In Landmark Decision, U.S. Supreme Court Provides Defendants with New Tools to Attack Class Certification Based on Individualized Reliance
On June 23, 2014, the U.S. Supreme Court issued its highly-anticipated opinion in Halliburton Co. v. Erica P. John Fund, a securities class action that might have important implications for consumer-law defendants seeking to challenge certification on individualized-reliance grounds. Commentators have touted Halliburton since the Court announced it would be reconsidering the “fraud-on-the-market-theory” established in its 1988 Basic v. Levinson decision. While the Court declined to overrule the Basic presumption of reliance – which would have all but eliminated class actions alleging securities fraud – it did grant Halliburton a partial victory by allowing it to rebut the presumption at the class certification stage with evidence demonstrating a lack of price impact. The effects of this partial “win” may very well extend to the consumer class action space as defendants will be armed with new tools to attack Rule 23’s requirements in cases where reliance is a required element.
The holding in Basic was grounded on the principle that public, material information about a publicly traded company affects the price of the company’s stock and that investors thereby rely on that information when they purchase securities. This fraud-on-the-market theory offers plaintiffs the presumption of class-wide reliance on that public, material information, and effectively eliminates the need for individual proof of reliance on behalf of putative class members for certification. Halliburton arose out of allegations that the defendant made a series of public misrepresentations downplaying its liability in asbestos litigation, falsifying its expected revenue from certain construction contracts, and overstating anticipated benefits from a merger with Dresser Industries that were designed to mislead its investors and inflate its stock prices.
In a unanimous decision, the Court vacated and remanded the Fifth Circuit’s ruling that Halliburton could not rebut the presumption of reliance directly at the class certification stage. While not finding the requisite “special justification” that would allow Halliburton to overcome the doctrine of stare decisis and have Basic overturned, the Court’s decision left Halliburton free to provide direct evidence that its alleged misrepresentations had no impact on the stock prices paid by the putative class plaintiffs. Under prior precedent, defendants were allowed to introduce this kind of evidence at the merits stage of a class action proceeding, or to rebut Basic’s underlying presumption of market efficiency, but not specifically at the class certification stage. Finding that such a decision “makes no sense,” today’s ruling expanded the ability of defendants to directly rebut the Basic presumption at an earlier stage than previously allowed.
What does this mean for defendants in the consumer-law arena?
A number of consumer claims require proof of reliance, including those based on theories of fraud and negligence, as well as unfair and deceptive acts and practices laws. In Halliburton, the Court noted that individualized proof of reliance can defeat class actions: “[W]ithout the presumption of reliance, a Rule 10b-5 suit cannot proceed as a class action: Each plaintiff would have to prove reliance individually, so common issues would not ‘predominate’ over individual ones, as required by Rule 23(b)(3).”
To avoid these issues, many consumer class actions are plead based on presumed reliance theories (i.e., “failure to disclose” cases). Indeed, plaintiffs’ attorneys have even proffered such arguments at the class certification stage. See e.g., Werdebaugh v. Blue Diamond Growers, 2014 U.S. Dist. LEXIS 71575, at *44-46 (N.D. Cal. May 23, 2014) (“Materiality is therefore a question common to the class . . . [such that] should Werdebaugh prevail in proving that Blue Diamond’s label misstatements were material, he will have established a presumption of reliance as to the entire class as well.”)
Halliburton chips away at the ease with which plaintiffs can try to obtain class certification – and this development has potential impact to class action practice generally, not just in the field of securities fraud. It reaffirms the case-dispositive nature of reliance in class certification and undercuts the ability of plaintiffs to avoid individualized inquiries by invoking a presumption of reliance. The world has gotten tougher for consumer class actions that require reliance as an element of the claim.
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