In a July 2011 Securities Litigation Alert, we reported on the Supreme Court's grant of certiorari in Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, to review a ruling by the Ninth Circuit concerning the limitations period applicable to claims, under Section 16(b) of the Securities Exchange Act, for recovery of "short-swing profits." Section 16(b) allows public companies to recover profits that their directors and officers, and certain owners of at least 10 percent of their shares, realize through a purchase and sale of the company's equity securities within a six month period. The statute is prophylactic in nature, requiring disgorgement of short-swing profits without regard to whether the trades actually involved the use of non-public information. Section 16(b) explicitly authorizes the company or a shareholder (if the company fails to take action following a demand) to sue to recover short-swing profits, but provides that "no such suit shall be brought more than two years after the date such profit was realized."
In 2007, the plaintiff in Credit Suisse purported to assert Section 16(b) claims against underwriters that assisted over 50 different companies in conducting public offerings of securities in the late 1990's and 2000. Several of the underwriters argued that the two-year period in Section 16(b) barred plaintiff's claims because the underlying facts all had been disclosed publicly years earlier, in registration statements for the offerings and in complaints from prior related litigation. The Ninth Circuit, citing its decision in Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), disagreed, holding that Section 16(b)'s limitations period is "tolled until the insider discloses his transactions in a Section 16(a) filing," known as a Form 4, "regardless of whether the plaintiff knew or should have known of the conduct at issue."
On March 26, 2012, by an 8-0 vote (Chief Justice John Roberts took no part in the case), the Supreme Court reversed. Credit Suisse Securities (USA) LLC v. Simmonds, 566 U.S. __ (2012). In an opinion by Justice Antonin Scalia, the Court held that, assuming equitable tolling applies at all to the two-year period under Section 16(b), it was error for the Ninth Circuit to have tolled the limitations period until the filing of a Form 4. Justice Scalia reasoned that, had Congress sought to toll the running of the limitations period until the filing of a Form 4, it easily could have provided for this in the statute, but it did not. And even assuming that failure to file a Form 4 triggered equitable tolling for fraudulent concealment, the rule applied by the Ninth Circuit - tolling the limitations period until the filing of a Form 4 regardless of whether the plaintiff knew or should have known of the conduct underlying the claim - was inconsistent with principles of equitable tolling. "It is well established," explained the Court, "that when a limitations period is tolled because of fraudulent concealment of facts, the tolling ceases when those facts are, or should have been, discovered by the plaintiff." The Court pointed out that the Ninth Circuit's rule was inconsistent with the very purpose of statutes of limitations, "to protect defendants against stale or unduly delayed claims," and proceeded to illustrate the inequitable consequences that the Ninth Circuit's rule could produce.
In a footnote the Court similarly rejected the Second Circuit's rule, enunciated in Litzler v. CC Investments, L.D.C., 362 F.3d 203 (2d Cir. 2004) - that the two-year period is tolled until the plaintiff "gets actual notice that a person subject to Section 16(a) has realized specific short-swing profits that are worth pursuing" - as a departure from usual equitable tolling principles.
The Court reported that it was split 4-4 on the broader question of whether the two-year period under Section 16(b) is fixed, so that it cannot be extended on the basis of equitable principles. Apparently, four justices would allow equitable tolling in appropriate circumstances, at least for some period after the plaintiff became aware, or with reasonable diligence should have become aware, of the facts underlying its Section 16(b) claim. An equal number of justices would apparently not allow tolling of the statute in any circumstances. The Court remanded to the lower courts “to consider how the usual rules of equitable tolling apply to the facts of this case,” without, however, attributing precedential value to its decision on this point.
With an even split among the Justices, parties will continue to litigate the availability of equitable tolling in Section 16(b) actions, at least until the Supreme Court takes up the question again. As the Court itself recognized, the application of equitable tolling principles to Section 16(b) claims will involve litigants in "fact-intensive disputes" as to the nature of the information necessary for plaintiffs to make a claim, and when such information is available to the reasonably diligent plaintiff. Given the Court’s rejection of both Whittaker and Litzler, it remains to be seen what standards the lower courts will apply in resolving these disputes.