Statute of Limitations

A substantial portion of the Court’s securities docket has been taken up with interpreting statutes of limitations: three of the fifteen total cases. The first two, both applicable to private rights of action, involved statutes specific to the securities laws. The third had substantially broader implications, applying generally to cases in which the government was seeking a penalty.

Merck & Co. Inc. v. Reynolds

The statute of limitations in Rule 10b-5 cases has a somewhat convoluted history. Given that the Rule 10b-5 cause of action was created by the judiciary, rather than Congress, it is no surprise that Congress did not specify a limitations period for § 10(b) when it passed the Exchange Act in 1934. Filling this gap, the Court borrowed the Exchange Act provision applicable to securities price manipulation claims,[1] which requires that suits be brought “within one year after the discovery of the facts constituting the violation and within three years after such violation.”[2] Congress claimed the issue for itself, however, when it passed the Sarbanes-Oxley Act in 2002, extending the limitations period for § 10(b) actions to “2 years after the discovery of the facts constituting the violation” or “5 years after such violation.”[3]

Merck & Co. Inc. v. Reynolds called on the Roberts Court to interpret both “discovery” and “facts constituting the violation” as used in this provision.[4] On the first point, the Court had to resolve the uncertainty over whether discovery required actual discovery of the facts by the plaintiff, or whether it should extend to facts that a “reasonably diligent plaintiff would have discovered.”[5] On its face, this would not seem to be much of an issue, as the parties (and the Solicitor General) agreed that the latter interpretation was correct.[6] Justice Breyer, however, addressed the issue at length, purportedly “because we cannot answer the question presented without considering whether the parties are right about this matter.” The more plausible explanation, however, is that Justice Scalia (joined by Justice Thomas) wrote separately to argue that discovery meant discovery by the actual plaintiff in the case.[7]

The justices disagreed on the meaning of discovery because of their differing approaches to statutory interpretation. For Breyer and the majority, the reasonably diligent discovery standard made sense because lower courts had followed that approach prior to the passage of the Sarbanes-Oxley Act.[8] “We normally assume that, when Congress enacts statutes, it is aware of relevant judicial precedent.” [6] Congress had codified that precedent.

Scalia rejected the majority’s approach:

Even assuming that Congress intended to incorporate the Circuits’ views—which requires the further unrealistic assumption that a majority of each House knew of and agreed with the Courts of Appeals’ opinions—that would be entirely irrelevant. Congress’s collective intent (if such a thing even exists) cannot trump the text it enacts, and in any event we have no reliable way to ascertain that intent apart from reading the text.[10]

Scalia’s preferred approach: locate the statute of limitations adopted by Congress in the overall statutory scheme. Included in this scheme, in Scalia’s view, were not only the other provisions of the Exchange Act, but also the Securities Act. Bringing the Securities Act into the picture changes the analysis because that law includes an explicit constructive discovery provision in § 13. The limitations period begins to run “after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.”[11] For Scalia, Congress’s inclusion of a constructive discovery provision in the Securities Act’s statute of limitations meant that its omission in the analogous provision of the Exchange Act must be given legal effect, or, in other words, constructive discovery would not trigger the statute of limitations period under the Exchange Act.[12]

One might label Breyer’s approach to statutory interpretation “judicial centric” and Scalia’s “textual centric.” Breyer’s approach can be criticized for making heroic assumptions about the average legislator’s familiarity with the judicial precedents in a given area. If the goal is to further legislative intent, Breyer’s postulated intent seems largely fictional. Worse yet, Breyer does not consistently take the approach throughout the opinion. Confronted with the question of whether “inquiry notice” suffices to begin the running of the statute of limitations, Breyer downplays the importance of lower court decisions adopting that standard because “[w]e cannot reconcile it with the statute, which simply provides that ‘discovery’ is the event that triggers the 2-year limitations period—for all plaintiffs.”[13] Now he’s a textualist? Sometimes the text controls, sometimes prior judicial interpretation controls. Breyer leaves us to guess when to apply which standard.

Scalia candidly concedes that he is uninterested in legislative intent, only in legislative enactments. His textual approach can be criticized for being unrealistic in its assumptions about the competence of legislators to fit together statutory provisions into a coherent whole. The problem becomes more acute when, as is the case with the securities laws, provisions are adopted by different Congresses. In this case, the statute of limitations adopted as part of the Sarbanes-Oxley Act came almost seventy years after the Securities Act. Expecting consistency across that long of a period may simply be wishful thinking on Justice Scalia’s part.

A more fundamental criticism ofJustice Scalia’s approach is that it ignores the reality of securities class-action practice. If the actual plaintiff must “discover ... the facts” to begin the tolling of the statute of limitations, it is hardly a challenge for an enterprising plaintiffs’ attorney to search out plaintiffs until he has found one who has not yet discovered the facts. Scalia’s approach would render the Exchange Act’s statute of limitations a nullity for securities class actions,[14] leaving only the five-year statute of repose. Even the plaintiffs did not endorse Scalia’s approach. What is surprising is that Breyer did not call Scalia on this point. Neither side of the dispute seems interested in—or perhaps aware of—the actual practice of securities litigation, in which plaintiffs are largely figureheads.

The second question at issue in the case—what are the “facts constituting the violation”—provoked no disagreement. The Court’s holding on this point— that scienter is one of the facts constituting the violation[15]—is unremarkable. Breyer’s discussion is notable only in that it invokes the pleading standard from the PSLRA to help interpret the statute of limitations.[16] The PSLRAs pleading standard requires that facts supporting scienter be plead in the complaint. On this issue, Breyer harmonized the different amendments to the Exchange Act, even though they were enacted by different Congresses. He saw no need, however, to harmonize the Exchange Act’s statute of limitations with the one found in the Securities Act. Statutory context apparently matters more within a particular statute than it does across the securities laws as a whole.

  • [1] Lampf v. Gilbertson, 501 U.S. 350 (1991).
  • [2] 15 U.S.C. § 78i(e).
  • [3] Sarbanes-Oxley Act § 804, 116 Stat. 801 (2002), codified at 28 U.S.C. § 1658(b).
  • [4] 1 30 S. Ct. 1784.
  • [5] Id. at 1793.
  • [6] Id.
  • [7] Id. at 1800 (Scalia, J., concurring).
  • [8] Id. at 1795.
  • [9] Id.
  • [10] Id. at 1802 (Scalia, J., concurring).
  • [11] 15 U.S.C. § 77m.
  • [12] Merck, 130 S. Ct. at 1800 (Scalia, J., concurring) (“To interpret § 1658(b)(1) as imposing aconstructive-discovery standard, one must therefore assume, contrary to common sense, that thesame word means two very different things in the same statutory context of limitations periods forsecurities-fraud actions under the 1933 and 1934 Acts.”).
  • [13] Id. at 1798.
  • [14] It would still play a role, however, in individual actions.
  • [15] Merck, 130 S. Ct. at 1796.
  • [16] Id. (citing 15 U.S.C. § 78u-4(b)(2)).
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