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Posts Tagged ‘erica p. john fund’

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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2013 was a memorable year for class actions.  I’ve assembled my top 10 most significant developments below.  There were almost enough U.S. Supreme Court decisions to fill up the entire list, but my number 1 development was still a pair of lower court decisions that may also become the story of the year in 2014.

10. Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct. 1659 (2013) – Not a class action decision per se, but likely to have significant repercussions on the development of international class action law.  Extraterritorial effect of the Alien Tort Statute is significantly limited.

9. Clapper v. Amnesty Intern. USA, 133 S. Ct. 1138 (2013) – Another non-class action decision already having a significant impact on the question of standing in data privacy class actions.

8. Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064 (2013) – Class Arbitration is not completely dead, but there’s a blueprint for how to kill it.

7. American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013)- Arbitration continues to reign supreme, even under the “federal law of arbitrability”

6. Genesis Healthcare Corp. v. Symczyk, 133 S. Ct. 1523 (2013) – Can class actions be defeated simply by picking off the representatives one at a time?  That’s for the circuits to decide.

5. Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S.Ct. 1184 (2013) – Supreme Court holds that materiality is a common question and that proof of materiality is not a prerequisite to class certification, but raises questions about the continued viability of the Basic fraud on the market presumption in securities cases.

4. Certiorari granted in Halliburton v. Erica P. John Fund, No 13-317 – That didn’t take long.  On the heels of , Supreme Court agrees to revisit the Basic fraud on the market presumption.

3. Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013) – Limited holding = damages theory has to match theory of liability.  Expansive holding = no class certification unless the question of damages is susceptible to common, classwide proof.  Which holding will be embraced by the lower courts?

2. Standard Fire Ins. Co. v Knowles, 133 S. Ct. 1345 (2013) – First ever CAFA decision limits representative plaintiffs’ ability to bind class prior to class certification.  Can’t avoid federal jurisdiction by stipulating to no more than $4,999,999.99 in damages on behalf of a putative class.

1. Moldy Washing Machine Decisions – Limited Comcast holding prevails so far.  Two lower courts reaffirm class certification orders after remand in light of Comcast.  Issue certification is alive and well, for the moment, but stay tuned to see if the Court takes up these cases in 2014.

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The United States Supreme Court granted certiorari today in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, to address the requirements for certifying a securities class action based on the “fraud-on-the-market” theory of reliance.  The “fraud-on-the-market” theory involves allegations that public misrepresentations or omissions adversely affected the market price of a stock causing losses to an entire class of investors whether or not they individually relied on the information.  The theory can alleviate a common barrier to class certification, the need to prove individual reliance on alleged fraud.  As summarized by the folks at SCOTUS blog, the issues accepted for review are as follows:

(1) Whether, in a misrepresentation case under Securities and Exchange Commission Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory; and (2) whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory. (Breyer, J., recused)

Amgen comes close on the heels of the Court’s decision last term in Erica P. John Fund Inc. v. Halliburton Co., in which a unanimous Court overturned a Fifth Circuit Court of Appeals ruling that the plaintiff in a securities class action brough under the fraud-on-the-market theory must prove loss causation at the class certification phase.  While the Court in Erica P. John Fund held that proof of the element of loss causation on the merits could not be required as a precondition of class certification, it was not presented with the question of what proof is needed at the class certification phase to support the application of the fraud-on-the-market doctrine itself.

The case will be heard in the October 2012 Supreme Court term.

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My submission to the SCOTUSblog Class Action Symposium is now available for viewing.  Click the title below for the link:

The October 2010 Supreme Court Term in review: For defendants, life returns to normal after the celebration ends

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The award-winning U.S. Supreme Court blog SCOTUSblog is presenting a symposium on recent Supreme Court developments in the area of class actions that you won’t want to miss.  Click here for an introduction to the symposium and here to see a list of the various contributions as they are released. I’m extremely honored to be listed among the other fine contributors to the series.

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It’s not too late to sign up for tomorrow’s Strafford Publications Webinar Class Certification After Dukes, Bayer and Halliburton Rulings.   As a preview, here is a copy of the written materials for my portion of the presentation, Opposing Class Certification After Dukes, Bayer and Halliburton.  I hope you can make it.

 

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For those of you who simply can’t get enough of the Supreme Court’s recent class action rulings, I will be speaking in an upcoming live phone/web seminar sponsored by Strafford Publications entitled “Class Certification After Dukes, Bayer and Halliburton Rulings.”   The Webinar  is scheduled for Tuesday, August 30, 1:00pm-2:30pm EDT.   Here is a summary:

The Supreme Court’s watershed Dukes v. Wal-Mart ruling set new standards for Rule 23(a) class certification and provided guidance to the level of merits inquiry appropriate at the certification stage. It also clarified when a claim for monetary relief can be made under Rule 23(b). While Dukes is a shift in defendants’ favor, the Court refused in Smith v. Bayer to curtail relitigation of class actions in parallel state court litigation. Federal courts may not enjoin state courts from considering certification when a federal court has denied certification of the same class. In Erica John Fund v. Halliburton, the Court held that loss causation is not a prerequisite to class certification in a securities action. However, the Court did not address the existing circuit court divergence on whether a court should examine evidence of price impact at the certification stage. My fellow panelists and I developed this program to analyze three key Supreme Court rulings, Dukes, Bayer and Halliburton and their impact on current class certification jurisprudence. We will discuss how plaintiff and defendant counsel can best leverage or overcome the impact of these rulings in certification proceedings. We will offer our perspectives and guidance on these and other critical questions: What impact will Dukes have on the use of statistics and expert testimony in support of class certification? How will commonality and numerosity be applied after Dukes? What guidance, if any, does the Bayer case provide regarding relitigating competing class actions where class certification has already been granted? In light of Halliburton, should a district court examine evidence of price impact at the class certification stage, and if so, who has the burden of proof? After our presentations, we will engage in a live question and answer session with participants — so we can answer your questions about these important issues directly. I hope you’ll join us.

For more information or to register, visit the Strafford website at this link.

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The United States Supreme Court heard oral argument today in the case of Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  A transcript of the argument is now available on the Court’s website. 

Erica P. John Fund involves the appropriate standard for assessing class certification in securities fraud cases brought under the “fraud on the market theory.”  Much of the argument was focused on whether the lower courts properly applied existing precedent in determining whether common issues predominated and whether the district court improperly considered the merits of the plaintiffs’ claim by requiring proof of loss causation at the class certification stage.  Many of these issues are unique to the securities fraud context.  The “fraud on the market” theory has been rejected in other contexts.  (See, e.g. CAB entry dated April 27, 2009.)  However, one seemingly off-the-wall hypothetical from Justice Breyer helps to illustrate what creates a common rather than an individualized question when evaluating either a securities fraud claim or another other fraud, misrepresentation, or nondisclosure claim: 

JUSTICE BREYER: Does your rule apply in all fraud cases? That is, a thousand farmers say, Mr. Jackson was our common buying agent, and the defendant lied to Mr. Jackson, and he relied on the lie.  It is a common issue whether he relied on the lie or he didn’t rely on the lie. I can understand somebody saying at the certification stage they have to see whether he’s really a common agent. But let’s imagine that’s assumed. The only question left is, did he rely or not rely?

Is that a question for the merits or is that a question for the common — for the —

MR. STERLING: Basic is really an exception that applies only –

JUSTICE BREYER: So you’re saying in the case that I just gave you reliance is for the merits?

MR. STERLING: Correct, Your Honor.

JUSTICE BREYER: Whether he really relied or didn’t rely, the common agent is for the merits?

MR. STERLING: But you couldn’t have

JUSTICE BREYER: Is that — is that your answer is?

MR. STERLING: No, Your Honor. You couldn’t have a case in that situation because reliance is an individual issue.

JUSTICE BREYER: No. A thousand people say Mr. Jackson is our common buying agent, and the defendant lied to this common buying agent, and he represented us. Relied on that. I’m asking if you that issue of reliance in an appropriate case is for the certification stage?

MR. STERLING: Yes, Your Honor, because

JUSTICE BREYER: Yes.

MR. STERLING: — you still have everybody having to say Mr. Jackson is my agent. That’s

JUSTICE BREYER: And they also have to prove there is a lie?

MR. STERLING: Right. And that’s a — but the individualized question of reliance is simply, is Mr. Jackson your agent or not? Because of that there is no common issue that — that predominates on reliance.

JUSTICE BREYER: Okay.

Slip op. at 44-45.

Setting aside the possibility of an individual question relating to the agency relationship, Justice Breyer’s hypothetical gets to the heart of what could make a fraud claim susceptible to class treatment.  First, although fraud requires reliance, in many contexts, it does not usually require reliance by the plaintiff.  In Justice Breyer’s hypothetical, a single party meets the reliance requirement for the entire class.  In other words, a false statement was made, and there was reliance because Mr. Jackson believed and acted upon it.  There could also be common causation of injury if, due to his reliance on the lie, Mr. Jackson paid $1 per thousand seed when he could have paid $.99 for seed with the same attributes somewhere else. 

The agency issue could very well be an individual issue, as Mr. Sterling surmised, but there really aren’t enough facts in the hypothetical to know this for sure.  For example, there could be a single document that all of the farmers signed, to which there is no dispute about authenticity, and which designates Mr. Jackson as the agent for all.  (Nor does Mr. Sterling’s answer probably help the defendant in a securities fraud case, since the “Mr. Jackson” in a “fraud on the market” claim is the market itself.  If it is an efficient market, so the theory goes, it sets the price that everyone pays regardless of their individual assent.)

The problem with the hypothetical, therefore, is not that it fails to describe the type of fraud claim that might be appropriate for class treatment but instead that it does not describe most real-life fraud cases that are brought as class actions.

In most fraud claims, however, neither the question of reliance nor the question of loss causation is a common question.  In most cases, the reliance that would have to be proved for any class member to prevail would be the class member’s own reliance.  Unless the case involves a situation in which no reasonable person would take any action other than the one that the plaintiff claims could have been taken for class members to avoid injury, reliance is probably not a common question.  Moreover, the existence of a common injury is not necessarily a common question in most cases because the existence of some better alternative often can only be evaluated on a case-by-case basis.  

For example, take away the common agent and change the hypothetical as follows, and the common issues go away: A seed salesman sells corn seed to 1000 farmers for $1 per thousand, and falsely claims, uniformly to each of the farmers, that the seeds grow ears of white-colored corn, but truthfully claims that the corn will be drought-tolerant and delicious.  In fact, they the seeds grow ears of slightly yellowish corn.  

Though the fraudulent statement was uniform, the lack of a common agent to rely on it injects problems with reliance and causation that should prevent this claim from being tried (fairly anyway) on a class-wide basis.  Proof of reliance will require that the color of the corn was an important attribute to each farmer, and that he would not have purchased the seeds if they had been advertised as being off-white.  Many farmers may not care what color the corn is, as long as it is drought-tolerant and delicious, and the only way to resolve the reliance question for sure is to adjudicate each farmer’s claim individually.  Proof of causation will require, in addition, that a given farmer had an alternative source of white corn available.  If not, and the farmer would have been compelled to buy the supplier’s seeds regardless of the color, then the false statement, even it if was relied upon, caused no injury.  Note that even in the hypothetical that includes a common agent, causation of injury may not be common because there may be farmers on whose behalf the agent would have been forced to buy the supplier’s seeds regardless of the false statement about color.  These same issues come up any time there was not one obvious course of action and palatable alternative that all members of a would-be class would take if the true facts had been revealed.

So, Justice Bryer’s hypothetical may illustrate the type of fraud claim that would be appropriate for a class action, the unique facts in the example can also serve to illustrate why many fraud claims should not be certified as class actions.

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Instead of a trilogy of class action decisions by the U.S. Supreme Court this term, it looks like there will be a “quadrilogy“!

For the fourth time in the October 2010 Term, the Court has granted certiorari in a class action-related case.  Today, the Court granted cert in Erica P. John Fund, Inc. v. Halliburton Co., No. 09-1403.  The appeal raises issues regarding the burden of proof  for class certification in a securities fraud case when the plaintiff intends to prove causation and reliance based on a “fraud on the market” theory. 

According to SCOTUS Blog, the specific issues presented for review are:

(1) Whether the Fifth Circuit correctly held that plaintiffs in securities fraud actions must not only satisfy the requirements to trigger a rebuttable presumption of fraud on the market, but must also establish loss causation at class certification by a preponderance of admissible evidence without merits discovery; (2) whether the Fifth Circuit improperly considered the merits of the underlying litigation when it held that a plaintiff must establish loss causation to invoke the fraud-on-the-market presumption.

(See SCOTUS Blog case file for Case No. 09-1403).

Although Erica P. John Fund, Inc. is a securities case, the Court’s decision may have ramifications in other areas, including consumer class actions.  Class action plaintiffs often attempt to employ the “fraud on the market” theory of reliance in consumer fraud cases, with varying success.  (See these CAB entries dated April 27, 2009 and February 24, 2008).

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