The Fifth Circuit Court of Appeals recently provided guidance on class certification related to securities fraud claims. On September 8, 2015, the Fifth Circuit released its opinion in Ludlow et al v. BP, P.L.C. et al, a case stemming from the 2010 Deepwater Horizon oil spill, where plaintiffs alleged BP made misstatements in violation of section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule 10b-5. In that opinion, the Fifth Circuit affirmed the district court in certifying one class of plaintiffs and in refusing to certify another class of plaintiffs based on whether the methodology presented for determining class damages for each class was a “sound methodology” applicable “across the entire class” as required by the Supreme Court’s decision in Comcast Corp. v. Behrend.

The two proposed classes were those claiming damages based on pre-spill misrepresentations by BP (the “Pre-spill Class”) and those claiming damages based on post-spill misrepresentations by BP (the “Post-spill Class”). The Pre-spill Class claimed that BP’s alleged misstatements regarding the efficacy of its safety procedures created an impression that the risk of a catastrophic failure was lower than it actually was and deprived investors of the opportunity to decide whether to invest in light of the heightened risk. The Post-spill Class complained of BP’s misrepresentation as to the magnitude of the spill, even as internal BP estimates showed that the magnitude was much higher than was being publicly disclosed.

The district court refused to certify the Pre-spill Class, but certified the Post-spill Class. The Fifth Circuit affirmed based on its analysis of the class damage models in comparison to Comcast’s requirement that a damage model must be “susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” The Fifth Circuit noted that the Pre-spill Class’s damages theory hinged on a determination that each plaintiff would not have bought BP stock at all were it not for the alleged misrepresentations. The Fifth Circuit explained that this would require an individualized inquiry as some investors would be less risk averse than others and might have still invested, even if in smaller amounts. In light of this, the Pre-spill Class’s damages theory could not provide an adequate measure of class-wide damages under Comcast. In contrast, the Fifth Circuit noted that Post-spill Class’s damages theory was sufficient under Comcast despite BP’s attack that the expert report on which plaintiffs relied said it was “possible” that BP’s stock price would have declined to a specified level if the true spill rate had been released earlier because Comcast requires a “sound” methodology and not certainty.