On June 6, 2011, the Supreme Court delivered its unanimous opinion in Erica P. John Fund, Inc. v. Halliburton Co.1 Prior to accepting the Halliburton appeal, the Court had agreed to hear only one prior appeal related to what is known as the “loss causation” requirement for claims brought under Section 10(b) of the Securities Exchange Act of 1934.2 The loss causation requirement has become an increasingly important factor in whether shareholders will be able to recover on claims brought under the federal securities laws. Under the loss causation requirement, a plaintiff must plead and prove that any stock price losses were caused by the defendants’ alleged misstatements and not by other factors, such as changed economic circumstances and industry-specific events. By accepting the Halliburton appeal, the Court had the opportunity to provide helpful guidance to the lower courts and litigants on what type of evidence would be sufficient to establish loss causation.
The Supreme Court, however, opted for a different – and more narrow – approach in resolving the Halliburton appeal. The Court’s opinion does not address in any respect how a plaintiff should go about attempting to prove loss causation or what kind of evidence would be relevant to that issue. Indeed, the Supreme Court never even reached the issue of whether the plaintiff in Halliburton had failed to establish loss causation – which was the well-reasoned conclusion reached by two prior courts. Instead, the decision in Halliburton turned on the narrow question whether the Fifth Circuit properly applied another twenty-plus year old opinion from the Supreme Court – Basic Inc. v. Levinson.3 The Supreme Court concluded that the Fifth Circuit had improperly required the plaintiff to satisfy an additional requirement (loss causation) to invoke the rebuttable presumption of reliance described in Basic that, upon a proper showing, is available to investors under the “fraud-on-themarket” theory. The Court ruled that Basic did not contain a loss causation requirement and remanded the case to the Fifth Circuit for further proceedings consistent with the opinion.
Overview of Halliburton Decision. In Halliburton, the Supreme Court was asked to rule on what had long been the rule in the Fifth Circuit – namely, that a plaintiff must prove loss causation by a preponderance of the evidence to certify a class of investors.4 The Fifth Circuit had agreed with the district court that, even though all of the other requirements for class certification had been met in the case, the investor class in Halliburton could not be certified because the plaintiff had failed to prove loss causation.5
The Supreme Court ruled that the Fifth Circuit erred by requiring proof of “the separate element of loss causation to establish that reliance was capable of resolution on a common, classwide basis.”6 For class certification purposes, most plaintiffs seek to rely on the rebuttable presumption of reliance described in Basic – i.e., that all class members are presumed to have relied on public statements about a given company because that information is reflected in the price at which they bought the company’s stock. Class certification, however, must be denied if the presumption of reliance is unavailable to the class because individualized reliance issues will predominate over other issues that class members may have in common.
In Halliburton, the Supreme Court observed that two points were undisputed (1) that a plaintiff “must prove certain things in order to invoke” Basic’s presumption of reliance and (2) that a defendant is entitled to come forward with evidence to attempt to rebut that presumption.7 But the Court concluded that there was no justification in Basic or its logic to read into that opinion the additional requirement of having to prove loss causation in every case where Basic is invoked. The Court noted that the loss causation requirement is not even mentioned in Basic and the Supreme Court has consistently referred to loss causation and reliance (i.e., “transaction causation”) as being separate elements of a Section 10(b) claim.8
The Court also noted that the defendants had essentially conceded on appeal that Basic on its face did not require proof of loss causation, even though they argued that the Fifth Circuit’s conclusion that the class could not be certified could be supported on other grounds.9 The Supreme Court, however, refused to consider these alternatives because it felt constrained to “take the Court of Appeals at its word.”10 The Fifth Circuit had repeatedly stated it was requiring proof of loss causation from the plaintiff and, “[b]ased on those words, the decision below cannot stand.”11 Accordingly, the Supreme Court declined to “address any other question about Basic, its presumption, or how and when it may be rebutted.”12 Any relevant arguments on these points against class certification that had been preserved by defendants could be raised on remand.13
Analysis of the Opinion. Given the narrow nature of the opinion, the Halliburton decision is not expected to impact significantly how class certification issues are litigated in Section 10(b) cases. The Supreme Court expressly reiterated the long-standing rule that defendants are entitled to come forward with evidence to attempt to rebut the presumption of reliance described in Basic. The Court, thus, refused to accept the plaintiff’s invitation to adopt a more restrictive view that could have precluded a defendant from relying on any evidence at class certification that arguably spoke to the merits of the plaintiff’s underlying claim.
It is interesting to note that all of the facts on which the defendants based their loss causation arguments in Halliburton would have also been relevant to the question of whether the plaintiff could invoke Basic’s presumption of reliance and/or whether that presumption could be rebutted. Even though the Supreme Court refused to consider these arguments, the Court made clear that, if adequately preserved, all of those arguments would still be available to defendants on remand. The Supreme Court’s opinion, thus, leaves open the possibility that the same evidence that had previously proven to be successful in Halliburton may still be considered if deemed relevant to a plaintiff’s attempt to rely on Basic.
Moreover, the Halliburton opinion does not suggest that loss causation issues can never be raised by defendants at class certification. Indeed, the opinion supports the view that such issues can be raised if they are relevant to other well-established requirements for class treatment, such as the need for common issues to predominate. The Supreme Court specifically recognized that the starting point for assessing whether common issues predominate is an examination of the mandatory elements of the underlying claim, which, for Section 10(b) claims, includes the requirement of proving loss causation.14 Halliburton stands only for the narrow point that, at class certification, a court cannot require a plaintiff to prove loss causation to invoke Basic.