Brief Fact Summary. Plaintiffs purchased units in partnerships for federal income tax benefits, which were ultimately disallowed by the Internal Revenue Service (IRS). Defendants were a law firm that handled the organization of the partnerships and drafted opinion letters regarding the tax consequences of joining the partnerships. The partnerships failed and Plaintiffs sued Defendant pursuant to Section 10(b) of the Securities and Exchange Act of 1934 (Act) and Securities and Exchange Commission (SEC) Rule 10b-5.
Synopsis of Rule of Law. When a private cause of action is implied from the government’s cause of action pursuant to a federal statute, the source of the statute of limitations for the private cause of action is the statute of origin. If there is no statute of limitations applicable, then the court may rely on state law for the limitations period.
Given our longstanding practice of borrowing state law, and the congressional awareness of this practice, we can generally assume that Congress intends by its silence that we borrow state law.View Full Point of Law
Issue. Is fraud based on Oregon state law the most analogous cause of action to actions brought pursuant to Section 10(b) of the 1934 Securities Act and SEC Rule 10b-5, thus making the two year statute of limitations applicable?
Held. No. Reversed. If no federal statute of limitations is provided for in a federal cause of action, the Court must apply the state statute of limitations for the most analogous cause of action except when applying such a limitation would frustrate the policies behind the federal statute. When there should be a uniform statute of limitations, the Court must determine what source the limitations should come from and what category of claims should be used , i.e., state or federal and types of claims analogous to the federal law. The focus should be on whether the application is predictable and whether it is in the interest of “judicial economy.” If applying state statutes of limitations would promote forum shopping, the source should be federal law. If a state claim is a “closer fit” to the federal claim at issue, the Court should use the state claim’s limitations period even if there is a federal claim that is close to the federal claim at issue but not as close as the state claim. Claims under Section 10(b) of the 1934 Act are implied causes of action. In this situation, the statute from which the cause of action originated is the source to look to for the limitations period. When there is no analogous limitations period, only then can the Court look to state law. The 1933 and 1934 Acts both provide for a limitations period in which the SEC may bring suit for almost all causes of action listed. The suit must be brought 1 year after discovery of the misrepresentations not to exceed 3 years after the statute of limitations. Therefore, the 1 year/3 year statute of limitations period should apply to Section 10(b) and Rule 10b-5 causes of action. The 5 year statute of limitations in Section 20A of the 1934 Act only applies to insider trading.
Dissent. Justice O’Connor: The 3 year statute of repose should not apply to private causes of action under Section 10(b) and Rule 10b-5. In addition, the Court should not have made its decision apply to this case because Plaintiffs and the lower courts relied on substantial Ninth Circuit precedent that the state statute of limitations would apply to the case. Justice Kennedy: The majority’s decision should not apply to Plaintiffs in this case. In addition, the 3 year statute of repose should not apply to these causes of action. This would impose an absolute bar on a claim after 3 years even if fraud is discovered. In common law fraud claims there is more time to discover fraud. The point of the private causes of action under Section 10(b) and Rule 10b-5 are to provide investors the opportunity to be compensated for fraud. This hinders the investors’ ability by imposing such a statute of repose. The Court has equitable remedies such as laches in the event the time of discovery is well past the time of the actual fraud. Therefore, the statute of repose should not be applicable.
Discussion. The majority’s opinion articulates the rules applicable when determining the statute of limitations on a federal cause of action when Congress has not provided one. Private actions under Section 10(b) and Rule 10b-5 are unique in that they are “implied” from the statute. Therefore, in the interest of uniformity, the Court picks the statute of limitations applicable to the most of analogous claims under the SEC Act of 1934.