Opinion
MDL No. 1500 (SWK), 05 Civ. 5748 (SWK).
May 23, 2007
OPINION AND ORDER
On May 11, 2005, plaintiff Kenneth G. Puttick ("Puttick") filed this lawsuit in the United States District Court for the Southern District of Florida, alleging that America Online, Inc. ("AOL"), AOL Time Warner, Inc. ("AOLTW"), and Time Warner, Inc. ("Time Warner") violated several provisions of the federal securities laws between 1999 and 2002. Shortly thereafter, Puttick's action was transferred to this Court by the Judicial Panel on Multidistrict Litigation ("JPML"). The defendants now move to dismiss the complaint, arguing, inter alia, that the plaintiff's claims are time-barred. For the reasons that follow, the complaint is dismissed for failure to comply with the statute of limitations.
The defendants also argue that the allegations of the complaint are immaterial, and that the plaintiff fails to adequately plead loss causation. The Court declines to consider these alternative theories in light of its conclusion that the plaintiff's claims must be dismissed for failure to comply with the statute of limitations.
I. BACKGROUND
This lawsuit is one of many securities actions filed following a year-and-a-half long decline in the share price of AOLTW stock after AOL and Time Warner completed their merger in January 2001. Familiarity with the general context of the securities class action litigation following the AOLTW merger, and the allegations of misconduct underlying that litigation, is presumed. See, e.g.,In re AOL Time Warner, Inc. Sec. "ERISA" Litig. ("In re AOL Time Warner I"), 381 F. Supp. 2d 192 (S.D.N.Y. 2004) (partially granting motion to dismiss in the securities class action litigation); In re AOL Time Warner, Inc. Sec. "ERISA" Litig. ("In re AOL Time Warner II"), No. MDL 1500, 02 Civ. 5575 (SWK), 2006 WL 903236 (S.D.N.Y. Apr. 6, 2006) (approving settlement of the securities class action litigation).
Puttick filed his complaint in the United States District Court for the Southern District of Florida on May 11, 2005. Shortly thereafter, the JPML recognized the complaint as related to the securities class action litigation pending in this Court, and transferred it hereto. On October 23, 2006, Puttick filed an amended complaint, alleging that the defendants violated section 11 of the Securities Act of 1933, sections 10(b) and 14(a) of the Securities Exchange Act of 1934, and related provisions promulgated thereunder. (Am. Compl. ¶¶ 99-115.) Each of these claims is based on alleged misstatements filed "with the SEC from December 1998 through June 2002." (Am. Compl. ¶ 19.) Puttick's allegations with respect to the defendants' wrongdoing do not extend beyond those addressed in the class action litigation. The defendants now move to dismiss the complaint in its entirety for failure to comply with the statute of limitations.
II. DISCUSSION
The central issue posed by this motion is whether the plaintiff, who filed his complaint nearly three years after the related securities class action litigation was initiated, but prior to a decision on class certification, is entitled to benefit from the tolling rule first announced in American Pipe Constr. Co. v. Utah, 414 U.S. 538 (1974). Prior to considering the applicability of that rule, however, the Court briefly considers Puttick's contention that he was not placed on inquiry notice of the defendants' alleged fraud until October 22, 2003, in which case the filing of his section 10(b) claim on May 11, 2005, would satisfy the statute of limitations without reliance on tolling.
The Sarbanes-Oxley Act of 2002 extended the statute of limitations for securities fraud claims to the earlier of two years "after the discovery of the facts constituting the violation" or five years "after such violation." 28 U.S.C. § 1658(b). "The two-year limitations period commences after the plaintiff `obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge.'" In re AOL Time Warner I, 381 F. Supp. 2d at 209 (quoting Kahn v. Kohlberg, Kravis, Roberts Co., 970 F.2d 1030, 1042 (2d Cir. 1992)). The latter of these is commonly referred to as inquiry notice. Id.
At the motion to dismiss stage of the class action litigation referred to above, the Court concluded that the plaintiffs were on inquiry notice of the alleged fraud as of July 18, 2002, the date on which the Washington Post "ran the first of two articles . . . which reported that AOLTW and AOL artificially inflated AOL's advertising revenue." Id. at 211. The Court also noted that the Securities and Exchange Commission and the Department of Justice commenced investigations into AOLTW just weeks after the publication of those articles and that, by August 14, 2002, the company disclosed that it may have overstated its revenues. Id. Furthermore, dozens of securities fraud complaints based on the alleged misconduct were filed in the summer and fall of 2002, including, on September 16, 2002, the class action complaint by which the plaintiff seeks to have the statute of limitations tolled. See id. at 207. Clearly, in light of this substantial public record, Puttick was on inquiry notice of the alleged fraud well over two years before he filed his suit on May 11, 2005; thus, none of his claims are timely absent tolling of the statute of limitations.
In American Pipe, the Court considered whether parties were entitled to intervene in a lawsuit following the denial of class certification, despite the fact that the statute of limitations had run as to all of the parties seeking leave to intervene. The Court held that "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." American Pipe, 414 U.S. at 553. This rule was later extended when the Supreme Court considered whether the tolling rule "permits all members of the putative class to file individual actions in the event that class certification is denied." Crown, Cork Seal Co. v. Parker, 462 U.S. 345, 346-47 (1983). The Court held that the statute is tolled "until class certification is denied. At that point, class members may choose to file their own suits or to intervene as plaintiffs in the pending action." Id. at 354. The language and factual context of American Pipe and Crown, Cork solely contemplate tolling in cases where litigants attempt to intervene or file individual lawsuits after the class certification stage. Therefore, the lower courts have been left to consider whether a plaintiff that seeks access to the courts before the class certification stage is also entitled to benefit from tolling.
The majority of courts to address this issue have concluded that the policy underlying class action tolling militates against applying the tolling rule prior to the class certification stage.See Fezzani v. Bear, Stearns Co., 384 F. Supp. 2d 618, 632-33 (S.D.N.Y. 2004); Calvello v. Elec. Data Sys., No. 00 Civ. 800, 2004 WL 941809, at *3-*5 (W.D.N.Y. Apr. 15, 2004); In re Worldcom, Inc. Sec. Litig., 294 F. Supp. 2d 431, 450-453 (S.D.N.Y. 2003); In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F. Supp. 2d 188, 220-21 (E.D.N.Y. 2003); Prohaska v. Sofamor, S.N.C., 138 F. Supp. 2d 422, 432-33 (W.D.N.Y. 2001);Primavera Familienstifung v. Askin, 130 F. Supp. 2d 450, 513-14 (S.D.N.Y. 2001), modified, 137 F. Supp. 2d 438 (S.D.N.Y. 2001);Wahad v. City of New York, No. 75 Civ. 6203 (AKH), 1999 WL 608772, at *5-*6 (S.D.N.Y. Aug. 12, 1999); see also Wyser-Pratte Mgmt. Co. v. Telxon Corp., 413 F.3d 553, 568-69 (6th Cir. 2005);Glater v. Eli Lilly Co., 712 F.2d 735, 739 (1st Cir. 1983); In re Enron Corp. Sec., Derivative "ERISA" Litig., 465 F. Supp. 2d 687, 730 (S.D. Tex. 2006); Irrer v. Milacron, Inc., No. 04-72898, 2006 WL 2669197, at *7 (E.D. Mich. Sept. 18, 2006); Kozlowski v. Sheahan, No. Civ.A. 05 C 5593, 2005 WL 3436394, at *3 (N.D. Ill. Dec. 12, 2005); Shriners Hosps. For Children v. Qwest Commc'ns Int'l Inc., No. 04-CV-0781-REB-CBS, 2005 WL 2350569, at *5 (D. Colo. Sept. 23, 2005); Shaffer v. Combined Ins. Co. of Am., No. 02 C 1774, 2003 WL 22715818, at *3 (N.D. Ill. Nov. 18, 2003); Chazen v. Deloitte Touche, L.L.P., 247 F. Supp. 2d 1259, 1271-72 (N.D. Ala. 2003), rev'd on other grounds, 88 Fed. Appx. 390 (11th Cir. Dec. 12, 2003); Chinn v. Giant Food, Inc., 100 F. Supp. 2d 331, 334-35 (D. Md. 2000); Rahr v. Grant Thornton LLP, 142 F. Supp. 2d 793, 799-800 (N.D. Tex. 2000); In re Brand Name Prescription Drugs Antitrust Litig., No. 94 C 897, MDL 997, 1998 WL 474146, at *7-*8 (N.D. Ill. Aug. 6, 1998); Stutz v. Minn. Mining Mfg. Co., 947 F. Supp. 399, 403-04 (S.D. Ind. 1996); Chemco, Inc. v. Stone, McGuire Benjamin, No. 91 C 5041, 1992 WL 188417, at *2 (N.D. Ill. July 29, 1992);Pulley v. Burlington N., Inc., 568 F. Supp. 1177, 1179-80 (D. Minn. 1983); Wachovia Bank Trust Co. v. Nat'l Student Mktg. Corp., 461 F. Supp. 999, 1011-12 (D.D.C. 1978), rev'd on other grounds, 650 F.2d 342, 346 n. 7 (D.C. Cir. 1980). But see Schimmer v. State Farm Mut. Auto. Ins. Co., No. 05-cv-02513-MSK, 2006 WL 2361810, at *5-*6 (D. Colo. Aug. 15, 2006); Lehman v. United Parcel Serv., 443 F. Supp. 2d 1146, 1148-52 (W.D. Mo. 2006);Official Committee of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 277 B.R. 20, 30-33 (S.D.N.Y. 2002); Rochford v. Joyce, 755 F. Supp. 1423, 1428 (N.D. Ill. 1990); Shannon v. Hess Oil Virgin Islands Corp., 100 F.R.D. 327, 333 (D.V.I. 1983); White v. Sims, 470 So. 2d 1191, 1193 (Ala. 1985). Although not bound by the majority position here, the Court finds much of the reasoning for that position persuasive and joins those courts in holding that a plaintiff filing an individual action may not benefit from class action tolling if he files suit prior to a decision on class certification.
The class action tolling rule is primarily concerned with effectuating the "principal purposes of the class action procedure — promotion of efficiency and economy of litigation."Crown, Cork, 462 U.S. at 349 (citing American Pipe, 414 U.S. at 553). In Crown, Cork, the Court expressed concern that plaintiffs who are fearful "that class certification may be denied" would be incentivized to file separate actions "prior to the expiration of [their] own period[s] of limitations," thereby generating "a needless multiplicity of actions — precisely the situation that Federal Rule of Civil Procedure 23 and the tolling rule ofAmerican Pipe were designed to avoid." Id. at 350-51. It stands to reason that the Supreme Court did not create a tolling rule that benefits a plaintiff who not only fails to file an individual suit prior to the expiration of his own period of limitations, but then files his action prior to the class certification stage, thereby engendering the very multiplicity of actions which the rule was designed to avoid. American Pipe's discussion of the class action procedure's operation reinforces this conclusion. In that case, the Court recognized that a class action is "a truly representative suit designed to avoid, rather than encourage, unnecessary filing of repetitious papers and motions." 414 U.S. at 550. The Court further noted that the tolling rule promotes Rule 23 by discouraging a "multiplicity of activity" 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)). Tolling the statute of limitations for putative class members satisfies the "purpose of the limitation provision as to all those who might subsequently participate in the suit." Id. at 551; cf. Shannon, 100 F.R.D. at 333 (permitting pre-certification intervention "as a legitimate attempt to strengthen the adequacy of representation of the contemplated class and to otherwise comply with . . . Rule 23"). Therefore, as originally conceived, the tolling rule focuses on routing litigation through the class action mechanism, rather than providing a procedural backdoor through which plaintiffs who have slept on their rights may pursue individual actions before a pending class action reaches the critical stage of certification.
In this context, Puttick's contention that he "desire[d] to expeditiously pursue his claims" (Pl.'s Opp'n Br. 5) is belied by his failure to file a complaint until nearly three years after he alleges that the defendants' misconduct concluded and the class action litigation in this Court was filed. Rule 23 does not provide class action representation and the attendant benefit of the tolling rule to those plaintiffs who do not wait for the class action litigation to reach a critical stage, namely class certification or dismissal of the class altogether. See Fezzani, 384 F. Supp. 2d at 632-33 (conditioning plaintiffs' entitlement to the benefit of tolling on the "concomitant burden" of putting "their faith in the class representatives to adjudicate their rights"); cf. In re Worldcom, 294 F. Supp. 2d at 453 ("Plaintiffs who choose, as is their right, to pursue separate litigation may not enjoy the benefits of that separate litigation without bearing its burdens. One of the burdens plaintiffs bear is the obligation to commence their actions within the applicable statute of limitations."). The tolling rule simply does not permit a plaintiff to reject the class action mechanism prior to class certification so that he may "expeditiously pursue his claims," while relying on the class action mechanism in order to preserve the timeliness of his individual action. If a plaintiff wishes to litigate his claims independently of parallel class action litigation prior to a decision on certification, he is required to comply with the statute of limitations set forth by Congress.
Those courts concluding that the tolling rule also protects plaintiffs filing individual actions prior to the class certification stage emphasize two distinct rationales: (1) that pre-certification tolling is consistent with the statute of limitations because the class action has put the defendants on notice of the allegations against them, see Lehman, 443 F. Supp. 2d at 1150-51; Official Committee, 277 B.R. at 32; and (2) thatAmerican Pipe created a legal, rather than equitable, rule because it does not take into account a plaintiff's reliance on, or awareness of, a class action's pendency, see Schimmer, 2006 WL 2361810, at *6; Official Committee, 277 B.R. at 31-32; White, 470 So. 2d at 1193. Although both of these considerations inform the class action tolling doctrine, neither of them sufficiently outweighs the fundamental policy interests on which the tolling doctrine rests so as to persuade the Court to reach a different conclusion.
In applying the American Pipe tolling rule to a state statute of limitations, the Seventh Circuit also recognized that the rule does not hinge on reliance, and further opined that an interpretation of the rule like the one adopted here "would set a trap for the unwary and turn reasonable precautions (such as filing standby suits just in case class certification is denied) against class members." Hemenway v. Peabody Coal Co., 159 F.3d 255, 265 (7th Cir. 1998). Yet this interpretation creates no greater trap than naturally inheres in statutes of limitation. Further, it is no great burden to require purportedly cautious class members to either file an individual suit within the explicit statute of limitations, or heed American Pipe and Crown, Cork's reasoning by forbearing from suit until the court has had occasion to rule upon the suitability of the class action mechanism for the contemplated litigation. Rather than "abbreviat[ing] the period of limitations," Hemenway, 159 F.3d at 266, such a rule simply bars plaintiffs from abusing a doctrine that was intended to promote efficiency and economy of litigation.
In creating the class action tolling rule, "the Supreme Court sought to afford class members greater flexibility following the denial of class certification while remaining ever vigilant of defendants' need to be put on notice of adverse claims." Korwek v. Hunt, 827 F.2d 874, 877 (2d Cir. 1987). Yet the Court's concern with placing defendants on notice of adverse claims does not overshadow the primary purposes of the tolling rule; rather, the tolling "rule is in no way inconsistent with" the operation of, and policies underlying, limitations periods, including providing notice to defendants. American Pipe, 414 U.S. at 554. "American Pipe and Crown, Cork represent a careful balancing of the interests of plaintiffs, defendants, and the court system. Flexibility, notice, and efficiency are the watchwords of these opinions." Korwek, 827 F.2d at 879. Allowing individual plaintiffs to take advantage of pre-certification tolling solely because defendants have sufficient notice of the claims against them realizes that single policy goal at the expense of the other goals the tolling rule seeks to promote. As discussed above, those other goals are sufficiently weighty to militate against a rule that would permit untimely individual actions filed before the class certification stage to benefit from tolling.
Nor does the Supreme Court's failure to append a reliance or awareness requirement to the tolling rule indicate that plaintiffs who file individual suits prior to class certification are entitled to benefit from the tolling rule. Although the tolling rule applies without regard to whether a plaintiff relied on, or was aware of, a class action in forbearing from suit, the Supreme Court was primarily concerned with ensuring that unwary class members were not barred from "class action representation" by their failure to timely intervene. American Pipe, 414 U.S. at 551-52 n. 21. This concern is amply and reasonably addressed by a rule providing tolling to those filing suit following class certification, without regard to reliance. But it does not provide a basis for interpreting American Pipe to create an inherently contradictory rule that would permit plaintiffs to "frustrate the principal function of a class suit," id. at 551, by flooding the courts with untimely individual suits before the contours of the class action have been defined and the economies of the class action mechanism realized. Thus, that some courts have concluded that the tolling rule is a legal, rather than equitable, rule because it does not require courts to consider a plaintiff's reliance or awareness fails to persuade the Court that tolling is available to plaintiffs filing individual suits prior to class certification. One can recognize that the tolling rule is a legal doctrine, yet conclude that the rule only protects individual suits filed after class certification. The issue is one of line-drawing with respect to the scope of the rule, rather than one of its doctrinal classification.
In summary, the Court declines to adopt an interpretation of the tolling rule that would permit litigants to take advantage of ongoing class action litigation prior to the certification stage solely to the extent necessary to avoid the statute of limitations, while rejecting the class action mechanism for all other purposes. Puttick is not entitled to tolling of the statute of limitations, and therefore his complaint must be dismissed as time-barred.
III. CONCLUSION
For the reasons stated above, the defendants' motion to dismiss is granted. The Clerk of Court is directed to enter judgment for the defendants dismissing the plaintiff's complaint and closing this case.
SO ORDERED.