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

• Decision Date: 23 June 2014
• Docket Number: No. 13–317.,13–317.
• Citation: 573 U.S. 258,189 L.Ed.2d 339,134 S.Ct. 2398
• Parties: HALLIBURTON CO., et al., Petitioners v. ERICA P. JOHN FUND, INC., fka Archdiocese of Milwaukee Supporting Fund, Inc.
• Court: U.S. Supreme Court

573 U.S. 258

134 S.Ct. 2398

189 L.Ed.2d 339

HALLIBURTON CO., et al., Petitioners

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

No. 13–317.

Supreme Court of the United States

Argued March 5, 2014.

Decided June 23, 2014.

Aaron M. Streett, Austin, TX, for Petitioners.

David Boies, Armonk, NY, for Respondent.

Malcolm L. Stewart, for the United States as amicus curiae, by special leave of the Court, supporting the Respondent.

Evan A. Young, Baker Botts L.L.P., Austin, TX, Wm. Bradford Reynolds, Baker Botts L.L.P., Washington, D.C., David D. Sterling, Aaron M. Streett, Counsel of Record, Benjamin A. Geslison, Shane Pennington, Edmund G. LaCour, Jr., Baker Botts L.L.P., Houston, TX, for Petitioners.

Lewis Kahn, Neil Rothstein, Kahn Swick & Foti, LLC, Madisonville, LA, Kim E. Miller, Esq., Kahn Swick & Foti, LLC, New York, NY, Special Counsel to Lead Plaintiff and the Class, E. Lawrence Vincent, Law Office of Joe H. Staley, Jr., P.C., Dallas, TX, David Boies, Counsel of Record, Boies, Schiller & Flexner LLP, Armonk, NY, Carl E. Goldfarb, Andrew L. Adler, Boies, Schiller & Flexner LLP, Ft. Lauderdale, FL, for Respondent.

Chief Justice ROBERTS delivered the opinion of the Court.

Investors can recover damages in a private securities fraud action only if they prove that they relied on the defendant's misrepresentation in deciding to buy or sell a company's stock. In Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), we held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information—including material misstatements. In such a case, we concluded, anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.

We also held, however, that a defendant could rebut this presumption in a number of ways, including by showing that the alleged misrepresentation did not actually affect the stock's price—that is, that the misrepresentation had no "price impact." The questions presented are whether we should overrule or modify Basic 's presumption of reliance and, if not, whether defendants should nonetheless be afforded an opportunity in securities class action cases to rebut the presumption at the class certification stage, by showing a lack of price impact.

I

Respondent Erica P. John Fund, Inc. (EPJ Fund), is the lead plaintiff in a putative class action against Halliburton and one of its executives (collectively Halliburton) alleging violations of section 10(b) of the Securities Exchange Act of 1934, 48 Stat. 891, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b–5, 17 CFR § 240.10b–5 (2013). According to EPJ Fund, between June 3, 1999, and December 7, 2001, Halliburton made a series of misrepresentations regarding its potential liability in asbestos litigation, its expected revenue from certain construction contracts, and the anticipated benefits of its merger with another company—all in an attempt to inflate the price of its stock. Halliburton subsequently made a number of corrective disclosures, which, EPJ Fund contends, caused the company's stock price to drop and investors to lose money.

EPJ Fund moved to certify a class comprising all investors who purchased Halliburton common stock during the class period. The District Court found that the proposed class satisfied all the threshold requirements of Federal Rule of Civil Procedure 23(a) : It was sufficiently numerous, there were common questions of law or fact, the representative parties' claims were typical of the class claims, and the representatives could fairly and adequately protect the interests of the class. App. to Pet. for Cert. 54a. And except for one difficulty, the court would have also concluded that the class satisfied the requirement of Rule 23(b)(3) that "the questions of law or fact common to class members predominate over any questions affecting only individual members." See id., at 55a, 98a. The difficulty was that Circuit precedent required securities fraud plaintiffs to prove "loss causation"—a causal connection between the defendants' alleged misrepresentations and the plaintiffs' economic losses—in order to invoke Basic 's presumption of reliance and obtain class certification. App. to Pet. for Cert. 55a, and n. 2. Because EPJ Fund had not demonstrated such a connection for any of Halliburton's alleged misrepresentations, the District Court refused to certify the proposed class. Id., at 55a, 98a. The United States Court of Appeals for the Fifth Circuit affirmed the denial of class certification on the same ground. Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330 (2010).

We granted certiorari and vacated the judgment, finding nothing in "Basic or its logic" to justify the Fifth Circuit's requirement that securities fraud plaintiffs prove loss causation at the class certification stage in order to invoke Basic 's presumption of reliance. Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ––––, ––––, 131 S.Ct. 2179, 2185–2186, 180 L.Ed.2d 24 (2011) (Halliburton I ). "Loss causation," we explained, "addresses a matter different from whether an investor relied on a misrepresentation, presumptively or otherwise, when buying or selling a stock." Ibid. We remanded the case for the lower courts to consider "any further arguments against class certification" that Halliburton had preserved. Id., at ––––, 131 S.Ct., at 2187.

On remand, Halliburton argued that class certification was inappropriate because the evidence it had earlier introduced to disprove loss causation also showed that none of its alleged misrepresentations had actually affected its stock price. By demonstrating the absence of any "price impact," Halliburton contended, it had rebutted Basic 's presumption that the members of the proposed class had relied on its alleged misrepresentations simply by buying or selling its stock at the market price. And without the benefit of the Basic presumption, investors would have to prove reliance on an individual basis, meaning that individual issues would predominate over common ones. The District Court declined to consider Halliburton's argument, holding that the Basic presumption applied and certifying the class under Rule 23(b)(3). App. to Pet. for Cert. 30a.

The Fifth Circuit affirmed. 718 F.3d 423 (2013). The court found that Halliburton had preserved its price impact argument, but to no avail. Id., at 435–436. While acknowledging that "Halliburton's price impact evidence could be used at the trial on the merits to refute the presumption of reliance," id., at 433, the court held that Halliburton could not use such evidence for that purpose at the class certification stage, id., at 435. "[P]rice impact evidence," the court explained, "does not bear on the question of common question predominance [under Rule 23(b)(3) ], and is thus appropriately considered only on the merits after the class has been certified." Ibid.

We once again granted certiorari, 571 U.S. ––––, 134 S.Ct. 636, 187 L.Ed.2d 415 (2013), this time to resolve a conflict among the Circuits over whether securities fraud defendants may attempt to rebut the Basic presumption at the class certification stage with evidence of a lack of price impact. We also accepted Halliburton's invitation to reconsider the presumption of reliance for securities fraud claims that we adopted in Basic .

II

Halliburton urges us to overrule Basic 's presumption of reliance and to instead require every securities fraud plaintiff to prove that he actually relied on the defendant's misrepresentation in deciding to buy or sell a company's stock. Before overturning a long-settled precedent, however, we require "special justification," not just an argument that the precedent was wrongly decided. Dickerson v. United States, 530 U.S. 428, 443, 120 S.Ct. 2326, 147 L.Ed.2d 405 (2000) (internal quotation marks omitted). Halliburton has failed to make that showing.

A

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission's Rule 10b–5 prohibit making any material misstatement or omission in connection with the purchase or sale of any security. Although section 10(b) does not create an express private cause of action, we have long recognized an implied private cause of action to enforce the provision and its implementing regulation. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). To recover damages for violations of section 10(b) and Rule 10b–5, a plaintiff must prove " ‘(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.’ " Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ––––, ––––, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013) (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. ––––, ––––, 131 S.Ct. 1309, 1317–1318, 179 L.Ed.2d 398 (2011)).

The reliance element " ‘ensures that there is a proper connection between a defendant's misrepresentation and a plaintiff's injury.’ " 568 U.S., at ––––, 133 S.Ct., at 1192 (quoting Halliburton I, 563 U.S., at ––––, 131 S.Ct., at 2184–2185). "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." Id., at ––––, 133 S.Ct., at 1192.

In Basic, however, we recognized that requiring such direct proof of reliance "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b–5 plaintiff who has traded on an impersonal market." 485 U.S., at 245, 108 S.Ct. 978. That is because, even assuming an investor could prove...