Supreme Court puts Kibosh on Piggybacked Class ActionsThe Supreme Court’s decision in China Agritech Inc. v. Resh means that class action plaintiffs can no longer rely on serial class actions to toll their statute of limitations indefinitely. Instead, the Supreme Court held that the judicially created rule which tolls the statute of limitations for putative class members—called American Pipe tolling—applies to individual claims only, and it only lasts until class certification is denied. This ruling is great news for class action defendants.

We blogged about the importance of this case last year, but here is a refresher on the background. American Pipe tolling allows individuals who fall within the definition of a proposed class action to wait until a court decides whether to certify the class before filing individual claims. This judge-made doctrine serves judicial economy: Class actions exist to litigate a multitude of claims in one action. If absent class members’ limitations periods were not tolled, those absent class members would face a dilemma: Either get in the game and file a lawsuit, or sit on the sidelines and bet that the class will be certified. The first choice encourages needless, duplicative lawsuits, which is wasteful and burdensome for defendants. (Defending a class action is a heavy load.  Defending a class action and a slew of individual cases is worse.) The second choice could cause potentially meritorious claims to expire while the class member waits on the result of a class certification decision the class member does not control, which is unfair. American Pipe tolling avoids the dilemma by tolling the class members’ limitations period until class certification is denied. It is a clumsy judge-made solution with no basis in the text of the rule, but it addresses a practical problem.

As often happens with clumsy solutions, however, fixing one problem created more problems. If, as some circuits held, American Pipe tolling applied to class claims in addition to individual claims, the balance struck by the rule collapses: As soon as class certification is denied, another class representative could file suit elsewhere proposing to certify a new class (or the same class), which would keep the tolling rolling. This process potentially could continue forever, until the plaintiffs found a receptive judge to certify the class.

Most circuits—including the Second, Fifth, and Eleventh—limited American Pipe tolling to individual claims. But other circuits—such as the Ninth, where China Agritech arose—allowed continuous, indefinite tolling from piggybacked class actions. The Supreme Court took the case to resolve the split, and did so decisively with a welcome, bright-line rule.

China Agritech holds that  American Pipe tolling applies to individual claims only, full stop.  Justice Ginsburg’s opinion focuses on efficiency: Plaintiffs who intend to file a class action must file within the original limitations period, and courts should rule on class certification quickly.  This rule encourages early filings, and Justice Ginsburg seemed to contemplate an almost Darwinian process where the better class representatives with better counsel and better-pleaded complaints (or perhaps the more strategic choice of forum) would be the ones whose claims would have the best chance to be certified. The majority rejected Justice Sotomayor’s suggestion in her concurrence that American Pipe tolling should apply to class claims if class certification were denied because of some problem with the class representative (such as poorly trained class counsel or an indifferent, lazy or otherwise inadequate class representative). No matter the reason for the denial of class certification, there is no statute of limitations tolling for subsequent class claims.

What does this mean?  Four things stand out to us:

Many companies’ exposure just went down. Defendants in California or those facing stale claims or claims with relatively short statutes of limitations will face fewer claims going forward.  The retroactive effect of this decision could perhaps still be litigated, but China Agritech immediately helps extinguish stale claims.

Get ready for competing class actions. We expect plaintiffs will heed the Supreme Court’s admonition and file their class claims sooner. While the ultimate number of class filings may not increase, those filings will become more front-loaded, and companies may face more of them at the same time. Again, the Supreme Court was aware of this incentive, and it expressed faith in lower courts’ abilities to use available procedures to consolidate, stay, or otherwise manage these cases. If we had to pick out two likely trends to watch here, look for a yet-further uptick in the use of multidistrict litigation and for more robust application of the first-to-file rule. For a more in-depth look, we dedicated a three-part series to handling competing class actions last year; you can find them here: part one, part two, and part three.

Where there are no competing class actions, the value of individual settlements just went up. When faced with a lone class action on a given claim, the expiration of the statute of limitations becomes a very important date. As it approaches (and especially after it passes), defendants have an incentive to pay a premium for an individual settlement with the named plaintiff because doing so extinguishes class risk on the claim.

Disaster avoided. Lastly, China Agritech is not a landmark case because most circuits already applied American Pipe tolling to individual claims only. But had the case come out the other way, making piggybacked class actions the law of the land, then a multitude of expired class claims could have been revived and companies would be scrambling today. Even though this case came out the right way, we recognize again that the Supreme Court probably plays an outsized role in making class action doctrine, and that role creates uncertainty. Creating and defining a tolling doctrine should be legislative work.

Spokeo v. Robins – which confirmed that a plaintiff’s allegation of a defendant’s statutory violation without accompanying concrete harm fails to satisfy Article III’s “case or controversy” requirement – has brought the issue of standing to the forefront in a variety of class action cases. Standing has become a frequent weapon in the defense’s arsenal, both as an initial hurdle for a class plaintiff to overcome, and as a basis for resisting class certification by demanding that each putative class member demonstrate actual, concrete injury. A recent decision by the Seventh Circuit, however, reminds us that there can be a downside to a successful standing challenge: the permanent loss of a federal forum for adjudication of the claim.

The Standing Trap: Will a Spokeo Challenge Lock a Class Action Defendant into a State Court Forum?Collier v. SP Plus Corporation involved a class action brought against the operator of public parking facilities, claiming that the receipts generated by the defendant contained the expiration dates of consumers’ credit and debit cards, in violation of the Fair and Accurate Credit Transaction Act (FACTA). Plaintiffs alleged willful violation of FACTA and sought statutory and actual damages. Their complaint, however, did not describe any concrete harm resulting from the alleged statutory violation. SP Plus removed the case to federal court, invoking the court’s federal question jurisdiction under FACTA, and then moved to dismiss under Fed. R. Civ. P. 12(b)(1), contending that plaintiffs lacked Article III standing because they alleged no injury in fact.  Plaintiffs responded by moving to remand the case to state court, contending that SP Plus had failed to establish subject matter jurisdiction. The district court denied the motion to remand, and granted plaintiffs leave to amend to make factual allegations in support of their request for actual damages. When plaintiffs did not amend their complaint, the trial court dismissed the case with prejudice. Plaintiffs appealed to the Seventh Circuit.

The appeals court reversed. The court agreed that plaintiffs’ complaint did not allege an actual injury sufficient to establish Article III standing under Spokeo. Nonetheless, relying on the mandatory language of 28 U.S.C. § 1447(c), the court held that remand to state court was the only permissible option upon a finding of lack of subject matter jurisdiction. The court also noted that even if a dismissal had been proper, it should have been one without prejudice, as a jurisdictional dismissal is not an adjudication on the merits. In a parting shot, the court expressed displeasure that the defendant had removed the case to federal court and then promptly attacked federal jurisdiction; SP Plus’s “dubious strategy has resulted in a significant waste of federal judicial resources, much of which was avoidable.”

There are several takeaways from this decision:

  • From the defense perspective, seeking a Rule 12(b)(1) jurisdictional dismissal in a case removed from state court is strategically risky. The weight of authority (which Collier reflects) and the language of 28 U.S.C. § 1447(c) instruct that a successful challenge to plaintiff’s standing will result in a remand to state court. And the benefit of a federal court’s ruling of “no Article III standing” is far from clear, unless the state court’s standing jurisprudence mirrors Article III. Even then, as a non-final (and, at best, appealable by permission only) ruling, it is difficult to imagine that a state court would consider the remand order to be preclusive. There is authority in some circuits that a district court can dismiss rather than remand to state court if remand would be futile, i.e., if it is clear that the state court would likewise dismiss for lack of standing. But making that showing is likely to be difficult, as many states’ standing rules differ from federal standards. And – as Collier also teaches – a jurisdictional dismissal by the federal court should be one without prejudice, leaving the plaintiff free to refile the case in state court anyway.
  • Of course, ignoring standing altogether does not eliminates the trap. The plaintiff himself can raise the issue in an effort to have the case remanded. And as the late, great Dan Meador taught many of us in his Federal Courts class, “even the janitor can raise subject matter jurisdiction.” But beyond those scenarios, the defendant is better served by saving its standing arguments for class certification, in particular the argument that each class member must show actual injury, thus defeating commonality, typicality and predominance. Not all courts have bought into the concept that every member of the class must have standing, but arguing these issues under the Rule 23 factors can create traction for the defense while minimizing the risk of remand.
  • Collier also serves as a reminder that federal jurisdictional statutes (including the Class Action Fairness Act) may be of limited utility to the defendant facing a class action involving statutory violations without actual injury. Federal district courts have a duty independent of any Congressional enactment to determine whether an action involves an actual “case or controversy” under Article III.
  • Defense counsel’s natural instinct in “touch foul” class actions is to argue early and often that “plaintiff hasn’t been hurt at all.” In class cases removed from state court, however, it may be wise to curb that instinct. Attacking standing can result in the defendant being left to the tender mercies of the state court where plaintiff’s counsel initially chose to bring the suit.

Supreme Court to Regulators: You Can’t Trump the Federal Arbitration ActIn a 5-4 decision along ideological lines, the Supreme Court has upheld a controversial tool used by employers to stop class action lawsuits before they start: contractual provisions requiring employees to bring individual arbitration proceedings rather than class actions in court.

In Epic Systems Corp. v. Lewis and its sister cases, the majority of the Supreme Court rejected the argument that the National Labor Relations Act (NLRA) requires employees to be able to bring class actions. Instead, Justice Gorsuch wrote for the majority, “[i]n the Federal Arbitration Act (FAA), Congress has instructed federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” In the view of the majority, neither the FAA nor the NLRA create any exception for employment contracts.

The issue of class action waivers in employment contracts has taken on new prominence in recent years as the use of arbitration agreements has increased. Though both statutes at issue here are approaching their centennial anniversaries, there was relatively little litigation on their interplay until recent years. In 2012, the Obama-era National Labor Relations Board (NLRB) held that the NLRA invalidates any employer-imposed contracts that bar group litigation, including arbitration agreements that limit employees to individual actions. Subsequently, the Sixth, Seventh, and Ninth Circuits deferred to the NLRB’s interpretation, while the Second, Fifth, and Eighth Circuits rejected it.

Last year, the Supreme Court granted certiorari to resolve the circuit split. In each of the three cases that were consolidated, employees brought Fair Labor Standards Act (FLSA) class or collective action claims in federal court. The employees argued that the NLRA renders class action waivers illegal and that their individual arbitration agreements were therefore unenforceable. The NLRB supported the employees’ positions. But in a move that caused the court to describe the executive branch as “of two minds,” the Solicitor General argued against the NLRB’s position and in favor of the employers’ interpretation of the FAA.

In the end, Justice Gorsuch’s opinion took a decidedly textual approach, as is his habit.  The majority found that the FAA explicitly requires courts to enforce arbitration agreements according to their terms. The employees sought refuge in a savings clause that allows courts to refuse to enforce arbitration agreements where grounds “exist at law or in equity for the revocation of any contract.” The employees argued that the arbitration agreements were illegal under the NLRA, a proper ground for revocation of a contract. But the Court returned to its 2011 decision in AT&T Mobility v. Concepcion, where it found that the FAA savings clause does not apply to defenses that can apply only to arbitration. Because the employees sought to attack only the individualized nature of arbitration and that characteristic is one of arbitration’s fundamental attributes, the savings clause did not apply.

The majority also rejected an argument that the NLRA overrides the FAA’s presumption in favor of arbitration. The employees argued that Section 7 of the NLRA guarantees workers the right to take collective action. But the majority found that “Section 7 focuses on the right to organize unions and bargain collectively.” Because the statute was silent on arbitration and class actions, the Court found that the NLRA could not overcome the FAA’s strong preference for enforcing arbitration provisions. Instead, Justice Gorsuch wrote, the FAA and NLRA should be construed in harmony, with the NLRA protecting collective bargaining and the FAA protecting arbitration agreements.

The Court further noted that it would be inappropriate to apply Chevron deference to the NLRB’s interpretation of the NLRA as invalidating arbitration clauses. After applying the interpretative canons, the Court was not left with any ambiguity in the statutory language itself. The Court also noted that the NLRB’s interpretation advanced its own statutory mission at the expense of another statute in which it has no expertise. As such, courts were not required to defer to the NLRB.

Writing for the four-person dissent, Justice Ginsburg described the decision as “egregiously wrong,” lamenting that the majority “subordinates employee-protective legislation to the Arbitration Act.” Justice Ginsburg’s dissent claimed that class actions are the only way that employees can afford to litigate claims for small underpayments. Though the majority found that the NLRB’s protection for “concerted activities . . . for the purpose of mutual aid or protection” was limited by the specific bargaining-related examples that preceded it, the dissent argued that group litigation is consistent with legislative intent. In particular, Justice Ginsburg urged, the NLRB has long held that the NLRA protects employees from employer interference when they bring class actions.

The Court’s decision in this case has been closely watched and is likely to greatly affect the landscape of employment relationships. Of clearest importance, the Court’s decision allows employers to include arbitration agreements waiving class actions in employment contracts without fear of invalidation. In the wake of this decision, we expect employers’ use of such agreements to increase. The Court’s disregard of the NLRB’s purported expertise in this matter may also suggest that litigants could have success in challenging NLRB rulings on procedural, legislative and regulatory issues that are not employment-specific in the future.

But the decision also offers insight into the Court’s broader attitudes towards arbitration and class actions. In the absence of a clear congressional directive, the Court declined to make a policy decision to give employees the unfettered ability to sue their employers in a class setting. In the eyes of the Court, given the simple, clear breadth of the FAA, if any such policy choice is to be made, it must be made explicitly by Congress rather than being implied by Congress or a regulator. This philosophy suggests that had Congress not nullified the CFPB’s proposed anti-class waiver rule for arbitration clauses, the Supreme Court likely would have.

The same philosophy also suggests the answer to a question that the Court has recently decided to hear next year: whether the FAA forecloses a state-law imposition of class procedures into an arbitration agreement that does not clearly, explicitly, and unambiguously provide for any. The Court’s opinion in Epic Systems reinforces our conclusion that the Court is unlikely allow defendants to be forced into class arbitration without clear express consent.