Erica P. John Fund, Inc. v. Halliburton Co

• Decision Date: 30 April 2013
• Docket Number: No. 12–10544.,12–10544.
• Citation: 718 F.3d 423
• Parties: ERICA P. JOHN FUND, INCORPORATED, formerly known as Archdiocese of Milwaukee Supporting Fund Inc., On Behalf of Itself and All Others Similarly Situated, Plaintiff–Appellee v. HALLIBURTON COMPANY, Defendant–Appellant Lori A. Russo, On Behalf of Herself and All Others Similarly Situated, Plaintiff v. Halliburton Company; David J. Lesar, Defendants–Appellants Ernest Hack, On Behalf of Himself and All Others Similarly Situated, Plaintiff v. Halliburton Company; David J. Lesar, Defendants–Appellants Polar Investment Club, On Behalf of Itself and All Others Similarly Situated, Plaintiff v. Halliburton Company; David J. Lesar, Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

718 F.3d 423

ERICA P. JOHN FUND, INCORPORATED, formerly known as Archdiocese of Milwaukee Supporting Fund Inc., On Behalf of Itself and All Others Similarly Situated, Plaintiff–Appellee

v.HALLIBURTON COMPANY, Defendant–Appellant

Lori A. Russo, On Behalf of Herself and All Others Similarly Situated, Plaintiff

v.Halliburton Company; David J. Lesar, Defendants–Appellants

Ernest Hack, On Behalf of Himself and All Others Similarly Situated, Plaintiff

v.Halliburton Company; David J. Lesar, Defendants–Appellants

Polar Investment Club, On Behalf of Itself and All Others Similarly Situated, Plaintiff

v.Halliburton Company; David J. Lesar, Defendants–Appellants.

No. 12–10544.

United States Court of Appeals, Fifth Circuit.

April 30, 2013.

David Boies, Boies, Schiller & Flexner, L.L.P., Armonk, NY, William B. Federman, Federman & Sherwood, Oklahoma City, OK, Justin Daniel Fitzdam, Attorney, Carl Edward Goldfarb, Esq., Boies, Schiller & Flexner, L.L.P., Fort Lauderdale, FL, Arthur Lewis Shingler, III, Law & Mediation, P.C., San Diego, CA, Kim Elaine Miller, Kahn Swick & Foti, L.L.C., New York, NY, David Randell Scott, Scott & Scott, Colchester, CT, Marc R. Stanley, Esq., Stanley Iola, L.L.P., Robert M. Thornton, Kilgore & Kilgore, P.L.L.C., Emery Lawrence Vincent, Dallas, TX, for Plaintiff–Appellee.

Robert Lawrence Voyles, Attorney, John Benjamin Lawrence, Jessica Bateman Pulliam, Baker Botts, L.L.P., Jose Luis Gonzalez, Godwin Ronquillo, P.C., Donald Everett Godwin, Esq., Managing Senior Counsel, Godwin Ronquillo, P.C., Brian N. Hail, Gruber, Hurst, Johansen, Hail & Shank, L.L.P., Dallas, TX, Scott Daniel Powers, Baker Botts, L.L.P., Austin, TX, Michael J. Quinn, K & L Gates, L.L.P., Los Angeles, CA, David Dykeman Sterling, Esq., Trial Attorney, Aaron Michael Streett, Baker Botts, L.L.P., Robert Alan York, Godwin Lewis, P.C., Houston, TX, for Defendants–Appellants.

Appeal from the United States District Court for the Northern District of Texas.

Before DAVIS, GRAVES, and HIGGINSON, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Plaintiffs–Appellees, a putative class of plaintiffs, seek to recover damages from Defendants–Appellants for securities fraud under § 10(b) of the Securities Exchange Act of 1934. The district court concluded that Defendants–Appellants were not entitled to use evidence of no market price impact to rebut the fraud-on-the-market presumption of reliance at class certification. We AFFIRM.

I.

This litigation arises out of alleged misrepresentations by the Halliburton Company and its CEO, President, and Chairman of the Board, David Lesar (collectively “Halliburton”). The Plaintiffs–Appellees, represented by the Erica P. John Fund, Inc. (“the Fund”), are a putative class of shareholders who allege that they suffered material losses as a result of these fraudulent misrepresentations between June 3, 1999, and December 7, 2001. Over this period of time, the Fund contends that Halliburton made misrepresentations concerning three primary aspects of its operations: (1) it understated its projected liability for asbestos claims, (2) it overstated its revenues by including billings whose collections were unlikely, and (3) it exaggerated the cost savings and efficiencies Halliburton would derive from its 1998 merger with Dresser Industries. Plaintiffs allege that these misrepresentations temporarily and artificially inflated the price of Halliburton stock; when the truth was subsequently revealed, the stock price fell, causing damages to those who purchased the stock in the relevant timeframe.

In September 2007, the Fund moved to certify a class of all persons who purchasedHalliburton's common stock during the class period. The district court first determined that the Fund had satisfied the Fed.R.Civ.P. 23(a) threshold class certification requirements of numerosity, commonality, typicality, and adequacy of representation. Turning to Rule 23(b)(3)'s predominance requirement, the district court conducted a limited inquiry into the plaintiffs' cause of action to determine whether common questions of law and fact predominated over questions affecting only individual plaintiffs. The court observed that “the Fifth Circuit has placed an extremely high burden on plaintiffs seeking class certification in a securities fraud case.” Specifically, the court pointed to Fifth Circuit precedent requiring securities fraud plaintiffs to make a showing of loss causation before obtaining certification. The district court then found that plaintiffs had not established loss causation and declined to certify the class. See Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., No. 3:02–CV–1152–M, 2008 WL 4791492 (N.D.Tex. Nov. 14, 2008) (unpublished).

On appeal, a panel of this court affirmed the district court's denial of class certification based on its conclusion that the Fund had “failed to meet this court's requirements for proving loss causation at the class certification stage.” See Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 344 (5th Cir.2010) (“AMS Fund ”). The Fund filed a petition for a writ of certiorari, which the Supreme Court granted. In Erica P. John Fund, Inc. v. Halliburton Co., ––– U.S. ––––, 131 S.Ct. 2179, 2184, 180 L.Ed.2d 24 (2011) (“EPJ Fund ”),¹ a unanimous Supreme Court reversed the judgment of the Fifth Circuit, finding that this court “erred by requiring proof of loss causation for class certification.” The Court then remanded the case back to this court, stating, “To the extent Halliburton has preserved any further arguments against class certification, they may be addressed in the first instance by the Court of Appeals on remand.” Id. at 2187.

On remand from the Supreme Court, this court remanded the case to the district court for further proceedings. Halliburton argued to the district court that the class should still not be certified because Halliburton's class certification evidence revealed that its alleged fraud did not affect the market price of the stock; that is, its alleged misrepresentation did not cause “price impact” or “price distortion.” The district court declined to consider Halliburton's evidence on the issue, finding that price impact evidence did not bear on the critical inquiry of whether common issues predominated under Rule 23(b)(3). Based on its finding that common issues predominated and that the other Rule 23 class prerequisites were satisfied, the district court certified the class. Halliburton now appeals.

II.

We review the district court's class certification decision for abuse of discretion. See Benavides v. Chicago Title Ins. Co., 636 F.3d 699, 701 (5th Cir.2011). “Because, however, a court by definition abuses its discretion when it applies an incorrect legal standard, we review such errors de novo.” Id. While the district court has substantial discretion to grant or deny certification, it “must conduct a rigorous analysis of the rule 23 prerequisites before certifying a class.” Id.

III.

A.

Halliburton's primary argument on appeal is that the district court erred by not permitting Halliburton to challenge class certification with evidence that the alleged misrepresentations did not impact the price of the stock ( i.e., there was no price impact).

1.

The pivotal question in this case is whether a defendant should be permitted to show the absence of price impact at the class certification stage of the proceedings to establish that common issues among class members do not predominate and that class certification is inappropriate.

A potential class of securities fraud plaintiffs, like any other group seeking class certification, must satisfy the requirements of Fed.R.Civ.P. 23 in order to be certified. Rule 23 provides that a class action may be maintained if the conditions of 23(a) and (b) are met. To satisfy the criteria set forth in Rule 23(a), a plaintiff must demonstrate numerosity, commonality, typicality, and adequacy of representation. In this case, the plaintiff must also show that common questions predominate, as provided in Rule 23(b). The parties agree that Rule 23(a)'s requirements have been met, so that the only element at issue is whether common questions predominate. Thus, if “questions of law or fact common to class members predominate over any questions affecting only individual members,” then a class of purchasers of Halliburton common stock from June 3, 1999–December 7, 2001 should be certified. Fed.R.Civ.P. 23(b)(3).

The private securities fraud action is based upon federal securities statutes and their implementing regulations. Section 10(b) of the Securities Exchange Act of 1934 forbids the use of any “deceptive device,” in “connection with the purchase or sale of any security.” 15 U.S.C. § 78j(b) (2006). The Securities and Exchange Commission's corresponding Rule 10b–5 forbids, among other things, the making of any “untrue statement of a material fact” “in connection with the purchase or sale of any security.” 17 CFR § 240.10b–5 (2004). From these provisions, courts have derived a private securities fraud cause of action; to succeed at trial or summary judgment, a plaintiff is required to establish the 10b–5 action's elements: (1) a material misrepresentation, (2) scienter (deceptive intent), (3) a connection with the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341–42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005).

The burden of establishing all the requirements of class certification likewise falls on the party seeking certification, here the Fund. See Wal–Mart Stores, Inc. v. Dukes, ––– U.S. ––––, 131 S.Ct. 2541, 2551, 180 L.Ed.2d 374 (2011). Establishing common question predominance as a prerequisite to class certification is different from the burden of proving 10b–5 fraud on the merits, although the inquiries may overlap. As the Supreme Court has stated, “[w]hether common questions of law or fact predominate in a...