Erica P. John Fund, Inc. v. Halliburton Co., 09–1403.

• Decision Date: 06 June 2011
• Docket Number: No. 09–1403.,09–1403.
• Citation: 180 L.Ed.2d 24,563 U.S. 804,131 S.Ct. 2179
• Parties: ERICA P. JOHN FUND, INC., fka Archdiocese of Milwaukee Supporting Fund, Inc., Petitioner, v. HALLIBURTON CO. et al.
• Court: U.S. Supreme Court

563 U.S. 804

131 S.Ct. 2179

180 L.Ed.2d 24

ERICA P. JOHN FUND, INC., fka Archdiocese of Milwaukee Supporting Fund, Inc., Petitioner,

v.HALLIBURTON CO. et al.

No. 09–1403.

Supreme Court of the United States

Argued April 25, 2011.

Decided June 6, 2011.

David Boies, Armonk, NY, for Petitioner.

Nicole A. Saharsky, for United States as amicus curiae, by special leave of the Court, supporting the Petitioner.

David Sterling, Houston, Texas, for Respondents.

Lewis Kahn, Neil Rothstein, Kahn Swick & Foti, LLC, Madisonville, LA, E. Lawrence Vincent, Plano, TX, David Boies, Boies, Schiller & Flexner LLP, Armonk, NY, Carl E. Goldfarb, Justin D. Fitzdam, Boies, Schiller & Flexner LLP, Ft. Lauderdale, FL, for Petitioner.

Robb L. Voyles, Jessica B. Pulliam, Susan C. Kennedy, Baker Botts L.L.P., Dallas, Texas, David D. Sterling, Aaron M. Streett, Benjamin A. Geslison, Baker Botts L.L.P., Houston, Texas, for Respondent Halliburton Co.

Donald E. Godwin, Godwin Ronquillo P.C., Dallas, Texas, R. Alan York, Godwin Ronquillo P.C., Houston, Texas, for Respondent David Lesar.

Evan A. Young, Baker Botts L.L.P., Austin, Texas, Jeffrey A. Lamken, Martin V. Totaro, Molo Lamken L.L.P., Washington, DC, for Respondents.

Chief Justice ROBERTS delivered the opinion of the Court.

To prevail on the merits in a private securities fraud action, investors must demonstrate that the defendant's deceptive conduct caused their claimed economic loss. This requirement is commonly referred to as "loss causation." The question presented in this case is whether securities fraud plaintiffs must also prove loss causation in order to obtain class certification. We hold that they need not.

I

Petitioner Erica P. John Fund, Inc. (EPJ Fund), is the lead plaintiff in a putative securities fraud class action filed against Halliburton Co. and one of its executives (collectively Halliburton). The suit was brought on behalf of all investors who purchased Halliburton common stock between June 3, 1999, and December 7, 2001.

EPJ Fund alleges that Halliburton made various misrepresentations designed to inflate its stock price, in violation of § 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b–5. See 48 Stat. 891, 15 U.S.C. § 78j(b) ; 17 CFR § 240.10b–5 (2010). The complaint asserts that Halliburton deliberately made false statements about (1) the scope of its potential liability in asbestos litigation, (2) its expected revenue from certain construction contracts, and (3) the benefits of its merger with another company. EPJ Fund contends that Halliburton later made a number of corrective disclosures that caused its stock price to drop and, consequently, investors to lose money.

After defeating a motion to dismiss, EPJ Fund sought to have its proposed class certified pursuant to Federal Rule of Civil Procedure 23. The parties agreed, and the District Court held, that EPJ Fund satisfied the general requirements for class actions set out in Rule 23(a) : The class was sufficiently numerous, there were common questions of law or fact, the claims of the representative parties were typical, and the representative parties would fairly and adequately protect the interests of the class. See App. to Pet. for Cert. 3a.

The District Court also found that the action could proceed as a class action under Rule 23(b)(3), but for one problem: Circuit precedent required securities fraud plaintiffs to prove "loss causation" in order to obtain class certification. Id., at 4a, and n. 2 (citing Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 269 (C.A.5 2007) ). As the District Court explained, loss causation is the " ‘causal connection between the material misrepresentation and the [economic] loss' " suffered by investors. App. to Pet. for Cert. 5a, and n. 3 (quoting Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 342, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005) ). After reviewing the alleged misrepresentations and corrective disclosures, the District Court concluded that it could not certify the class in this case because EPJ Fund had "failed to establish loss causation with respect to any" of its claims. App. to Pet. for Cert. 54a. The court made clear, however, that absent "this stringent loss causation requirement," it would have granted the Fund's certification request. Ibid.

The Court of Appeals affirmed the denial of class certification. See 597 F.3d 330 (C.A.5 2010). It confirmed that, "[i]n order to obtain class certification on its claims, [EPJ Fund] was required to prove loss causation, i.e., that the corrected truth of the former falsehoods actually caused the stock price to fall and resulted in the losses." Id., at 334. Like the District Court, the Court of Appeals concluded that EPJ Fund had failed to meet the "requirements for proving loss causation at the class certification stage." Id., at 344.

We granted the Fund's petition for certiorari, 562 U.S. ––––, 131 S.Ct. 856, 178 L.Ed.2d 622 (2011), to resolve a conflict among the Circuits as to whether securities fraud plaintiffs must prove loss causation in order to obtain class certification. Compare 597 F.3d, at 334 (case below), with In re Salomon Analyst Metromedia Litigation, 544 F.3d 474, 483 (C.A.2 2008) (not requiring investors to prove loss causation at class certification stage); Schleicher v. Wendt, 618 F.3d 679, 687 (C.A.7 2010) (same); In re DVI, Inc. Securities Litigation, 639 F.3d 623, 636 – 637, 2011 WL 1125926, *7 (C.A.3, Mar.29, 2011) (same; decided after certiorari was granted).

II

EPJ Fund contends that the Court of Appeals erred by requiring proof of loss causation for class certification. We agree.

A

As noted, the sole dispute here is whether EPJ Fund satisfied the prerequisites of Rule 23(b)(3). In order to certify a class under that Rule, a court must find "that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed. Rule Civ. Proc. 23(b)(3). Considering whether "questions of law or fact common to class members predominate" begins, of course, with the elements of the underlying cause of action. The elements of a private securities fraud claim based on violations of § 10(b) and Rule 10b–5 are: " ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.’ " Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. ––––, ––––, 131 S.Ct. 1309, 1317, 179 L.Ed.2d 398 (2011) (quoting Stoneridge Investment Partners, LLC v. Scientific–Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008) ).

Whether common questions of law or fact predominate in a securities fraud action often turns on the element of reliance. The courts below determined that EPJ Fund had to prove the separate element of loss causation in order to establish that reliance was capable of resolution on a common, classwide basis.

"Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action." Stoneridge, supra, at 159, 128 S.Ct. 761. This is because proof of reliance ensures that there is a proper "connection between a defendant's misrepresentation and a plaintiff's injury."

Basic Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he was aware of a company's statement and engaged in a relevant transaction—e.g., purchasing common stock—based on that specific misrepresentation. In that situation, the plaintiff plainly would have relied on the company's deceptive conduct. A plaintiff unaware of the relevant statement, on the other hand, could not establish reliance on that basis.

We recognized in Basic, however, that limiting proof of reliance in such a way "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b–5 plaintiff who has traded on an impersonal market." Id., at 245, 108 S.Ct. 978. We also observed that "[r]equiring proof of individualized reliance from each member of the proposed plaintiff class effectively would" prevent such plaintiffs "from proceeding with a class action, since individual issues" would "overwhelm[ ] the common ones." Id., at 242, 108 S.Ct. 978.

The Court in Basic sought to alleviate those related concerns by permitting plaintiffs to invoke a rebuttable presumption of reliance based on what is known as the "fraud-on-the-market" theory. According to that theory, "the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations." Id., at 246, 108 S.Ct. 978. Because the market "transmits information to the investor in the processed form of a market price," we can assume, the Court explained, that an investor relies on public misstatements whenever he "buys or sells stock at the price set by the market." Id., at 244, 247, 108 S.Ct. 978 (internal quotation marks omitted); see also Stoneridge, supra, at 159, 128 S.Ct. 761; Dura Pharmaceuticals, 544 U.S., at 341–342, 125 S.Ct. 1627. The Court also made clear that the presumption was just that, and could be rebutted by appropriate evidence. See Basic, supra, at 248, 108 S.Ct. 978.

B

It is undisputed that securities fraud plaintiffs must prove certain things in order to invoke Basic 's rebuttable presumption of reliance. It is common ground, for example, that plaintiffs must demonstrate that the alleged misrepresentations were publicly known (else how would the market take them into account?), that the stock traded in an efficient market, and that the relevant transaction took place "between the time the misrepresentations were made and the time the truth was...