SECURITIES LITIGATION & REGULATION

Transcription

1 Westlaw Journal SECURITIES LITIGATION & REGULATION Litigation News and Analysis Legislation Regulation Expert Commentary VOLUME 19, ISSUE 8 / AUGUST 20, 2013 Expert Analysis Recent Supreme Court Decisions On Class Certification: No Exceptions For Securities Class Actions By Susan Hurd, Esq., and Cara Peterman, Esq. Alston & Bird Over the past 30 years, the U.S. Supreme Court has issued a series of opinions which make abundantly clear the court s view that a district court must engage in a rigorous analysis of whether the predominance requirement for class certification can be satisfied. 1 Under Rule 23(b)(3) of the Federal Rules of Civil Procedure, a class may not be certified unless the representative plaintiff can show that the questions of law or fact common to class members predominate over any questions affecting only individual members. There is nothing in the Supreme Court s decisions to suggest this requirement of an exacting inquiry into predominance applies only to certain types of claims. 2 Thus, for purposes of implementing the court s directives, it should be irrelevant what type of claim the class is pursuing, i.e., whether the case involves securities, antitrust or employment discrimination claims. The Supreme Court s decisions require a rigorous inquiry into predominance in every case. Under the express language of these decisions, there is no preference in favor of certification as a general matter, and certainly no presumption of certification for any particular type of claim. Plaintiffs seeking class claims pursuant to Section 10(b) of the Securities Exchange Act of 1934 often argue that such claims are uniquely suited to certification and a demanding review of Rule 23 s requirements is not necessary in such cases. As explained below, this view cannot be reconciled with the court s most recent decisions on class certification.

2 WESTLAW JOURNAL SECURITIES LITIGATION AND REGULATION The Supreme Court s recent pronounce-ments not only fail to carve out securities cases as being subject to a lesser standard, but make clear the specific burdens of proof that securities plaintiffs must satisfy before a class may be certified. Though two recent decisions Erica P. John Fund v. Halliburton Co. and Amgen Inc. v. Connecticut Retirement Plans & Trust Funds 3 were initially heralded as victories for the plaintiff s bar, both decisions reiterate the tough standards securities plaintiffs face at certification. A class may not be certified unless the representative plaintiff can show that the questions of law or fact common to class members predominate over any questions affecting only individual members. Taken as a whole, the recent body of case law from the Supreme Court suggests no favoritism for certification of securities claims. Rather, the court has made clear that a motion to certify must be denied in any type of case if the representative party fails to provide sufficient evidence to prove that common questions of law or fact will predominate. 4 The focus in securities cases is typically on whether the plaintiff has satisfied all the requirements necessary to rely on a class-wide presumption of reliance. 5 THE PREDOMINANCE INQUIRY IN SECURITIES CASES Twenty-five years ago, the Supreme Court in Basic Inc. v. Levinson first acknowledged that, under certain circumstances, a plaintiff may be able to invoke a presumption of reliance to satisfy Rule 23(b)(3) s predominance requirement. 6 Under Basic, reliance on a defendant s alleged misstatements a necessary requirement for prevailing on a Section 10(b) claim may be presumed if the plaintiff can prove, among other things, that the stock at issue traded on an efficient market during the proposed class period. 7 The Basic court reasoned that in an efficient market, or an open and developed securities market, the price of a company s stock is determined by the available material information regarding the company and its business. Misleading [public] statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. 8 Basic makes clear that, without the benefit of this presumption, a plaintiff cannot possibly satisfy the predominance requirement for securities claims. 9 If no presumption of reliance is available, individual questions of reliance with respect to the specific alleged misstatements in the case will necessarily overwhelm common ones, making class certification impossible. 10 Under Basic, the presumption of reliance will be unavailable if, for example, the plaintiff fails to carry the burden of proving the existence of an efficient market or defendants come forward with sufficient facts to rebut this showing. 11 The court said a defendant may rebut the presumption of reliance through [a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price. 12 ERICA P. JOHN FUND V. HALLIBURTON CO. After Basic, the Supreme Court s next opportunity to address certification in a securities case was in Halliburton, a decision issued in The Supreme Court chose, however, to resolve the Halliburton appeal without ever reaching the issue of whether the plaintiff had successfully invoked Basic s presumption of reliance. 13 The court s opinion addressed only the narrow question of whether there should be other requirements for presuming reliance not specifically set forth in Basic Thomson Reuters

3 VOLUME 19 ISSUE 8 AUGUST 20, 2013 The defendants in Halliburton argued that a plaintiff must prove loss causation another element of a Section 10(b) claim to invoke Basic s presumption of reliance. 15 The Supreme Court rejected this view, saying reliance and loss causation are two distinct requirements and that Basic never mentioned the loss causation requirement. 16 The court in Halliburton nevertheless said, securities fraud plaintiffs must prove certain things in order to invoke Basic s rebuttable presumption of reliance, including that the stock traded in an efficient market. 17 As noted above, the court did not, however, issue any substantive ruling on market efficiency because the denial of certification in Halliburton was based exclusively on the failure to prove loss causation. 18 For that reason, the Supreme Court concluded that it was not necessary to rule on whether market efficiency had been established, nor did it need to address any other questions about Basic, its presumption or how and when it may be rebutted. 19 Therefore, the court s opinion in Halliburton did nothing to lessen the existing requirements for certification in a securities case, such as proof of market efficiency. The court simply declined to impose additional burdens on plaintiffs. Importantly, they also made clear that plaintiffs cannot prevail on a class certification motion based on mere allegations of market efficiency. 20 The court said plaintiffs must come forward in each instance with evidence affirmatively proving market efficiency. 21 The Supreme Court s decisions require a rigorous inquiry into predominance in every case. WAL-MART V. DUKES Six days after Halliburton was decided, the court again revisited the question of class certification in securities cases in Wal-Mart Stores v. Dukes. 22 Dukes was not a securities case, but the court referenced the market efficiency analysis to illustrate the type of rigorous inquiry district courts are required to perform under Rule 23. In ruling that the class was improperly certified in Dukes, the court said, Rule 23 does not set forth a mere pleading standard. 23 For that reason, a party seeking certification must affirmatively demonstrate his compliance with the rule that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc. 24 The court also repeated that the district courts must conduct a rigorous analysis of all Rule 23 requirements and said, [f]requently, th[is] rigorous analysis will entail some overlap with the merits of plaintiff s underlying claim, [which] cannot be helped. 25 The court then refuted once and for all the notion that a merits-based inquiry is somehow precluded at class certification. 26 To debunk this myth, the court said, [p]erhaps the most common example of considering a merits question at the Rule 23 stage arises in class-action suits for securities fraud. 27 The court also said, [securities] plaintiffs seeking 23(b)(3) certification must prove that their shares were traded on an efficient market, an issue they will surely have to prove again at trial in order to make out their case on the merits. 28 Thus, like the decisions that came before it, Dukes cannot be cited for the proposition that securities claims are somehow exempted from the rigorous analysis requirement. Rather, in Dukes, the Supreme Court cited the examination of market efficiency as an example of the type of exacting, merits-based inquiry demanded of courts. Dukes likewise repeated the directive that plaintiffs must prove, not plead, the existence of 2013 Thomson Reuters 3

4 WESTLAW JOURNAL SECURITIES LITIGATION AND REGULATION an efficient trading market for the stock at issue and failure to do so requires denial of class treatment. AMGEN INC. V. CONNECTICUT RETIREMENT PLANS & TRUST FUNDS In February of this year, the Supreme Court decided Amgen. 29 The question presented in Amgen was whether proof of materiality of the defendants alleged misstatements (another mandatory element of a Section 10(b) claim) should be required to invoke Basic s presumption of reliance. 30 Amgen, like Halliburton, thus turned on the question of whether there should be additional requirements imposed on securities plaintiffs at class certification. Unlike what happens in the majority of securities cases, the defendants in Amgen had previously conceded that Amgen s shares traded on an efficient market. 31 Thus, in Amgen, like Halliburton, the question of whether the plaintiffs had actually proven market efficiency or whether the defendants had rebutted that showing was not before the court. 32 The court said plaintiffs must come forward in each instance with evidence affirmatively proving market efficiency. With respect to the materiality issues that were raised on appeal, the Supreme Court held that proof of the materiality of the alleged misstatements was not necessary to certify a class. The court reasoned that materiality is based on an objective reasonable investor standard and is, therefore, a question common to all class members. 33 Thus, the plaintiff class s inability to prove [the] materiality [of the statements at issue] would not result in individual questions predominating and the denial of class certification, but would instead end the case for once and for all. 34 In so ruling, the court juxtaposed proof of materiality at class certification with the plaintiff s established burden of proving market efficiency, which the court deemed an essential predicate[] of the fraud-on-the-market theory. 35 The court said, where a market for a security is inefficient or the defendant s alleged misrepresentations were not aired publicly, a plaintiff cannot invoke the fraud-on-the-market presumption. As previously recognized by the court, under those circumstances, [i]ndividualized reliance issues would predominate [and] [t]he litigation could not be certified under Rule 23(b)(3) as a class action. 36 The fact that the Supreme Court in Amgen again refused to impose additional burdens on securities plaintiffs can have no impact on the rigorous inquiry into the established prerequisites for class treatment, such as proof of market efficiency. Defendants seldom challenged materiality at class certification, whereas market efficiency is often a hotly contested issue. Amgen had no effect on a plaintiff s burden of proof on market efficiency because market efficiency had already been conceded in that case. Moreover, it is important to point out that the court in Amgen went beyond reiterating its prior rulings on the importance of demonstrating market efficiency by providing guidance on the type of evidence relevant to proving or disproving that issue. The majority in Amgen said, in an efficient market, [f]ew investors, if any, can consistently achieve above-market returns by trading based on publicly available information alone, for if such above-market returns were readily attainable, it would mean that market prices were not efficiently incorporating the full supply of public information. 37 In cases, unlike Amgen, where market efficiency is directly challenged, Thomson Reuters

5 VOLUME 19 ISSUE 8 AUGUST 20, 2013 defendants often point to the existence of consistent arbitrage opportunities during the proposed class period as evidence of an inefficient trading market. COMCAST CORP. V. BEHREND Roughly one month later, the Supreme Court issued its opinion in Comcast, a case involving certification of a class of cable subscribers seeking to recover for alleged violations of the federal antitrust laws. 38 The defendants in Comcast argued that the class had been improperly certified because the district court refused to consider certain shortcomings they had identified in the damages opinion of the plaintiffs expert. 39 The district court viewed these arguments as an attack on the merits, which it concluded had no place in the class certification inquiry. 40 The district court held that predominance could be satisfied in the case because it determined that the expert s submission proved damages could be calculated on a class-wide basis. In ruling that the class should not have been certified, the Supreme Court again highlighted the need for a rigorous examination of predominance, even if that inquiry implicated the merits. The court said that a party seeking certification must satisfy through evidentiary proof at least one of the provisions of Rule 23(b). 41 A straightforward application of [these] class-certification principles necessarily meant that the prior certification order could not stand because any other view would reduce Rule 23(b)(3) s predominance requirement to a nullity. 42 The Supreme Court highlighted the need for a rigorous examination of predominance, even if that inquiry implicated the merits. In other words, [b]y refusing to entertain arguments against the respondents damages model that bore on the propriety of class certification, simply because those arguments would also be pertinent to the merits determination, the [courts below] ran afoul of [the Supreme Court s] precedents requiring precisely that inquiry. 43 Comcast provides further proof that the court intends for the certification phase of the litigation to be a robust process in which the district court rigorously explores predominance and all the other Rule 23 requirements. Comcast and the other decisions discussed above also reflect the court s clear preference for hard questions to be squarely faced and resolved by district courts at class certification. As Comcast makes clear, district courts are no longer at liberty to defer such matters until later in the case based on the theory that they are better left to the merits stage of the litigation. NOTES 1 See, e.g., Gen. Tel. Co. of the Sw. v. Falcon, 102 S. Ct. 2364, 2372 (1982); Wal-Mart Stores v. Dukes, 131 S. Ct. 2541, 2551 (2011); Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1196 (2013); Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432 (2013). 2 See id. 3 Erica P. John Fund v. Halliburton Co., 131 S. Ct (2011); Amgen, 133 S. Ct. at See, e.g., Dukes, 131 S. Ct. at Basic Inc. v. Levinson, 485 U.S. 224 (1988). 6 at at at (quotations omitted). 9 at at at Halliburton, 131 S. Ct. at at Thomson Reuters 5

6 WESTLAW JOURNAL SECURITIES LITIGATION AND REGULATION 15 at To prove loss causation, a plaintiff must show that his or her economic losses were proximately caused by the defendant s misstatements. See Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1633 (2005); see also Halliburton, 131 S. Ct. at Halliburton, 131 S. Ct. at at 2185 (emphasis added). 18 at at See id. 22 Dukes, 131 S. Ct. at at (emphasis in original) at 2552 n.6 (quoting Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177, 94 S. Ct (1974)) (emphasis in original and added). 29 Amgen, 133 S. Ct. at at Under Basic, the materiality requirement means there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. Basic, 485 U.S. at 232 (quoting TSC Indus. v. Northway Inc., 426 U.S. 438, 449 (1976)). 31 Amgen, 133 S. Ct. at at at at (quotations and citations omitted) (emphasis added). 37 at Comcast, 133 S. Ct. at at at at at Thomson Reuters. This publication was created to provide you with accurate and authoritative information concerning the subject matter covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit Susan Hurd (L) is a partner in the securities litigation group of Alston & Bird in Atlanta, where she represents officers and directors in a variety of litigation matters, including securities class actions, shareholder derivative suits and merger-related litigation. She also routinely advises clients on disclosure issues and electronic discovery best practices. Cara Peterman (R) is an associate with Alston & Bird s securities litigation group. Her practice focuses on shareholder derivative suits, securities fraud class actions and other complex commercial litigation matters Thomson Reuters