On June 23, the United States Supreme Court issued its highly anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 ("Halliburton II"), ruling that defendants may defeat class certification in securities fraud cases if they show that alleged misrepresentations did not have an impact on the price of a stock.
Although the business community had hoped the Court would overruleBasic Inc. v. Levinson, 485 U.S. 224 (1988), and the presumption of reliance it created, the Court did not go so far. The majority, over the objection of three concurring justices, found the presumption of reliance too strong a federal securities law precedent for such a drastic step. Nor did the Court put the burden on plaintiffs to prove price impact to gain class certification, as many had hoped. All of that said, however, the Court’s decision may lead to more frequent denials of class certification since the Court expressly held that defendants must be given an opportunity to rebut the presumption of reliance, by showing a lack of price impact, before a class can be certified.
While not a sea change in the law, Halliburton II should make it more difficult for plaintiffs to obtain class certification and the settlement leverage that comes with it. The decision adds a valuable tool for the defense of securities fraud class action cases.
The petitioners asked the Supreme Court to overrule Basic, which established the fraud-on-the-market theory as a substitute for individual reliance in securities class actions. When the Court accepted the case, some observers predicted that the Court would take the opportunity to eviscerate 25 years of securities law jurisprudence and make securities class actions a virtual impossibility. The Court’s own negative comments in prior decisions about the premise of Basicreinforced the notion that Basic might soon be gone, and with it much securities litigation as we know it.
Nevertheless, at oral argument on March 5, the Court appeared reluctant to discard the presumption of reliance. Much of the argument was devoted to an alternative—characterized as the "midway position"—that would not require the Court to overrule Basic. The midway position sought to shift the focus from a market’s overall efficiency to the question of whether a particular misrepresentation caused a market distortion, which question would be answered using event studies at the class certification stage.
During argument, Justice Kennedy previewed that, even under the existing Basic framework, "at the merits stage[,] there has to be something that looks very much like an event study." The question then is: "why not have it at the class certification stage[?]" The Supreme Court answered that question in Halliburton II, placing the role of expert testimony on price impact at the forefront of class certification proceedings.
Though initial assessment of the Supreme Court’s opinion may suggest that the plaintiffs’ bar essentially won this round, the fact is that Halliburton II did their cause some damage. While the Court declined both to overturn Basic and "to effectively jettison half of it by revising the prerequisites for invoking it" (Op. at 18), it expressly held that defendants have the right to challenge the presumption of reliance much earlier in the litigation than many courts previously had allowed.
Indeed, the Court recognized defendants’ ability to "rebut the presumption of reliance with evidence of a lack of price impact, not only at the merits stage … but also before class certification." (Id. at 16.) The Court noted:
While Basic allows plaintiffs to establish [reliance] indirectly, it does not require courts to ignore a defendant’s direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock’s market price and, consequently, that the Basic presumption does not apply.
(Id. at 21.) As a result, "defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock." (Id. at 23.)
What Halliburton II Might Mean for Securities Litigation
Securities litigation will not vanish in the post-Halliburton II world, but it remains to be seen what impact Halliburton II ultimately will have.
At a minimum, we expect that defendants will increasingly be motivated to devote significant efforts—and resources—to opposing class certification, now that the Court has explicitly approved the use of event studies. After Halliburton II, we expect that plaintiffs still may be able to obtain class certification in some percentage of securities cases. But a not-insignificant number of securities cases involve "noisy" disclosure patterns or non-firm-specific factors that affected the stock price, and, in those situations, plaintiffs should have more difficulty obtaining class certification under the new Halliburton II framework.
Possibilities for "Non-Class" Actions
For those cases where defendants successfully defeat certification through the use of event studies or where plaintiffs perceive a risk to their ability to rely on a presumption of reliance, the plaintiffs’ bar may pursue different litigation strategies. In cases where class certification is problematic because defendants will be able to show an absence of price impact, plaintiffs may turn to devices other than the prototypical § 10(b)/Rule 10b-5 class action to pursue a recovery. And they may notnecessarily follow the model of traditional opt-out cases, where a single large investor or group of significant investors takes on a defendant.
Instead, those cases may take on characteristics of mass-tort litigation, where claims are litigated on an aggregated or "mass" basis even if class certification is not available. In cases where class certification has been (or is likely to be) denied, plaintiffs’ lawyers, relying on their "inventories" of plaintiffs, may file non-class-action lawsuits on behalf of individual plaintiffs or groups of plaintiffs, and seek to litigate those claims on a coordinated or consolidated basis, without class certification, as is regularly done in the product liability and toxic tort contexts.Such actions are litigated and resolved on an aggregated basis in circumstances where class certification is not appropriate. Securities litigation plaintiffs may set out on this "road less traveled" after considering its impact not only on issues of case management but also on discovery (e.g., implications of the PSLRA stay), pleadings (e.g., use of a master complaint and broad applicability of dispositive motion rulings), and settlement (e.g., considerations of court approval; certainty associated with damages calculations).
In the short term, the likely impact of Halliburton II will be seen most clearly in defendants’ increased willingness and ability to fight class certification in securities fraud actions, despite the increased expense associated with that fight. Over the long term, however, and as to cases where defendants can mount a serious challenge on price impact, plaintiffs may seek alternate, non-class means of advancing their claims. Potential defendants, therefore, should remain poised to challenge plaintiffs who bring specious claims, whether on a class, mass, or individual basis, with all the available tools, including the newest one offered by Halliburton II.