United States: Supreme Court Decision In Halliburton II Affords Welcome Tool To Defendants

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 overrule Basic 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.1

Prelude

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.2 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 Basic reinforced the notion that Basic might soon be gone, and with it much securities litigation as we know it.3

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.4 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.5

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."6 The question then is: "why not have it at the class certification stage[?]"7The Supreme Court answered that question in Halliburton II, placing the role of expert testimony on price impact at the forefront of class certification proceedings.

The Opinion

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.8 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 not necessarily follow the model of traditional opt-out cases, where a single large investor or group of significant investors takes on a defendant.9

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.10 Such actions are litigated and resolved on an aggregated basis in circumstances where class certification is not appropriate.11 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).

Conclusion

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.

Footnotes

1 This decision comes in the wake of Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011) (the Supreme Court's earlier decision in the same Halliburton lawsuit), and Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013), which limited the tools available to defendants in defeating the certification of a class of investors. We discussed those decisions in April 2013, and predicted the Court's reexamination of the fraud-on-the-market presumption. See Jones Day Commentary, "Securities Litigation Defense Implications from the Supreme Court's Amgen Opinion"(Apr. 2013).

2 The premise and the effect of the fraud-on-the-market theory are well known. In Basic, the Supreme Court held that investors in securities fraud actions may be presumed to have relied on alleged misrepresentations about a company whose stock trades in an efficient market. That classwide presumption of reliance enabled certification of classes of investors, without any showing that each class member actually relied on the allegedly misleading disclosure. If Halliburton II had done away with Basic's fraud-on-the-market theory, issues concerning reliance of individual shareholders on allegedly misleading disclosures would predominate over common issues, marking the end of securities fraud class actions.

3 In a concurring opinion to Amgen, Justice Alito warned that the theory "may rest on a faulty economic premise." 133 S. Ct. at 1204. In their dissent, Justices Thomas, Kennedy, and Scalia called it "questionable." Id. at 1208 n.4. Justice Scalia also said the theory was "invented by the Court" in Basic. Id. at 1204.

4 This position was articulated by amici "Law Professors" including Adam C. Pritchard, the Frances and George Skestos Professor of Law at the University of Michigan Law School, and M. Todd Henderson, Professor of Law at the University of Chicago Law School. The Law Professors' "scholarship and teaching focuses on corporate law and federal securities law" with "an interest in ensuring that the securities laws are interpreted to accurately reflect both current financial economic scholarship and the law's historical underpinnings." (Br. of Law Profs. as Amici Curiae in Supp. of Pet'rs at 1.)

5 An event study is a regression analysis that analyzes the impact of an event, such as a disclosure of negative information, on the price of a stock. Economists frequently use event studies in securities litigation to evaluate market efficiency for purposes of class certification, but they can also be used to determine whether an alleged misstatement was incorporated into the stock price. (Br. of Law Profs. as Amici Curiae in Supp. of Pet'rs at 25-28.)

6 Oral Arg. Tr. at 18:9-11.

7 Oral Arg. Tr. at 18:15-16.

8 Without a meaningful way to rebut the fraud-on-the-market presumption at the class certification stage, 73 percent of securities class actions between 2000 and 2013 were either settled or dismissed before certification; decisions on class certification were reached in only 15 percent of all securities actions filed during the same period. See Dr. Renzo Comolli & Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2013 Full Year Review, NERA Economic Consulting, at 19 (Jan. 21, 2014), available at http://www.nera.com/nera-files/PUB_2013_Year_End_Trends_1.2014.pdf. With new weapons in defendants' arsenal at the class certification stage, these numbers may change.

9 E.g., Mont. Bd. of Invs. v. Pfizer Inc., No. 12-CV-08379 (S.D.N.Y. filed Nov. 15, 2012) (large investors, including the California Public Employees' Retirement System, the California State Teachers' Retirement System, and investment managers on behalf of their funds, opted out of pending securities class action); Schwab S&P 500 Index Fund v. Bank of Am. Corp., No. 1:11-CV-07779 (S.D.N.Y. filed Nov. 1, 2011) (funds managed by Schwab opted out of $2.4 billion class-action settlement with Bank of America to pursue individual claims relating to BofA's acquisition of Merrill Lynch); Cal. State Teachers Ret. Sys. v. Qwest Commc'ns Int'l, Inc., No. 415546 (Cal. Super. Ct. filed Dec. 10, 2002) (opt-out lawsuit eventually settled for $46.5 million in 2007).

10 For example, more than 300 cases relating to Yamaha's "Rhino" side-by-side vehicle were consolidated for pretrial purposes in the Western District of Kentucky. See In re Yamaha Motor Corp. Rhino ATV Prods. Liab. Litig., MDL No. 2016 (W.D. Ky.). Likewise, hundreds of those cases were consolidated for pretrial purposes in Georgia and California state courts. The so-called Engle progeny tobacco cases illustrate the potential numerosity of non-class actions. Since the class was decertified in 2006, thousands of individual lawsuits have been filed in federal and state courts in Florida. More than 100 have gone to trial, and thousands of cases still are pending.

11 This happens through the use of consolidation under Rule 42 of the Federal Rules of Civil Procedure, as well as the multidistrict litigation device under 28 U.S.C. § 1407, such that claims brought by many plaintiffs are combined for pretrial purposes before a single judge, with coordinated or consolidated proceedings on discovery and pretrial motions (including motions to dismiss and motions for summary judgment).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
William S. Freeman
Geoffrey J. Ritts
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

    Disclaimer

    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

    Registration

    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

    Cookies

    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

    Links

    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

    Mail-A-Friend

    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

    Emails

    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

    Security

    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions