In what may be the biggest business case of the term, the Supreme Court today declined to show its hand.
Halliburton v. Erica P. John Fund, Inc. takes aim at shareholder class actions, a field of law that the Court itself created in a 1988 case, Basic v. Levinson. A four-justice majority in Basic held that shareholders suing over misrepresentations may prove that they relied on the false statements—a necessary element of any fraud suit—by presumption: if the market for the stock in question is more-or-less efficient, their reliance on any misrepresentations that are baked into the price of the stock may be presumed. Without this presumption, each shareholder would have to individually demonstrate his or her actual knowledge of the misrepresentation and actual reliance upon it, precluding the kind of “commonality” required to bring a class action.
Basic came at the tail-end of the Court’s decades-long experiment in policymaking by creating and defining the contours of civil actions. Where Congress passed remedial laws—here, Section 10(b) the Securities Exchange Act of 1934—the Court would often read into them “implied” causes of action allowing private litigants to bring suit and seek damages over alleged infractions that would otherwise be left to regulators.
The test of time has shown that the Court is ill-suited to this function, particularly in the securities-law context. Since Basic, stock-drop class actions have boomed, and attaining class certification (merely by relying on Basic’s presumption that the issues at play are common to class members) just about guarantees a settlement. But there has been commensurately little benefit to shareholders, who are, in the end, the ones who wind up paying any damages or settlements, with the lawyers skimming off a good portion. In other words, these suits are very likely a net negative for shareholders—which may explain why Congress has never authorized them legislatively. And in a 2013 decision, four of the Court’s conservatives stated their willingness to reconsider Basic.
Chief Justice Roberts, however, kept his own counsel then, and that is what he did today. His few questions, most directed at the plaintiffs’ counsel David Boies and Malcolm Stewart, arguing for the government in support of the plaintiffs, focused on concrete results.
The Chief Justice asked Boies to confirm that, since most cases settle immediately following certification, they never reach the merits. Similarly, Chief Justice Roberts asked Stewart whether, when the Court decided Basic, high-quality “event studies” were available by which plaintiffs could show that the heart of Basic’s presumption—that a given misrepresentation affected the stock price—holds true.
Justices Alito and Kennedy, who led the questioning of the justices skeptical of Basic, took the Chief’s drift. They pushed hard on a fallback argument by the defendant (also made by several law professors) that would require shareholder plaintiffs, at the certification stage, to prove that all class members were injured in the same way by the misrepresentation—that is, to show that the misrepresentation caused a price impact. That showing, the defendant’s counsel Aaron Streett argued, is the “glue” that holds together the class. Even Justices Breyer and Sotomayor, assumed to be unlikely pickups for the defendants, expressed some sympathy for the idea that price impact is at least relevant to demonstrating commonality at the certification stage, though they wavered on whose burden it should be: plaintiffs to prove it, or defendants to rebut it. And Stewart conceded that requiring plaintiffs to make such a showing, such as through an event study, would not have any negative effects, given that (under any view of the law) plaintiffs are required to make such a showing at some point in the case—albeit, as currently understood, after certification during the merits phase if, that is, the case has not already settled.
The chief barrier to overturning Basic may not be its logic, its wisdom, or even its correctness as a matter of law, but instead stare decisis—that is, the Court’s respect for its prior decisions, particularly where they interpret statutes that Congress may subsequently reverse through legislation. Justice Kagan, in particular, seemed to suggest by her questioning that any changes since Basic have been minor and do not justify the Court’s upending settled law. The Chief Justice as well suggested that the Court is not well-suited to track developments in the field of economics that might undermine Basic and instead should leave that task to Congress.
If one had to make a prediction, it is that Basic’s presumption of shareholder reliance will continue in force, but with a new requirement of price impact engrafted upon it. While that result would not correct the Court’s initial mistake of creating and then expanding a kind of lawsuit that Congress never envisioned, it would at least limit the damage and do so in a way that is consistent with the Court’s overall jurisprudence on implied rights of action and class action certification. That would cut down on abusive litigation, while leaving the bigger questions of policy to Congress—where they rightly belong.
