Everyone has been talking about the recent decision from the US Supreme Court in Halliburton Co v Erica P. John Fund Inc (Halliburton) and its rulings regarding the “fraud on the market” doctrine in US securities class action litigation (previously reported on here and here). In Canada, many are likely wondering about the potential impact of the decision here. However, what this case shows is a deepening divide between the certification process of such actions in the US and Canada. In the US, the process is becoming more difficult for investors, while Canada remains a very pro-certification jurisdiction.
Brief Background – the “Fraud on the Market” Doctrine and the New Barrier imposed in Halliburton
A class action was filed against Halliburton and one of its executives by Erica P. John Fund, as the lead plaintiff, based on allegations that various misrepresentations were made that were designed to inflate the price of Halliburton’s securities in violation of US securities laws. Halliburton subsequently made a number of corrective disclosures which, it is alleged, caused the company’s stock price to drop and investors to lose money.
Investors in the US may recover damages in private securities fraud actions only if they prove they relied on the defendant’s misrepresentation when they decided to buy or sell a company’s securities. The US Supreme Court had previously held, in Basic Inc. v Levinson, 485 U.S. 224 (1988) (Basic), that investors could satisfy the reliance requirement by invoking a presumption that the price of securities traded in an efficient market reflects all public, material information, including material misrepresentations (commonly known as the “fraud on the market” doctrine or theory). Further, that defendants could rebut the presumption at trial by showing the alleged misrepresentation did not actually affect the stock price or had no price impact.
In Halliburton, both the District Court and (on appeal) the Fifth Circuit initially denied the motion for class certification. The USSC vacated their decisions, finding that securities fraud plaintiffs need not prove a causal connection between the alleged misrepresentations and the plaintiffs’ economic losses at the class certification stage in order to invoke the presumption of reliance. On remand, the US Supreme Court again overturned the District Court and Fifth Circuit. This time, the lower courts had certified the class but concluded that Halliburton could only use evidence about price impact to rebut the Basic presumption at trial, and not at the class certification stage. While the US Supreme Court upheld Basic and its presumption, it agreed with Halliburton that defendants must be afforded an opportunity to rebut the presumption of reliance before class certification with evidence of a lack of price impact (if they are able).
Some commentators have mused that this new barrier will create a new battle of experts that will cause securities fraud class actions to become more expensive to litigate. However, what Halliburton does is just change the timing of when the battle occurs (from the merits stage to the pre-certification stage). The impact may, nonetheless, be significant as a potential barrier to certification.
Potential Impact of Halliburton in Certification-friendly Canada
There has been a consistent rejection of the US “fraud on the market” doctrine and the concept of deemed reliance by Canadian courts in regards to common law negligent or fraudulent misrepresentation actions by shareholders, e.g., Kripps v Touche Ross, 1990 CanLII 628 (BCSC), upheld by the BC Court of Appeal on appeal, and Carom v Bre-X Minerals, 998 CanLII 14705 (ONSC). The rejection stemmed from various differences between the laws and class action rules in Canada versus the US. Consequently, certification motions in such cases were often denied due to the overwhelming individual issues, having to prove reliance for each individual investor. (It should be noted that in actions for misrepresentation in the primary or secondary market under provincial securities legislation there has been no need to invoke such doctrines or concepts since securities legislation now expressly allows such actions by investors without regard to reliance.)
But with a desire to allow certification, our courts have forged an alternative path (to the rejected US doctrine) using the concepts of “inferred reliance” and the “efficient market” theory. Essentially, some courts have held that whether or not a person relied on a misrepresentation may be inferred from all the circumstances as a question of fact, allowing certification notwithstanding there is no pleading of individual reliance. So where such securities class actions had previously been refused, some are now being allowed based on these principles, e.g., Mondor v Fisherman, 2001 CanLII 28388 (ONSC), Silver v Imax Corporation, 2011 ONSC 1035 (CanLII),Dobbie v Arctic Glacier Income Fund, 2011 ONSC 25 (CanLII) and Dugal v Manulife Financial Corporation, 2013 ONSC 4083 and 2014 ONSC 1347, denying leave to appeal (Dugal).
There has been some challenge to the use of these concepts, including because they seem to be indistinguishable from the US doctrine, but courts in Canada are still finding a way to certification. Some have chosen to focus more on the question of causation, finding that if causation can be established otherwise, then reliance is not required, e.g., Collette v Great Pacific Management Co, 2004 BCCA 110 at para. 34 and Eaton v. HMS Financial, 2008 ABQB 631 at paras. 90-91. Or, as seen in Green v Canadian Imperial Bank of Commerce, 2014 ONCA 90 (CanLII), where certification was allowed of issues common to misrepresentation claims, other than reliance, in order to significantly advance the claims, with individual trials to be ordered to determine issues of reliance and damages.
Defendants here may still try seek to add a Halliburton-style change to the certification stage – to allow full evidence at that stage to disprove a claim of inferred reliance. However, our Supreme Court’s recent decision in Pro-Sys Consultants Ltd v Microsoft Corporation, 2013 SCC 57 (Pro-Sys) would seem to be a formidable obstacle to such a development. Evidence (mainly expert evidence) has only been allowed at the certification stage in statutory misrepresentation claims to show “what the market knew” (as seen in Dugal) and in indirect purchaser class actions to show commonality of harm or loss, i.e., that the overcharge was passed on to the indirect purchasers, as in Pro-Sys. But such evidence has only being allowed to show there is “some basis in fact” to support the claim, to show that the procedural requirements of class proceedings legislation are met. Canadian courts have expressly rejected the idea that resolving such issues or conflicts between experts should occur at certification instead of at trial.
Therefore, given such developments and the Canadian courts’ overall penchant towards certification, Halliburtondemonstrates a deepening divide between the US and Canada in the approach to certification of these types of securities class actions. The road to certification is getting more difficult for investors in the US, with public issuer defendants now able mount evidentiary challenges at the certification stage, potentially being able to end the action before its really begun. While in Canada, things keep getting easier for investors, with generally no or only very limited consideration of evidence or merits at the certification stage and with courts showing an overall tendency to allow certification and find a way to work out any individual issues as the action proceeds.
Halliburton Co et al v Erica P. John Fund Inc
U.S. Supreme Court, No. 13-317.
Date of Decision: June 23, 2014