The U.S. Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. is not the game changer for securities litigation that some hoped for, but D&O insurers will be keeping a close eye on securities cases to see whether the decision increases defense costs or changes settlement calculations.
In Halliburton, the Supreme Court refused to overturn its decision in Basic Inc. v. Levinson, which held that plaintiffs in securities class actions do not need to prove that the class members actually relied on the alleged misrepresentations at issue. The Court did rule, however, that defendants can now challenge the presumption that the alleged fraud affected share prices at the class certification stage. The ruling does not give defendants a new right as they were free to challenge the “price impact” presumption after class certification through summary judgment or at trial, but it does mean that defendants can mount this challenge earlier. Doing so would increase up-front litigation costs, resulting in self-insured retentions being eroded more quickly and implicating D&O coverage at an earlier point.
Members of the defense bar have already speculated that this change will be a boon to expert witnesses who may be retained at an earlier stage and asked to perform a more wide-ranging analysis. This could make securities litigation more costly as defendants pay for more expert time as well as the related attorney time necessary to present these arguments to the court.
This shift may also have an impact on settlement negotiations. If plaintiffs defeat a defendant’s “price impact” argument at the class certification stage, plaintiffs would presumably have increased leverage as they will have already cleared a key hurdle. This risk may ultimately make defendants shy away from raising the issue at the class certification stage but defendants may still incur the up-front expert costs and attorney time to analyze the issue.
Defense counsel have also speculated there may be a short-term uptick in defense costs as parties wage hard-fought battles in the lower courts regarding exactly what evidence is sufficient to rebut the price impact presumption and what standard of proof applies. While the ultimate impact of Halliburton remains to be seen, D&O insurers will certainly be watching closely given the risk of increased defense costs and changes in settlement value.