On June 23, 2014, the Supreme Court released its decision in Halliburton Co. v. Erica P. John Fund, Inc. The much anticipated ruling had the potential to essentially abolish the securities class action litigation process as we know it; however, the court’s ruling re-affirmed the current class action litigation framework, with arguably one modest modification.
What was at stake: The core issue in this case was whether the Court should overrule or substantially modify the holding of Basic Inc. v. Levinson. Basic established the precedent of permitting class-wide reliance, based on the fraud-on-the –market theory. The fraud-on-the-market theory states that stock prices efficiently capture all public knowledge about a stock and therefore, plaintiffs do not need to prove each individual in the class actually relied upon fraudulent information in making their investment decisions, but that rather so long as the market is efficient, the fraudulent information is, by nature, reflected in the stock price. Basic, decided in 1988, established the securities class action landscape and set the stage for securities class action lawsuits as we know them today.
The court’s decision this week indicates defendants now have the opportunity to rebut the presumption of class-wide reliance at the class certification stage, by showing that the alleged misrepresentations had no impact on the market price. Although price impact evidence could always have been presented, it was previously allowed only after the class certification stage. Once classes are certified, defendants and insurance companies are often more motivated to settle, as neither want the distraction and added exposure of a trial, or the potentially devastating financial outcome of a jury verdict against them.. The ability to rebut this presumption earlier in the case timeline appears designed to prevent frivolous lawsuits, which are without merit, from moving forward to the stage where the parties typically settle.
As occurs with any Supreme Court decision, the case will continue to draw commentary from a variety of sources, with different factions attempting to interpret and extrapolate the court’s opinion to predict the practical impact on the securities class action landscape moving forward. Based on initial speculation from top legal scholars and leading plaintiff and defense attorneys, it appears the class action securities case pipeline will continue to be robust, with tweaks to the mechanics of how each case is actually litigated.
To read the court’s opinion, click here.