (3d Cir. 1983), that, “[c]onsistency with the
policies reiterated in Crown, Cork & Seal requires that the
tolling of the statute of limitations continue until a final adverse
determination of class claims.” Id. at 766. Edwards concluded
that such a final adverse determination in the prior case that
tolled the statute of limitations had occurred only when the issue
was decided on appeal. Id. at 765-66. That conclusion was
based on the fact that the class had been certified and the issues
10
raised by the class had gone to trial. Id. at 766. Although the
district court found against the class in its verdict, questions
remained as to whether the district court should have dismissed
the claims of all class members who were not parties when it
ruled in favor of some of the individual named plaintiffs in the
bifurcated trial. Id. at 765.
Here, there is no basis for extending applicable tolling
through the pendency of the In re World Access appeal in the
Eleventh Circuit. We do not agree with Defendants, however,
that applicable tolling ended when the Northern District of
Georgia first denied class certification. That initial denial was
a rejection of the parties’ proposed joint stipulation of a class
definition, and as such was not the kind of “final adverse
determination of class claims” required by Edwards. The July
26, 2001, order states only that “the parties have failed to make
an appropriate showing that the requirements of Rule 23 have
been satisfied as required by the United States Supreme Court.”
It does not identify the basis for the rejection or even the
particular requirement(s) of Rule 23 that had not been satisfied.
Indeed, Korwek v. Hunt, 827 F.2d 874 (2d Cir. 1987), the
leading case cited by Defendants in arguing that tolling should
not apply, would end tolling only upon a determination by the
district court that provided “dispositive reasons indicating
unequivocally that a class action suit was inappropriate.” Id. at
877 (declining to apply tolling where “district court rendered a
11
definitive determination as to potential manageability problems
and intraclass conflicts”). American Pipe, the seminal case on
the issue of tolling statutes of limitations during the pendency of
a class action, is not to the contrary; there the Supreme Court
concluded that tolling continued only “during the pendency of
the motion to strip the suit of its class action character.” 414
U.S. at 561.
Here, a final adverse determination of class claims in In
re World Access, and a resolution to the defendants’ attempt to
strip the suit of its class action character, did not occur until the
Northern District of Georgia denied class certification with
prejudice on July 1, 2002, and the applicable tolling period
ended that day.
Only two days had elapsed between the start of the
limitations period and the filing of the first In re World Access
suit. Therefore, the Yang complaint, having been filed on
December 17, 2002, (i.e., less than six months after the
applicable tolling period ended), was timely to the extent that
tolling applies.
IV.
A. Class Action Tolling in the Supreme Court: American Pipe
and Crown, Cork & Seal
The Supreme Court announced in American Pipe that
12
at least where class action status has been denied solely
because of failure to demonstrate that ‘the class is so
numerous that joinder of all members is impracticable,’
the commencement of the original class suit tolls the
running of the statute for all purported members of the
class who make timely motions to intervene after the
court has found the suit inappropriate for class action
status.
414 U.S. at 552-53. In reaching that conclusion, the Court
weighed the policies behind both statutes of limitations and the
class action mechanism to determine that “[s]ince the imposition
of a time bar would not in this circumstance promote the
purposes of the statute of limitations, the tolling rule we
establish here is consistent both with the procedures of Rule 23
and with the proper function of the limitations statute.” Id. at
555. Statutory limitation periods serve
[t]he policies of ensuring essential fairness to defendants
and of barring a plaintiff who has slept on his rights,
[and] are satisfied when, as here, a named plaintiff who
is found to be representative of a class commences a suit
and thereby notifies the defendants not only of the
substantive claims being brought against them, but also
of the number and generic identities of the potential
plaintiffs who may participate in the judgment. Within
the period set by the statute of limitations, the defendants
have the essential information necessary to determine
both the subject matter and size of the prospective
litigation, whether the actual trial is conducted in the
13
form of a class action, as a joint suit, or as a principal suit
with additional intervenors.
Id. at 554-55 (internal citation and quotation omitted). To
explain why tolling should apply while a class certification
decision is pending, the Court reasoned that the alternative
would
frustrate the principal function of a class suit, because
then the sole means by which members of the class could
assure their participation in the judgment if notice of the
class suit did not reach them until after the running of the
limitation period would be to file earlier individual
motions to join or intervene as parties—precisely the
multiplicity of activity which Rule 23 was designed to
avoid in those cases where a class action is found
‘superior to other available methods for the fair and
efficient adjudication of the controversy.’
Id. at 551 (quoting Fed. R. Civ. P. 23(b)(3)).
The Supreme Court later explained that the American
Pipe holding extends to “all asserted members of the class, not
just as to intervenors.” Crown, Cork & Seal, 462 U.S. at 350(internal citation and quotation omitted). The Court based its
decision to extend American Pipe to individual suits on its
conclusion that “[m]uch the same inefficiencies would ensue if
American Pipe’s tolling rule were limited to permitting putative
class members to intervene after the denial of class
14
certification.” Id.Pertinent to the issue before us, the Court observed that
because the filing of a class complaint puts a defendant on
notice “of the need to preserve evidence and witnesses
respecting the claims of all the members of the class[,] . . .
[t]olling the statute of limitations thus creates no potential for
unfair surprise, regardless of the method class members choose
to enforce their rights upon denial of class certification.” Id. at
353 (emphasis added). Here, we are asked to determine the
extent to which the suits contemplated in Crown, Cork & Seal
– i.e., those brought by individuals following a denial of class
certification – can be aggregated in a subsequent substantively
identical class action.
B. Tolling and Sequential Class Actions in the Courts of Appeal
In McKowan, this Court held that American Pipe tolling
applies to an intervenor as a proposed lead plaintiff in a later
class action where the district court had, in a prior class action,
declined “to certify a class for reasons unrelated to the
appropriateness of the substantive claims for certification.” 295
F.3d at 389.5 In McKowan, although the original class suit
5
McKowan built on Haas v. Pittsburgh Nat’l Bank, 526 F.2d
1083 (3d Cir. 1975), where this Court held that “the broad
tolling principle” enunciated in American Pipe should apply to
a replacement lead plaintiff where the district court determined
15
satisfied the commonality and numerosity requirements of Rule
23, the district court rejected the motion for class certification
because the putative lead plaintiff failed to satisfy the
requirements of typicality and adequacy. We stressed that the
intervening class representative in McKowan was not
“attempting to resuscitate a class that a court [had] held to be
inappropriate as a class action,” and that the class certification
motion had not been “rejected because of any defects in the
class itself but because of [the lead plaintiff’s] deficiencies as a
class representative.” Id. at 386. Indeed, this Court stated that
“we see no good reason why class claims should not be tolled
where the district court had not yet reached the issue of the
validity of the class.” Id. at 389.
Plaintiffs here argue that the District Court improperly
limited McKowan to its specific facts. According to Plaintiffs,
the McKowan rationale should apply equally to the filing of a
new class action with different class representatives.
Defendants counter that neither American Pipe nor Crown, Cork
& Seal supports the extension of the tolling doctrine to class
claims in a new action filed in a different court. Thus,
Defendants urge this Court to cabin McKowan’s application of
tolling to purported class members as intervenor class
representatives in the same class suit, and to refuse to extend the
reasoning of McKowan to purported class members’ pursuit of
after certification of a class that the original lead plaintiff did not
have standing to sue on behalf of the class. Id. at 1097.
16
a new class action in a different forum. Because we can discern
no principled basis for the line-drawing Defendants suggest, we
hold instead that American Pipe tolling applies to would-be
class members who file a class action following the denial of
class certification due to Rule 23 deficiencies of the class
representative. American Pipe tolling will not apply to
sequential class actions where the earlier denial of certification
was based on a Rule 23 defect in the class itself.
Defendants rely upon a line of cases from other courts of
appeal, typified by the Second Circuit’s Korwek decision, to
argue that this Court should limit the rule announced in
McKowan. As we stated in McKowan, this Court agrees with
the Korwek line of cases insofar as they refuse to toll limitations
periods for substantively identical class actions in which the
earlier putative class was denied certification because the
substantive claims were inappropriate for class treatment. Our
review of the case law of the Circuits which have addressed the
issue reveals them to be unanimous on this point. No Circuit
allows plaintiffs the benefit of American Pipe tolling to
sequentially relitigate a denial of class certification based on a
Rule 23 deficiency in the class itself.
In tolling limitations periods for subsequently filed class
actions where the sole basis for the earlier denial of certification
was the deficiency of the lead plaintiff as class representative,
we inevitably break from some Circuits’ treatment of the issue,
for the decisions are mixed. The Circuits have taken three
17
approaches: (1) the majority of Circuits have not tolled
limitations where the earlier class was denied certification
because of a deficiency in the class itself, but have not addressed
the distinction at issue here; (2) the Eleventh Circuit bars tolling
for all sequential class actions; and (3) supportive of this Court’s
approach, the Ninth Circuit has recently allowed plaintiffs to
aggregate their claims in a second class action if their individual
claims would be timely using American Pipe tolling; the case
involved a class which had been certified before enactment of
a statute abrogated the certification, but the rationale of the
Ninth Circuit’s holding potentially extends to all sequential class
actions.
Illustrative of the first approach, the Second Circuit in
Korwek held that tolling did not apply “to permit the filing by
putative class members of a subsequent class action nearly
identical in scope to the original class action which was denied
certification.” Id. at 876. Contrary to the broad scope of
certification requested by the plaintiff, the district court in the
original class suit, citing problems of manageability and
intraclass conflict, decided to “limit drastically the scope of the
class certified” to be coextensive with the lead plaintiff’s trading
behavior in the silver futures market. Id. Purported members of
the class excluded by the narrowed scope then filed a new class
action requesting certification of a class identical in scope to the
broad request rejected in the original suit. Id. at 876. The
Second Circuit rightly declined to toll the statutory period in
these circumstances, as the district court had found that the
18
broad class requested would be unwieldy and unmanageable
regardless of the class representative. Indeed, the Second
Circuit did not foreclose tolling the limitations period for
subsequent class actions asserting an appropriate scope. Id.(“This Court notes that it leaves for another day the question
whether the filing of a potentially proper subclass would be
entitled to tolling under American Pipe.”).
In taking this approach, Korwek followed the Fifth
Circuit’s decision in Salazar-Calderon v. Presidio Valley
Farmers Ass’n, 765 F.2d 1334 (5th Cir. 1985), which found that
“American Pipe tolling does not apply to permit putative class
members to file a subsequent class action.” Korwek, 827 F.2d
at 877-78. Significantly, in Salazar-Calderon the putative class
had been denied certification in the first action because of
defects in the purported class itself. The Fifth Circuit noted that
common questions of law and fact did not predominate among
the putative class members and that “a class action was not
necessarily the superior method for handling the controversy.”
Salazar-Calderon, 765 F.2d at 1350. Similarly, in the leading
First Circuit case which followed Korwek and Salazar-
Calderon, the refusal to allow tolling in sequential class actions
was in the context of a district court having based its earlier
denial of class certification on deficiencies in the class itself.
See Basch v. Ground Round, Inc., 199 F.3d 6, 8 n.4 (1st Cir.
1998) (class members not “similarly situated” due to many
factual differences between them); see also Andrews v. Orr, 851
F. 2d 146, 149 (6th Cir. 1988) (applying Korwek and Salazar-
19
Calderon without noting the reason for the district court’s denial
of class certification).
The second approach, which only the Eleventh Circuit
has taken, reads Korwek broadly to deny tolling to all sequential
plaintiffs invoking the class action device, regardless of the
reason class certification was denied in the earlier suit. In
Griffin v. Singletary, 17 F.3d 356 (11th Cir. 1994), which
involved a district court’s denial of class certification for lack of
a proper representative, the Eleventh Circuit cited Andrews,
Korwek, Salazar-Calderon, and Robbin v. Flour, 835 F.2d 213(9th Cir. 1987), for the proposition that at that time all Circuit
courts agreed that a pending class action does not toll the
limitations period for later class actions brought by putative
members of the class denied certification earlier. Griffin, 17
F.3d at 359.6 The Eleventh Circuit continued, “The plaintiffs
may not ‘piggyback one class action onto another,’ Salazar-
Calderon, 765 F.2d at 1351, and thereby engage in endless
rounds of litigation in the district court and in this Court over the
adequacy of successive named plaintiffs to serve as class
representatives.” Griffin, 17 F.3d at 359.
As this Court stated in McKowan, “The Griffin Court
6
As noted previously, Griffin has special significance here
because its precedential force within the Eleventh Circuit is
precisely what Yang, Jackson, and Kelsh sought to avoid by not
filing this action in the Northern District of Georgia.
20
does not appear to have distinguished between the Korwek line
of cases where denial of tolling followed a decision rejecting the
class action itself and the situation where no court has yet
determined that the class action is inappropriate.” McKowan,
295 F.3d at 388. While Griffin’s denial of tolling for all
sequential class action plaintiffs has the virtue of clarity and
ease of application, it is also characterized by a rigidity which
we reject for at least three reasons. First, by its terms, Korwek
invited refinement, and Griffin in effect bootstrapped Korwek’s
limited holding to be a blanket prohibition on sequential class
actions. Moreover, it did so without analysis. Second, as
discussed below, to the degree Griffin relied on Robbin, that
foundation has eroded because the Ninth Circuit has since held
that at least in certain circumstances, individuals whose claims
were tolled by an earlier class action can aggregate their claims
in a subsequent class suit. Catholic Social Servs., Inc. v. I.N.S.,
232 F.3d 1139 (9th Cir. 2000) (en banc). Third,
The policy at the very core of the class action mechanism
is to overcome the problem that small recoveries do not
provide the incentive for any individual to bring a solo
action prosecuting his or her rights. A class action solves
this problem by aggregating the relatively paltry potential
recoveries into something worth someone’s (usually an
attorney’s) labor.
Amchem Prods. v. Winter, 521 U.S. 591, 617 (1997) (quoting
Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir.
1997). Given that American Pipe tolling would unquestionably
21
apply were the plaintiffs here to bring individual actions, it
would be at odds with the policy undergirding the class action
device, as stated by the Supreme Court, to deny plaintiffs the
benefit of tolling, and thus the class action mechanism, when no
defect in the class itself has been shown.
The Ninth Circuit has taken the third approach. In
Robbin, the prior class action was denied certification because
the class as defined lacked commonality and because the lead
plaintiff was not typical of the class in that he was vulnerable to
additional defenses. See Robbin, 835 F.2d at 214; Schlesinger
Inv. P’ship v. Fluor Corp., No. 81 Civ. 2852, 1983 U.S. Dist.
LEXIS 15329, at *18, (S.D.N.Y. July 14, 1983). On appeal, the
Ninth Circuit relied on Korwek in declining to extend tolling to
a subsequently filed class action, stating, “to extend tolling to
class actions ‘tests the outer limits of the American Pipe
doctrine and . . . falls beyond its carefully crafted parameters
into the range of abusive options.’” Robbin, 835 F.2d at 214(quoting Korwek, 827 F.2d at 879).
However, in Catholic Social Services, the Ninth Circuit
abandoned Robbin’s seemingly encompassing holding by
allowing certification of a subsequent class comprised of
individuals whose individual claims were tolled by an earlier
class action. In Catholic Social Services, following district
court certification of the class, Congress stripped federal courts
of jurisdiction over the named plaintiffs. 232 F.3d at 1144. A
second class action, which would have been time-barred if the
22
first suit did not toll the statute of limitations, named plaintiffs
who alleged that they satisfied the new jurisdictional
requirements. Id. In affirming the district court’s application of
American Pipe tolling, the en banc Ninth Circuit refused to
distinguish, for tolling purposes, subsequent suits brought by
individuals from those aggregated as class actions: “Strictly
speaking, this is not a statute of limitations question at all. It is,
rather, a question of whether plaintiffs whose individual actions
are not barred may be permitted to use a class action to litigate
those actions.” Id. at 1147. In assessing that question, the Ninth
Circuit distinguished its own decision in Robbin, as well as the
Korwek, Griffin, and Salazar-Calderon decisions, on the basis
that the plaintiffs were “not attempting to relitigate an earlier
denial of class certification, or to correct a procedural deficiency
in an earlier would-be class.” Id. at 1149.
To be sure, Catholic Social Services involved a class that
indeed had been certified before enactment of the statute
abrogated the certification, a situation possibly unique in Circuit
case law. However, its rationale undergirds the distinction this
Court adopted in McKowan and which we iterate here.7
7
Although no court of appeals has yet applied tolling to
subsequent class claims where certification in the prior class
action had been denied on the basis of the lead plaintiffs’
deficiencies as class representatives, a number of district courts
have done so. See i.e., Shields v. Smith, 1992 U.S. Dist. LEXIS
15718, *8 (N.D. Cal. Aug. 14, 1992); In re Quarterdeck Office
23
Catholic Social Services may be read narrowly or broadly. At
its narrowest, Catholic Social Services is limited to the rare
factual scenario in which the certification of a class is later
abrogated by statute. This reading does not implicate the usual
case where the class was not certified in the prior action, i.e.,
cases where the suitability of the putative class for class
treatment was not reached, either because the action was
dismissed or abandoned on other grounds. In a more broad
sense, Catholic Social Services can be read as authority for our
holding that class claims should be tolled where the district
court denies class certification based on deficiencies of a class
representative, and not on the validity of the class itself.
In McKowan, this Court distinguished the Korwek line
of cases (the first approach) and rejected the Eleventh Circuit’s
categorical bar (the second approach) to allow intervenors to
benefit from American Pipe tolling in an attempt to certify a
class so long as the earlier class action was denied certification
because the putative representative, but not the class itself,
suffered a Rule 23 infirmity. Unlike the Korwek plaintiffs, the
lead plaintiff in McKowan was not attempting to “resuscitate a
class that a court ha[d] held to be inappropriate as a class
action.” McKowan, 295 F.3d at 386. Rather, the lead plaintiff
Systems, Inc., No. CV-92-3970-DWW, 1994 WL 374452, *4
(C.D. Cal. Mar. 24, 1994); In re Crazy Eddie Secs. Litig., 802 F.
Supp. 804, 813 (E.D.N.Y. 1992); Schur v. Friedman & Shaftan,
P.C., 123 F.R.D. 611, 613 (N.D. Cal. 1988).
24
in McKowan “was not rejected because of any defects in the
class itself but because of [his] deficiencies as a class
representative.” Id.; see id. at 388 (“[T]he Griffin panel’s
reasoning is inconsistent with our precedent in Haas where we
approved American Pipe tolling for a subsequent
representative’s class claims after the original certified class
representative was found wanting.”).
V.
In light of the forgoing discussion, the basis for the
Northern District of Georgia’s denial of class certification is
central to this appeal. We note as an initial matter that the
District Court concluded that the Northern District of Georgia
“denied certification with prejudice based on the inadequacy of
the class representatives.” Yang, 265 F. Supp. 2d at 471. Our
own examination of the Northern District of Georgia’s decision
leads us to the same conclusion with respect to the Open Market
and Telco classes: the denials of certification to these classes
were based solely on deficiencies in the putative representatives.
We therefore reverse the District Court’s ruling and hold that
American Pipe tolling applies to the class claims of the Open
Market and Telco classes. As to the NACT class, however, the
Northern District of Georgia’s opinion indicates 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.
25
Tanner and the Open Market Class
The Northern District of Georgia began its analysis by
noting that the class was sufficiently numerous. The remainder
of the court’s analysis, however, focused on Tanner’s suitability
to be the lead plaintiff. Not having reached the class members’
suitability for class treatment beyond noting that Rule 23's
numerosity requirement was satisfied, the District Court on
remand will have to address the issue, and may yet determine
that a Rule 23 defect exists in the class itself, requiring a denial
of class certification or a division of issues and/or creation of
subclasses pursuant to Rule 23(c)(4).
The Northern District of Georgia indicated that Tanner’s
particular WAXS trading behavior presented a hurdle to proving
the reliance prong of the securities action such that it would be
unfair to couple the fortunes of the Open Market class members
to Tanner’s claim. The court explained that under the Supreme
Court’s endorsement of the fraud-on-the-market theory in Basic
Inc. v. Levinson, 484 U.S. 224, 247 (1988), courts may presume
that members of a putative class of stock purchasers relied on
the integrity of market prices, alleged to be fraudulently inflated,
in making purchasing decisions. Evidence of subjective reliance
by individual purchasers is unnecessary. The presumption of
reliance is rebuttable, however, and the court explained why
Tanner was too susceptible to anticipated defense arguments to
be the Open Market class representative. Moreover, the court
was also concerned that Tanner had first purchased WAXS
26
stock in April 1998, a full year after the class period began,
suggesting that Tanner’s claims would not be adequately aligned
with those of the class members. Significantly, the court did not
address whether the class itself was suitable for employment of
the fraud-on-the-market presumption, or whether the WAXS
purchasing behavior of the class as a whole was sufficiently
common to be aggregated in a class action.
The Northern District of Georgia noted that on January
5, 1999, the same day WAXS announced that poor sales of the
CDX switch would lower its quarterly earnings to less than half
of analysts’ estimates, Tanner purchased 24,000 WAXS shares.
By purchasing WAXS stock on the earnings announcement, the
court reasoned, Tanner did not rely on the defendants’ alleged
misstatements of fact. This purchase undermined the reliance
element necessary to his claim, and cast doubt on his suitability
to be the Open Market Class representative. Indeed, Tanner’s
purchase may have placed him directly at odds with the class
members he sought to represent. That is, the fate of class
members dependent on the fraud-on-the-market theory to
establish their reliance on the alleged misrepresentations of the
defendants should not be tied to a representative who purchased
WAXS stock immediately after the alleged misrepresentations
were revealed.
Based on his entry late in the class period and his January
5, 1999, sale of WAXS stock, the court determined that “Tanner
has failed, however, to meet his burden with regard to the
27
typica lity, com mo nality, adeq uacy, an d sup eriority
requirements.” (emphasis added). The Northern District of
Georgia did not, however, indicate that the class as a whole also
suffered from similar defects.
Though the deficiencies mentioned by the court often
indicate defects in the class itself, the Northern District of
Georgia’s opinion reveals that the Open Market class was
denied certification solely because Tanner was not an
appropriate class representative and not because the class itself
was deficient under Rule 23.
With respect to typicality, commonality, and adequacy,
the court explained that because Tanner first entered the putative
Open Market class half-way through the class period, it was
“unclear whether common questions of law and fact
predominate,” and it could not “be assumed that Tanner [would]
adequately represent those early members of the class as
vigorously as the later members of the class.” The court did not
inquire whether the class members themselves had
predominating common questions of law or fact supporting their
claims, such that a typical lead plaintiff could be found to
adequately represent the claims of the putative class members.
As this Court has stated, “Class actions are a particularly
appropriate and desirable means to resolve claims based on the
securities laws, since the effectiveness of the securities laws
may depend in large measure on the application of the class
28
action device.” Eisenberg v. Gagnon, 766 F.2d 770, 775 (3d
Cir. 1985). Given the prevalence of the class action mechanism
in securities regulation, and because the Northern District of
Georgia did not suggest that In re World Access was anything
but a routine securities class action, we believe the Northern
District of Georgia was referring solely to Tanner when
speaking of typicality, commonality, and adequacy. Whether the
class itself merits class treatment is an inquiry the District Court
will address on remand.
Lastly, having noted that a class action may be
maintained only when it is found to be superior to other
available adjudicative methods, the Northern District of Georgia
reasoned that Tanner’s large stake in WAXS gave him adequate
incentive to pursue his claim individually, and thus his resort to
the class action device was unnecessary. Again, the court’s
inquiry focused entirely on Tanner; it did not address whether
the class mechanism would be superior to other available
methods of adjudication for the putative class members as a
whole.
The court concluded by stating that, “[b]ased on this
dearth of information and on the numerous other concerns
regarding Tanner’s representation, the court denies class
certification for the Open Market class.” (emphasis added).
Each finding that led to the court’s decision not to certify the
Open Market class was tied to the particular weaknesses of
Tanner as a lead plaintiff, and was not necessarily shared by the
29
class itself.
Brothers and the Telco Class
The Northern District of Georgia concluded that Brothers
and the putative Telco Class had satisfied the reliance
requirement under the § 10(b) and Rule 10b-5 claims because
they acquired their WAXS securities in connection with a
merger, and there was no evidence that Brothers failed to rely on
the market pricing during the merger. However, the court found
that Brothers had sold all his shares in WAXS just days after the
merger took place. Therefore, not only might Brothers not be
able to show that he was harmed by the alleged fraud, the court
suggested that he may have actually profited from it due to the
resulting inflated stock price. Thus, the court reasoned that
Brothers was not an adequate and typical representative of the
class because “[i]t would be entirely unfair to tie the fortunes of
all potential Telco class members to that of a lead plaintiff who
cannot satisfy the basic elements of the claims presented. Due
to his sale of stock, Plaintiff Brothers has failed to meet his
burden of showing that his claim is typical of those of other
class members.” As with the Open Market class, the Rule 23
deficiencies cited by the court were entirely Brothers’ and did
not pertain to the class itself.
Thompson and the NACT Class
The Northern District of Georgia observed that
30
“Thompson and all other members of the putative NACT class
relied on the market to valuate properly the WAXS stock in
order to achieve a fair exchange for their NACT securities” and
that they satisfactorily alleged the elements of the §§ 20(a), 11
and 15 claims. The court concluded, however, that it “need not
undergo an intense inquiry into the commonality, typicality,
superiority and predominance requirements of [the] putative
class action as Plaintiff Thompson has failed to meet her burden
regarding numerosity.” The court observed that because
Thompson had not provided support for her claims pertaining to
numerosity, despite repeated requests from the court, it had “no
way of determining whether these millions of shares reside in
the hands of a handful of individuals or in the hands of
hundreds.” The court concluded that it
would usually deny the NACT class certification without
prejudice as numerosity may be proven at a later date. In
this case, however, the court has repeatedly requested
additional facts and more precise briefing on the issue of
class certification. As this is Plaintiff’s second attempt
at seeking class certification, the court finds that Plaintiff
has no excuse for not meeting her burden on the basic
grounds of numerosity.
Thus, in contrast to its findings regarding Tanner and the
Open Market Class, and Brothers and the Telco class, the
Northern District of Georgia did not base its denial of
certification to Thompson and the NACT Class on
representative-based reasons. Rather, it found that the record
31
did not support a conclusion that the class could satisfy the
numerosity requirement. Although the Northern District of
Georgia couched its findings in terms of Thompson’s failure to
meet her burden, what doomed certification for the class was the
finding that numerosity was lacking – a class-based
determination.
Summary
Despite framing its decision in terms that are more often
used to describe class-based characteristics, the Northern
District of Georgia’s opinion indicates that it based its decision
to deny certification to the Open Market and Telco Classes on
deficiencies in the lead plaintiffs as representatives of the class.8
In the absence of any authority which would make the
invocation of a particular Rule 23 requirement definitive as to
whether a denial of class certification was class- or
representative-based, we evaluate the Northern District of
Georgia’s opinion as a whole. This review leads us to conclude
that the Northern District of Georgia’s decision as to the Open
Market and Telco classes was based on deficiencies in the lead
plaintiffs and not in the class itself, and the District Court’s
8
It is important to note that this is not a case in which
Plaintiffs have attempted to repackage the class-based denial of
their claims as being representative-based determinations.
Rather, our conclusion rests entirely on the explanation provided
by the Northern District of Georgia for its decision.
32
order to the extent it dismisses these class claims will be
reversed. The NACT class, however, was denied certification
because the evidence showed that the class failed Rule 23's
numerosity requirement, a deficiency in the class itself. The
District Court’s order, to the extent that it denies certification of
the NACT class, will be affirmed.
B.
In keeping with our Circuit precedent in Haas and
McKowan, and because we can discern no principled reason to
rule otherwise, we hold that where class certification has been
denied solely on the basis of the lead plaintiffs’ deficiencies as
class representatives, and not because of the suitability of the
claims for class treatment, American Pipe tolling applies to
subsequent class actions. Since American Pipe, it has been
well-settled that would-be class members are justified – even
encouraged – in relying on a class action to represent their
interests with respect to a particular claim or claims, and in
refraining from the unnecessary filing of repetitious claims. See
American Pipe, 414 U.S. at 550. The policy objectives of the
class action device – efficient deployment of court resources and
the ability to consolidate claims which would otherwise be too
small to warrant individual lawsuits–continue to obtain after the
rejection by a court of the proposed class representatives.
Drawing the line arbitrarily to allow tolling to apply to
individual claims but not to class claims would deny many class
33
plaintiffs with small, potentially meritorious claims the
opportunity for redress simply because they were unlucky
enough to rely upon an inappropriate lead plaintiff. For many,
this would be the end result, while others would file duplicative
protective actions in order to preserve their rights lest the class
representative be found deficient under Rule 23. Either of these
outcomes runs counter to the policy behind Rule 23 and, indeed,
to the reasoning employed by the Supreme Court in American
Pipe and Crown, Cork & Seal.
Nor would the objectives of limitations periods be better
served were we to hold otherwise. The defendants were on
notice of the nature of the claims and the generic identities of
the plaintiffs within the required period, eliminating the
potential for unfair surprise and prompting them to preserve
evidence which might otherwise have been lost.
Allowing tolling to apply to subsequent class actions
where the original class was denied because of the lead
plaintiffs’ deficiencies as class representatives will not lead to
the piggybacking or stacking of class action suits “indefinitely”
as Defendants argue and as the Eleventh Circuit feared in
Griffin. Rather, applying tolling under these circumstances will
allow subsequent classes to pursue class claims until a court has
definitively determined that the claims are not suitable for class
treatment. Where repeated tolling is implicated and the class
appears unable to put forward an appropriate lead plaintiff,
courts may reasonably conclude that the class itself fails Rule 23
34
analysis. Rather than arbitrarily eliminate the possibly
meritorious claims of countless class members, we prefer to see
careful case management employed to avoid the prospect of
“indefinite” tolling.
We are cognizant of Justice Blackmun’s admonition in
American Pipe that lawyers are not to be encouraged “to frame
their pleadings as a class action, intentionally, to attract and save
members of the purported class who have slept on their rights.”
414 U.S. 561 (Blackmun, J., concurring). We are also mindful
of the warning in Crown, Cork & Seal that “[t]he tolling rule of
American Pipe is a generous one, inviting abuse.” 462 U.S. at
354 (Powell, J., concurring). The rule announced here does not
offend these concerns. Allowing tolling in the circumstances
described here is unrelated to the warnings expressed in
American Pipe and Crown, Cork & Seal, which concerned the
potential for abuse where counsel could manipulate a complaint
to trigger tolling. Here, there is no question that these would-be
class members would have been eligible for tolling as
intervenors under American Pipe and as individuals under
Crown, Cork & Seal. The question, then, is not whether tolling
applies but simply how.
Finally, Defendants warn that “[t]his Court should avoid
making the district courts in the Third Circuit a haven for
unhappy plaintiffs’ lawyers who cannot obtain class certification
in the original court of their choosing.” Rather than inviting
forum shopping, we believe our holding will lead to more
35
efficient handling of class actions by encouraging district judges
to address the merits of class treatment for putative classes early
in Rule 23 proceedings.
C ONCLUSION
We hold that American Pipe 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.
We also hold that American Pipe tolling does not apply to
later class actions where a substantially identical class suit
was denied certification due to a Rule 23 defect in the class
itself. Accordingly, we will reverse the District Court’s
dismissals of the Open Market and Telco classes, affirm the
dismissal of the NACT class, and remand this matter to the
District Court for further proceedings consistent with this
opinion.
ALITO, Circuit Judge, concurring and dissenting.
I join the opinion of the Court insofar as it holds that a
prior action in which class certification is denied based solely on
deficiencies of the class representative tolls the statute of
limitations for filing a later, substantively identical action with
36
a new representative. The logic of our decision in McKowan
Lowe & Co. v. Jasmine, Ltd., 295 F.3d 380 (3d Cir.), cert.
denied, 537 U.S. 1088 (2002), leads to this conclusion. I
therefore agree with the majority that we must reverse the
decision of the District Court with respect to the claims of the
Telco Class, because class certification of those claims was
denied on the ground that the lead plaintiff did not satisfy the
typicality requirement of Federal Rule of Civil Procedure 23(a).
See JA 402. I also agree with the majority that we should affirm
the decision of the District Court with respect to the NACT
Class because class certification of those claims was based on
a class defect.
I disagree with the majority, however, insofar as it
reverses the decision of the District Court with respect to the
Open Market Class. Our decision in McKowan Lowe took
pains to make it clear that the statute of limitations should not be
tolled by a prior action in which class certification is denied
based on “defects in the class itself,” rather than “deficiencies”
of the class representative. 295 F.3d at 386. 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. The lawyers could simply file a new, substantively
identical action with a new class representative as soon as class
certification is denied in the last previous action. See McKowan
Lowe, 295 F.3d at 386.
37
In the present case, as the majority notes, Judge Evans of
the Northern District of Georgia denied class certification in a
“substantively identical suit.” Maj. Op. at 4. Judge Evans stated
that certification of the Open Market Class was denied for
failure to meet “the typicality, commonality, adequacy, and
superiority requirements.” JA 389. Thus, Judge Evans found
two fatal defects – lack of “commonality” and “superiority” –
that, as the majority acknowledges, are generally “used to
describe class-based characteristics.” Maj. Op. at 32. Under
McKowan Lowe, therefore, it would appear that we should hold
that the prior action did not toll the statute of limitations with
respect to the claims of the Open M arket Class.
The majority, however, concludes in effect that Judge
Evans, despite the language noted above, actually based her
decision regarding the Open Market Class solely on deficiencies
of the class representative, not defects in the class. For example,
the majority stresses Judge Evans’s statement that the proposed
representative of the Open M arket Class “failed . . . to meet his
burden with regard to the typicality, commonality, adequacy,
and superiority requirements.” Maj. Op. at 28 (quoting JA 389)
(emphasis added in majority opinion).
It is possible that the majority’s interpretation of Judge
38
Evans’s 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],” Fed. R. Civ. P. 23 (a)(2), 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.” Fed. R. Civ. P. 23 (b)(3). But
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.
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. I 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, 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. We must keep in mind
that, in most circuits, the distinction drawn in McKowan Lowe
39
between deficiencies in the representative and defects in the
class has no bearing on the tolling of the statute of limitations,
and therefore district courts in those circuits may not always
make it clear whether their rulings rest on representative- or
class-based defects. 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. Because I am
concerned about the effects of the majority’s approach, I must
respectfully dissent in part.
40