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Basically the Same Story after Halliburton II?

Posted in Class Action Decisions, Class Action News, Securities Class Actions, Supreme Court Decisions, tagged , , , , , , , , , , , , on June 23, 2014| Leave a Comment »

The U.S. Supreme Court issued its decision earlier today in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (Halliburton II), its most highly-anticipated class-action-related decision of the October 2013 term.  Those who were hoping for a sea-change in securities class action jurisprudence were left disappointed, as the Court, in an opinion authored by Chief Justice Roberts, declined to overrule its 25-year-old decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  Rather than abolish the framework established in Basic, which provides a means for securities fraud plaintiffs to satisfy the elements of class certification through a class-wide presumption of reliance on material misrepresentations, the Court instead held that a defendant can rebut the presumption by demonstrating, at the class certification stage, that the alleged misrepresentations did not actually have any impact on the stock price.  In doing so, the Court reversed the Fifth Circuit Court of Appeals’ decision barring the defendant from offering evidence of non-impact on stock price at the class certification stage.

The Court distinguished its earlier decision in the same case, Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ___ (2011) (Halliburton I), in which it held that a plaintiff should not be required to prove materiality of the alleged misrepresentation at the class certification stage.  The distinction between the issue of materiality of a misrepresentation (a merits issue not appropriate for the class certification phase according to Halliburton I), and the issue of whether a misrepresentation actually had a common price impact on the stock (a proper class certification question according to Halliburton II) is the key to making sense of the Court’s decision today.  As Justice Roberts stated:

[P]rice impact differs from materiality in a crucial respect. Given that the other Basic prerequisites must still be proved at the class certification stage, the common issue of materiality can be left to the merits stage without risking the certification of classes in which individual issues will end up overwhelming common ones. And because materiality is a discrete issue that can be resolved in isolation from the other prerequisites, it can be wholly confined to the merits stage.

Price impact is different. The fact that a misrepresentation “was reflected in the market price at the time of [the]transaction”—that it had price impact—is “Basic’s fundamental premise.” Halliburton I, 563 U. S., at ___ (slip op., at 7). It thus has everything to do with the issue of predominance at the class certification stage. That is why, if reliance is to be shown through the Basic presumption,the publicity and market efficiency prerequisites must be proved before class certification. Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.

Halliburton II, slip op., at 21-22.  In other words, a merits question that is indisputedly common to the class should not be considered prior to class certification, but a merits question that also bears on whether the issues to be resolved at trial are truly common or individualized in the first place must be considered as part of the class certification decision.

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Are Securities Fraud Class Actions Basically a Thing of the Past?

Posted in Class Action Decisions, Securities Class Actions, Supreme Court Decisions, tagged , , , , , , , , , , , on November 20, 2013| 1 Comment »

The Supreme Court granted certiorari earlier this week in Halliburton Co. v. Erica P. John Fund, 13-317, a second trip to the high Court for the same case.  At issue is whether the Court should overrule holding of Basic Inc. v. Levinson, which recognized the “fraud-on-the-market” theory of class wide reliance in securities fraud cases.  The Court foreshadowed its willingness to consider this issue last term when it decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 132 S. Ct. 2742 (2012).  Both Amgen and the Court’s earlier decision in  Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011) were victories for plaintiffs, with the Court holding in both cases that plaintiffs were not required to prove questions on the merits as a prerequisite to class certification.  However, in Amgen, Justice Alito’s concurrence as well as dissenting opinions by Justices Scalia and Thomas (joined by Justice Kennedy) all raised questions about the continued viability of the Basic decision.

At the risk of oversimplification, the “fraud-on-the market” theory is that a material misrepresentation made in connection with the sale of a publicly traded security can have an effect on the entire market, so that investors may be harmed (or benefitted) by the misrepresentation even if they did not directly rely on it, because enough investors in the market did rely on it to the point where the price was affected.  A decision by the Court that this presumption is no longer viable could seriously limit or eliminate securities fraud class actions, because without the “fraud-on-the-market” presumption, a required element of a securities fraud claim, reliance, becomes an individualized question of fact.  As a result, Halliburton becomes the first case on the Court’s 2013-14 docket that has a potential for a truly significant impact on class actions.

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Class Action CLE Recap – Insights on the 2012-13 Supreme Court Term from the Bench and Both Sides of the Bar

Posted in Class Action Trends, CLE Programs, Supreme Court Decisions, Uncategorized, tagged , , , , , , , , , , , , , , , , , , , , , , , , , on May 14, 2013| Leave a Comment »

The Class Actions, Mass Torts and Derivative Suits Subcommittee of the Colorado Bar Association, now ably chaired by my BakerHostetler partner, Casie Collignon, held its first CLE luncheon of the year this past Friday.  The program, United States Supreme Court vs. Class Actions in 2013, featured excellent commentary about the Supreme Court’s 2013 class action decisions by The Honorable Marcia Krieger, Chief Judge, U.S. District Court for the District of Colorado, Seth Katz of Burg Simpson, and John Fitzpatrick of Wheeler Trigg O’Donnell.  Here are just a few of the many insightful observations made by each of the speakers:

Judge Krieger opened by observing that none of the cases this term have been a surprise from the standpoint of what a trial court judge would have expected given existing law.  Amgen was predictable because the question of materiality in a securities fraud case is unquestionably a common issue, so it is not surprising that it is a question for trial, not a prerequisite for class certification.  Standard Fire can be viewed as a straightforward application of agency law: a plaintiff cannot bind a class of people that he or she doesn’t yet represent.  Comcast exemplifies the importance of examining the plaintiffs’ theory of liability and the relationship to the theory of loss.  Damages are not the same as loss.  The theory by which the plaintiff establishes loss determines the measure of damages.

When asked to identify any trends that she has been seeing in class actions recently, Judge Krieger identified issue certification as a key trend.  She has been seeing more situations where the factual issues may be individualized but there are common legal issues that can be resolved classwide.  She noted that she has been inclined to grant partial certification limited to the common legal issue(s) in that situation.

From the plaintiffs’ perspective, Katz agreed that the outcome of Standard Fire was not surprising, and he went as far as to say that the outcome was correct, noting that plaintiffs’ attorneys shouldn’t be afraid of the federal courts.  Although the holding of Amgen was favorable to plaintiffs, Katz noted an issue that should be of great concern to plaintiffs, and that is the commentary from the conservative wing of the court suggesting that they might be willing to revisit the fraud-on-the-market presumption adopted in Basic Inc. v. Levinson.  Katz sees the potential of a 4-4 split on that issue, with Chief Justice Roberts being the deciding vote.  He predicts market studies being commissioned by both sides over the coming years to demonstrate or disprove the continued efficiency of the markets.

Comcast, Katz noted, caused a collective sigh of relief in the plaintiffs’ bar because it does not go as far as many would have feared by requiring Daubert hearings at the class certification phase.  He noted that one positive impact for plaintiffs arising from the “death of Eisen” (the rejection in decisions like Wal-Mart and Comcast of the idea that merits questions were off-limits at the class certification phase) is that it gives plaintiffs’ counsel an opportunity to obtain merits discovery much earlier in a case than was allowed previously.  On the other hand, Katz expressed fear about the possibility that the Court is trying to raise the bar for plaintiffs with a subtle change in the language about what common proof is necessary on the issue of damages.  Where earlier decisions required that damages be “susceptible to classwide proof,” the Comcast majority phrased the standard as requiring the plaintiff to “prove classwide damages.”  Katz predicts that defendants will argue that this means damages must be uniform, as opposed to simply being susceptible to formulaic calculation.  He noted, however, that the few lower courts that have interpreted Comcast so far have rejected a broad application of the decision.

Fitzpatrick combined philosophical commentary about the evolution of class actions with some practical tips for defense lawyers.  Standard Fire, he argued, is proof that judicial hellholes still exist.  He pointed to Amgen as an example of the dangers of accepting conventional wisdom, pointing out that the outcome in that case might well have been different if the defendants had stipulated to the existence of an efficient market.

Comcast, Fitzpatrick said, provides an opportunity for defendants to prevail at the class certification stage by discrediting a plaintiffs’ expert.  Focus not just on the opinions themselves, he suggested, but also on 1) the existence of bias; 2) the expert’s credentials, and 3) flaws in the methodology.  Scour the country for transcripts about the plaintiffs’ experts.  Look at misstatements and exaggerations in the expert’s CV.  Make sure you find and read all of their prior statements in books, media, and transcripts.  Just as important, Fitzpatrick reminded defense practitioners, is the make sure to prepare your own experts for class certification.

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Materiality Can Wait, Says the Supreme Court in Amgen

Posted in Class Action Decisions, rule 23, Securities Class Actions, Supreme Court Decisions, tagged , , , , , , , , , , , , , , , , on February 27, 2013| 3 Comments »

The Supreme Court has issued its opinion in one of the most highly anticipated class action-related cases on the docket this term.  The result in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, slip op. (U.S., Feb. 27, 2013) is not surprising given the content and tone of the questioning at oral argument.  In an 6-3 opinion authored by Justice Ginsberg, the Court held that the plaintiff in a securities fraud case based on a fraud-on-the-market theory of reliance does not have to prove materiality of the fraudulent statement or omission at the class certification stage.  Because materiality is a common question capable of resolution simultaneously for the entire class, the majority reasoned, it does not have to be proven at the class certification stage.  Justices Scalia, Thomas, and Kennedy dissented.

Amgen is an important decision in the securities fraud context because it addresses the lingering question of whether any special prerequisites exist in certifying a securities fraud class action that aren’t required in certifying other types of class actions.  Like the Supreme Court’s earlier decision in Erica P. John Fund v. Halliburton Co., 131 S. Ct. 2179 (2011), Amgen will probably have an impact beyond the securities fraud context.  In the context of class certification decisions more broadly, the opinion will be almost certainly be cited as clarifying the distinction between issues impacting the elements of class certification, which must be resolved at the class certification phase, and merits issues, which can wait until trial to be resolved.

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Association, Causation, and the Fuzzy World of the Baysian p-Value in Class Actions

Posted in Class Action Trends, Commentary, tagged , , , , , , , , , , , , , , , , on November 15, 2011| Leave a Comment »

David H. Kaye, Distinguished Professor of Law and Weiss Family Faculty Scholar at the Penn State School of Law, recently published a fascinating commentary in the BNA Insights section of the BNA Product Safety & Liability and Class Action Reporters, entitled Trapped in the Matrixx: The U.S. Supreme Court And the Need for Statistical Significance.  In the article, Professor Kaye applies his vast expertise in the areas of scientific evidence and statistics in the law to add some color to the U.S. Supreme Court’s March 2011 decision in the securities class action Matrixx Initiatives, Inc. v. Siracusano. 

For those not familiar with Matrixx, the case involved allegations that the makers of the cold remedy product, Zicam, withheld information from investors suggesting that the product may cause a condition called anosmia, or loss of smell.  At the risk of oversimplifying, the holding of Justice Sotomayor’s unanimous opinion can generally be summarized as follows: in a securities fraud action arising out of an alleged failure to disclose information about a possible causal link between a product and negative health effects, the plaintiff need not allege that the omitted information showed a statistically significant probability that the product causes the ill effects in order to establish that the information was material.  The decision reaffirms the applicability of the reasonable investor standard for materiality announced in Basic Inc. v. Levinson, which looks to whether the omitted information would have “significantly altered the ‘total mix’ of information made available” to investors. 

Thus, Matrixx eschews a bright-line rule (statistical significance) in favor of a more flexible “reasonable investor” standard.  Professor Kaye does not take issue with the Court’s rejection of a bright line rule requiring a plaintiff to plead (and ultimately, prove) statistical significance of omitted information in the securities context.  Instead, he is critical of the Court’s failure to articulate in better detail the technical shortcomings of using statistical significance as a bright-line rule, and he cautions against interpreting Matrixx as suggesting that something less than statistical significance would be appropriate to prove a causal link between a product and disease in other contexts.  In other words, it is one thing to say that the causal link does not have to be statistically significant in order for information about an association between the product and disease to be meaningful to investors or consumers.  It is another thing to say that statistical significance is unimportant when it is necessary to actually show evidence of a causal link itself, such as in the toxic tort context.

Although I followed and generally agreed with Professor Kaye’s article from a legal perspective, there were some technical concepts discussed in the article that were admittedly a bit over my head.  Fortunately, I knew just who to ask for more insight, having recently worked with Justin Hopson of Hitachi Consulting on two CLE presentations discussing the use of statistics in class actions.  Here are some of Justin’s observations after reading the article:

  • The article is well-written.  Professor Kaye would make a good expert witness.
  • Kaye identifies studies showing that zinc sulfate caused anosmia.  He does not comment on zinc acetate, nor zinc gluconate, the active ingredients in Zicam.  It sounds like the causal link may have been known, and available to use.  So, this was not a case about “arbitrary statistics.”  Instead, the issue had to do with the measurement of an understood, causal relationship.
  • Kaye describes the standard applied in Matrixx as looking to whether a reasonable investor would find the omitted information “sufficiently extensive and disturbing” to induce him to make a different investment decision.  Nonlawyer experts may be tempted to ask for a formulaic definition for this phrase, and it may not be obvious without explanation that the standard would leave the question about what is “sufficiently extensive and disturbing” to the factfinder.
  • Kaye talks about the historical treatment of .05 as the threshold “significance level” that makes something statistically significant.  I’ve often thought of “significance level” associated with the relative degress of the “risks”.  If the risk of being wrong is death, then is 1-in-20 OK?  You really have to think through: What does Type I and Type II error look like in my experiment?  What are the implications?
  • If one were really attempting to compute the potential causal connection between Zicam and anosmia, it might help to understand why the FDA suggested a background rate in “all cold remedies”.  If the causality is related to zinc sulfate, then isn’t that the common population?
  • The point that the 0.05 “convention” is somewhat arbitrary is an important one.  Kaye observes that “[a] useful rule of complaint drafting must avoid inquiries into the soundness of expert judgments about the population, the test statistic, and the model.”  Hmm…so how do we get a useful rule if you cannot attack the fundamentals?  Indeed, Kaye’s next point is that Bayesian analysis should be used sometimes.  All inferential statistics have assumptions, and any appropriate standard of pleading or proof should be flexible enough to allow the opposing lawyer to challenge every single assumption. 
  • The observation that “the p-value, by itself, cannot be converted into a probability that the alternative hypothesis is true” is also very important.  This is a common misunderstanding in beginning stats because we teach, “I fail to reject the null hypothesis.  Or I reject the null, and accept the alternative hypothesis.”  It becomes very important to correctly specify null/alternative in exhaustive and exclusive terms.  Otherwise some other non-specified conclusion should be reached.
  • The one thing I might challenge is the assertion that adverse event reports (AERs) are “haphazardly collected data”.  I’m not sure why Kaye chose this phrase.  The AERs should be observations.  It is only their cause that is in doubt.  It is not their function to establish the causal link.  Instead, the link would have to be established with other data, such as through a clinical trial using a well-organized data collection process.

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