On March 10, 2014, the U.S. Supreme Court granted certiorari in Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc. The case will address whether the tolling doctrine announced in American Pipe & Construction Co. v. Utah applies to the three-year statute of repose in Section 13 of the Securities Act of 1933. Section 13’s statute of repose provides that “[i]n no event” shall an “action be brought to enforce a liability created under section 11 or section 12(a)(1) more than three years after the security was bona fide offered to the public, or under section 12(a)(2) more than three years after the sale.”1 In American Pipe, the Supreme Court held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.” The American Pipe Court held that allowing the statute of limitations to run during the pendency of a putative class action would “frustrate the principal function of a class action” and “create a multiplicity of activity which Rule 23 was designed to avoid.”

In the IndyMac case, a single lead plaintiff brought purported class claims based on 106 offerings pursuant to three registration statements. The district court dismissed claims arising from offerings in which the lead plaintiff did not purchase securities, holding that the lead plaintiff lacked standing to pursue those claims. Members of the asserted class who purchased in some of the offerings for which lead plaintiff lacked standing sought to intervene to revive those claims. The district court denied the motions to intervene because Section 13’s three-year statute of repose had expired, and the district court declined to apply American Pipe tolling to the statute of repose.

The U.S. Court of Appeals for the Second Circuit affirmed the denial of plaintiffs’ motions to intervene. In so doing, it distinguished between statutes of limitations, which limit the availability of remedies and thus may be subject to “equitable considerations, such as tolling,” and statutes of repose, which “affect the underlying right, not just the remedy, and thus they run without interruption once the necessary triggering event has occurred.” By extinguishing the cause of action, the Second Circuit held, statutes of repose “create a substantive right . . . to be free from liability” once a certain amount of time has passed. The Second Circuit acknowledged that courts have disagreed as to whether American Pipe tolling is “equitable” (i.e., arising from a court’s power to relieve hardships) or “legal” (i.e., based on Rule 23 of the Federal Rules of Civil Procedure, which governs class actions), but determined that it need not resolve that issue. If American Pipe tolling is equitable, it does not apply to Section 13’s statute of repose because the Supreme Court held in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson that equitable tolling does not apply to Section 13. If American Pipe tolling is legal, then it cannot apply to Section 13’s statute of repose because the Rules Enabling Act forbids interpreting Rule 23 to “abridge, enlarge or modify any substantive right,” and the statute of repose creates a substantive right to be free from liability after the repose period ends. The Tenth Circuit has held that American Pipe tolling is legal in nature and does apply to Section 13’s statute of repose, but the parties in that case apparently did not raise the Rules Enabling Act argument that the Second Circuit found dispositive.

The plaintiffs in the IndyMac case argued that if American Pipe tolling does not apply to Section 13’s statute of repose, plaintiffs will be forced to file “protective actions” to preserve their rights in cases in which there is not a decision on class certification before the repose period ends. The Second Circuit noted that, “given the sophisticated, well-counseled litigants” involved in securities class actions, it is “not apparent that such adverse consequences will follow our holding,” but if they do, it is an issue for Congress to address.

The Supreme Court will hear the case during the Term that begins in October 2014.