Supreme Court Limits Successive Securities Class Action Filings, but Risks Remain
In a unanimous decision, the US Supreme Court this week held that following denial of class certification, an unnamed class member is barred from commencing a new class action beyond the applicable statute of limitations. The 9-0 decision in China Agritech, Inc. v. Resh, et al will undoubtedly allow many companies to breathe a sigh of relief, but it doesn’t eliminate their securities class action risk.
The Statute of Limitations and Tolling
Securities class action filings are subject to a statute of limitations: plaintiffs are required to file litigation within a specific number of years after discovery of a securities law violation. If the plaintiff files after the statute of limitations expires, a court will dismiss the lawsuit as time-barred; plaintiffs that are not diligent, in essence, lose their right to relief.
The statute of limitations, however, can be equitably tolled — in other words, suspended — while a class action is pending. If a statute of limitations is equitably tolled and a class action is later dismissed or the class is not certified, individual class members will not be time-barred and can still assert their individual claims. In China Agritech, the Supreme Court ruled that equitable tolling does not apply to subsequent class action claims. As a result, plaintiffs must file class action claims within the applicable statute of limitations or face dismissal.
Had the court not ruled in this manner, companies could have faced successive class action lawsuits well beyond the statute of limitations. The court’s ruling, therefore, provides companies with some comfort that once the statute of limitations has expired, plaintiffs cannot commence new class actions alleging the same conduct. Putative class members can still file individual claims, but a company’s financial exposure in individual claims will be far less than in a class action.
Securities Class Action Risk Persists
Despite the favorable ruling, companies still face a significant risk of a securities class action lawsuit. The percentage of public companies forced to defend securities class actions has increased in recent years, with the number of lawsuits reaching record levels in 2017. Plaintiffs’ attorneys have shown a willingness to pursue claims against both large and small companies in all industries. And while many of these cases result in dismissals, the financial cost to defend them can be significant.
Directors and officers should therefore consult with their insurance advisors to ensure they are adequately protected if confronted with a securities class action. Directors and officers liability (D&O) insurance can provide financial protection to both individuals and corporations, including coverage for defense and settlement costs. Your insurance advisors can help ensure your D&O program has appropriate policy limits and provides broad coverage for securities class actions.
The Supreme Court’s China Agritech decision is welcome news for businesses, but it doesn’t mean the risk of a securities class action suit is gone. Talk to your insurance advisors today about your potential class action risk and how you can build a D&O insurance program that protects your organization and senior leaders.