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Posts Tagged ‘reliance’

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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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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Phoenix Attorney Shawn Aiken sent me an advance copy of a draft class action bill set to be introduced in the Arizona legislature this week.  The bill sets forth some specific requirements for class certification that are much more exacting than those required under federal Rule 23 and most state class action rules.  Some of the highlights are summarized below.  Click this link for a complete copy of the bill.

  • clear and convincing evidence would be required to justify a grant of class certification
  • orders granting class certification would have to be supported by a detailed written statement of the reasons and evidence justifying the decision
  • in assessing superiority, the court would be required to consider, among other things, “whether it is probable that the amount which may be recovered by individual class members will be large enough in relation to the expense and effort of administering the action to justify maintaining the case as a class action”
  • there would be a rebuttable presumption against class certification in cases involving claims where individual knowledge, causation, and  reliance are required elements
  • certification of a case as a class action would not relieve any class member of the requirement of proving individual injury or damages
  • class notice must include a statement of “the possible financial consequences for the class”
  • the law would expressly provide that the plaintiff would bear the initial cost of distributing notice to the class
  • appeals from orders granting or denying class certification could be taken as a matter of right the same as a final judgment, and trial court proceedings would be automatically stayed pending the appeal

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I’m pleased to announce that the BakerHostetler Class Action Defense Team has just released its 2012 Year-end Review of Class Actions, a joint project with the firm’s Employment Class Actions, Antitrust, and Data Privacy practice teams.  See below for a synopsis of the project.  Click the link above to access a copy of the report itself:

We are pleased to share with you the BakerHostetler 2012 Year-end Review of Class Actions, which offers a summary of some of the key developments in class action litigation during the past year. Class action litigation continues to persist in all areas of civil litigation despite the Supreme Court’s 2011 decisions in AT&T Mobility v. Concepcion and in Wal-Mart Stores, Inc. v. Dukes, which were seen by many commentators as marking the beginning of the end of class actions as we know them. But while the Supreme Court’s 2011 decisions have had a significant impact on class action litigation, they have not brought about its demise and are not likely to do so anytime soon. In the last two years, we’ve seen landmark decisions and the addition of important judicial gloss to those decisions. 2013 will be no different as the Supreme Court is set to weigh in on a series of key cases this spring.

We hope you find this Review a useful tool as you move forward into the new year. This comprehensive analysis of last year’s developments in class action procedure and jurisdiction, as well as developments by subject matter will hopefully provide context and insight as you look ahead to 2013’s expected trends in class action law, including the proliferation of privacy class action litigation and class action litigation relating to the LIBOR rate-fixing scandal.

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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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The Colorado Supreme Court’s highly anticipated rulings in four class actions were announced earlier today.  Here are links to the opinions.  I’ll have more commentary on the four decisions soon:

No. 09SC668 – Jackson v. Unocal Corp. – Judgment Reversed (class certification upheld) – Addresses the burden of proof on class certification.

 

No. 09SC1080 – Garcia v. Medved Chevrolet, Inc. Judgment Affirmed (case to be remanded to trial court to conduct rigorous analysis of class certification) – Addresses the circumstances in which the plaintiff in a fraud class action can establish that reliance, injury, and causation can be tried a class-wide basis.

 

No. 10SC77 – State Farm Mut. Auto. Ins. Co. v. Reyher  – Judgment Reversed (denial of class certification upheld) – Addresses the standards for determining whether individual issues predominate and the extent to which the court may consider the merits of a plaintiff’s claims in ruling on class certification.

 

No. 10SC214 – BP America Prod. Co. v. Patterson – Judgment Affirmed (class certification upheld) – Addresses the circumstances in which the plaintiff can prove fraudulent concealment and ignorance of facts giving rise to a claim on a common, class-wide basis.

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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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