Toward a Just Measure of Repose: The Statute of Limitations for Securities Fraud

Abstract

Statutes of limitations have been part of the architecture of civil litigation for centuries. They are designed to mitigate the risk that evidence of meritorious claims will become stale and also to relieve those who might be exposed to such claims from unending uncertainty about whether they will be brought. The “stale evidence” rationale is rooted in the premise that resolution of claims on their merits is more likely if the evidence, including testimony based on recall, is produced closer in time to the occurrence that gives rise to the claim. The “litigation uncertainty” rationale is based on two related propositions: (1) a party who is uncertain about whether it will be sued is more likely to be distracted by the threat of litigation, and thus less likely to devote resources to productive purposes; and (2) at some point in time, it is simply unjust to subject a party to the sword of Damocles - the lingering possibility that litigation could be brought at any moment. These rationales are invariably balanced against allowing potential plaintiffs sufficient time to discover and file meritorious claims.

This delicate balance is manifest in the judicial and congressional effort to fashion a statute of limitations period for securities fraud claims. The Supreme Court in Merck & Co. v. Reynolds recently attempted to strike that balance in its interpretation of the statute of limitations for securities fraud claims under § 10(b) and Rule 10b-5. But in this Article, we show that the Court has failed. Merck presents a pleading trap for victims of securities fraud that will preclude the adjudication of meritorious claims. Moreover, the Supreme Court’s Merck decision exemplifies a much more serious problem with the entire limitations regime for securities fraud. This Article demonstrates that the discovery provision in that regime should be discarded for a singular statute of repose. The discovery provision unnecessarily precludes meritorious claims without providing any more support for the twin rationales beyond what is already provided by a statute of repose alone. The repose provision by itself reduces the use of stale evidence and litigation uncertainty, and it does not unnecessarily preclude meritorious claims. In this sense, our proposal bucks the trend of scholarship addressing the statute of limitations that advocates eliminating limitations periods entirely. We find that insights from behavioral economics and practical realities of market activity justify some measure of repose. Thus, this Article advocates abolishing the discovery provision in the statute of limitations but keeping the statute of repose.