Things keep getting tougher for class action plaintiffs. You may recall that the Delaware Supreme Court recently held that fee-shifting provisions in a corporation’s bylaws are facially valid and enforceable against stockholder plaintiffs under Delaware corporate law. (See this Doug’s Note.) Now comes the U.S. Supreme Court’s decision in Halliburton v. Erica P. John Fund, Inc., which adds another defense against the proliferation of meritless stockholder class action litigation.
What was Halliburton about?
In a nutshell, the stockholder plaintiff filed a class action suit against Halliburton and one of its executives alleging that they had made misrepresentations designed to inflate Halliburton’s stock price. The case went back and forth between the U.S. District Court and the Fifth Circuit Court of Appeals over the issue of class certification. The arguments boiled down to:
Must the plaintiffs prove a causal connection between the alleged misrepresentations and the plaintiffs’ loss? (An affirmative answer would have overturned the Supreme Court’s 1988 Basic v. Levinson decision, which established the “fraud on the market” theory that allows the presumption of reliance by class action plaintiffs once the information is made public instead of establishing it for each class member individually), and
May Halliburton rebut the presumption of fraud on the market loss causation at the class certification stage by showing the absence of any impact on its stock price when the alleged misrepresentation became public knowledge?
What did Halliburton hold?
Basic’s fraud on the market theory remains the law of the land. Some observers were hoping the Court would reverse Basic on this point, thereby effectively ending meritless securities class action suits since class certification on a member-by-member basis would be virtually impossible. However, that was never a realistic possibility since, as Chief Justice Roberts noted in his opinion, “those concerns are more appropriately addressed to Congress.”
The Court did, however, reverse the Court of Appeals, and widely established precedent, by concluding that defendants may introduce evidence of the absence of “price impact” at the class certification stage of litigation, rather than after certification (when the damage is already done).
What does this mean for defendant companies?
Halliburton has given companies a new tool in their battles against meritless class action suits. Now, in order to make class certification more likely, plaintiffs are expected to be more targeted in the statements they identify as potentially misleading, which could shrink the scope, and therefore the impact, of what have become shotgun-style complaints. Also, the weakest cases may never be filed or, if filed, may settle more easily and for smaller amounts.
Although Halliburton was not a win-the-lottery decision for defendant companies, the odds against that result were extremely high to begin with. For now it’s enough that the drumbeat against strike lawsuits continues to sound from various locations, including the U.S. Supreme Court, and that progress is being made.