IBEW Local 98 Pension Fund v. Best Buy Co., 14–3178.

• Decision Date: 12 April 2016
• Docket Number: No. 14–3178.,14–3178.
• Citation: 818 F.3d 775
• Parties: IBEW LOCAL 98 PENSION FUND, et al., Plaintiffs–Appellees v. BEST BUY CO., INC., et al., Defendants–Appellants. Securities Industry and Financial Markets Association ; Chamber of Commerce of the United States, Amici on Behalf of Appellants.
• Court: U.S. Court of Appeals — Eighth Circuit

818 F.3d 775

IBEW LOCAL 98 PENSION FUND, et al., Plaintiffs–Appellees

v. BEST BUY CO., INC., et al., Defendants–Appellants.Securities Industry and Financial Markets Association ; Chamber of Commerce of the United States, Amici on Behalf of Appellants.

No. 14–3178.

United States Court of Appeals, Eighth Circuit.

Submitted: Oct. 22, 2015.

Filed: April 12, 2016.

Joseph M. McLaughlin, argued, New York, N.Y. (Eric John Magnuson, Stephen Paul Safranski, Jeffrey Sullivan Gleason, Minneapolis, MN, Joseph M. McLaughlin, George S. Wang, Daniel J. Stujenske, New York, NY, on the brief), for Defendants–Appellants.

Susan Katina Alexander, San Francisco, CA (Clayton Dean Halunen, Minneapolis, MN., Susan Katina Alexander, Shawn A. Williams, Daniel J. Pfefferbaum, Aelish M. Baig, Kenneth J. Black, San Francisco, CA, on the brief), for Plaintiffs–Appellees

Kathryn L. Comerford Todd, Charles E. Davidow, Ira D. Hammerman, Kevin Carroll, Tyler R. Green, Washington, DC, Lewis J. Liman, Marc Falcone, Robin Tarnofsky, New York, NY, on the brief, for Amici on Behalf of Appellants.

Before LOKEN, MURPHY, and COLLOTON, Circuit Judges.

LOKEN, Circuit Judge.

Best Buy Co., Inc., is a leading retailer of consumer electronic products and services. Plaintiffs sued Best Buy and three of its executives (collectively, "defendants") alleging they violated Rule 10b–5 of the federal securities laws¹ by making fraudulent or recklessly misleading public statements. Plaintiffs alleged that statements in a press release and ensuing conference call with securities analysts on September 14, 2010, artificially inflated and maintained Best Buy's publicly traded stock price until the misstatements were disclosed when Best Buy reported its quarterly earnings on December 14. After the district court dismissed claims relating to the press release, plaintiffs moved to certify their claims relating to the conference call as a class action. Plaintiffs relied on the fraud-on-the-market presumption to satisfy the Rule 23 requirement that common questions predominate in proving their Rule 10b–5 claim. See Basic, Inc. v. Levinson, 485 U.S. 224, 241–47, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). Defendants contended they rebutted the presumption; plaintiffs responded that rebuttal evidence was not admissible at the class certification stage.

The district court stayed the class certification motion until the Supreme Court resolved that issue in Halliburton Co. v. Erica P. John Fund, Inc., ––– U.S. ––––, 134 S.Ct. 2398, 2414–16, 189 L.Ed.2d 339 (2014) ( Halliburton II ). The district court then certified a class consisting of all purchasers of Best Buy stock between September 14 and December 14, 2010, concluding that common questions predominate because defendants failed to rebut the Basic presumption by establishing that the challenged statements did not impact Best Buy's publicly-traded stock price. We granted defendants permission to appeal this interlocutory ruling. See Fed.R.Civ.P. 23(f). Addressing an issue of first impression, we conclude the district court misapplied the price impact analysis mandated by Halliburton II and therefore reverse.

I. Factual Background.

On September 14, 2010, Best Buy issued a press release summarizing its reported financial performance for the second quarter of its 2011 fiscal year, which ended on August 28. The press release, issued at 8:00 A.M., before the stock market opened, announced that Best Buy was increasing its full-year earnings per share (EPS) guidance by ten cents to $3.55–$3.70. Best Buy's common stock (BBY), which closed the prior day at $34.65, opened at 9:30 A.M. at $37.25, up 7.5%.

At 10:00 A.M. on September 14, Best Buy's Chief Executive Officer, Brian J. Dunn, and its Chief Financial Officer, Jim Muehlbauer, held a conference call with analysts. The call began with a reminder to investors that the executives' discussion "may contain forward-looking statements, which are subject to risks and uncertainties," and that the company's SEC filings contained additional information about these factors. During the call, Muehlbauer said: (1) "looking at the results for the first half of fiscal 2011, while there are many moving pieces that we manage, like always, we are pleased that our earnings are essentially in line with our original expectations for the year"; and (2) "Overall, we are pleased that we are on track to deliver and exceed our annual EPS guidance." (Emphases added.) BBY closed on September 14 at $36.73; 21.3 million shares were traded that day.

At 8:00 A.M. on December 14, Best Buy issued a press release reporting a decline in fiscal third quarter sales and announcing that it had reduced the FY 2011 EPS guidance to $3.20–$3.40. In a conference call after the market opened that day, Dunn and Muehlbauer discussed the "lower than expected" third quarter sales. BBY's price, which had risen after September 14 (though not in a straight line) to close at $41.70 on December 13, closed at $35.52 on December 14, down 14.8%; 64.7 million shares were traded that day.

Plaintiffs filed this action on February 18, 2011. On March 20, 2012, the district court dismissed the Amended Complaint with prejudice, concluding that plaintiffs failed to allege sufficient facts showing that misrepresentations on September 14, specifically including the conference call statement that Best Buy was "on track to deliver and exceed our annual EPS guidance," were not forward looking statements protected by the PLSRA's Safe Harbor provision.² The court denied plaintiffs' request to further amend their complaint. However, in October 2012, after a further hearing, the court granted plaintiffs' motion for leave to file a First Amended Class Action Complaint.

The First Amended Class Action Complaint alleged that defendants made three actionable false and misleading statements on September 14, 2010: the statement in the press release increasing Best Buy's FY 2011 EPS guidance to $3.55–$3.70, and two statements in the conference call: "we are on track to deliver and exceed our annual EPS guidance," and "our earnings are essentially in line with our original expectations for the year." In an Order dated August 5, 2013, the district court dismissed the claim based on the EPS guidance statement in the press release because it was forward-looking and accompanied by meaningful cautionary statements in Best Buy's Form 8–K and Form 10–K SEC filings. However, the court denied defendants' motion to dismiss the claim based on the conference call statements because they were "not forward-looking and are, therefore, actionable as a statement of present condition." The court denied defendants' request to certify that interlocutory ruling for immediate appeal. Thus, not presently before us is the question whether those statements, "when read in context, cannot meaningfully be distinguished from the future projection of which they are a part." Avaya, 564 F.3d at 255.³ Plaintiffs then filed the motion for class certification here at issue.

II. Framing the Price Impact Issue.

Plaintiffs in Rule 10b–5 fraud actions must prove six elements: "(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. Conn. Ret. Plans & Tr. Funds, ––– U.S. ––––, 133 S.Ct. 1184, 1192, 185 L.Ed.2d 308 (2013) (quotation omitted). To be certified, a proposed class must show that "questions of law or fact common to class members predominate over any questions affecting only individual members."

Fed.R.Civ.P. 23(b)(3). Defendants contest the district court's Rule 23 predominance ruling.⁴ A district court abuses its discretion if it certifies a class that does not meet this requirement. Halvorson v. Auto–Owners Ins. Co., 718 F.3d 773, 780 (8th Cir.2013). We review the grant of class certification for abuse of discretion, but review legal questions de novo. In re St. Jude Med., Inc., 425 F.3d 1116, 1119 (8th Cir.2005).

In Basic, 485 U.S. at 245, 108 S.Ct. 978, the Supreme Court observed that requiring each investor to prove individual reliance on an alleged fraudulent misrepresentation "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b–5 plaintiff who has traded on an impersonal market," because each investor would have to prove "how he would have acted ... if the misrepresentation had not been made." Concluding this would be contrary to the statutory purpose of protecting investors trading on well-developed securities markets, the Court held that Rule 10b–5 plaintiffs may invoke a rebuttable fraud-on-the-market presumption of reliance.

The presumption is based on the theory "that the market price of shares traded on well-developed markets reflects all publicly available information," and therefore "[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price." Id. at 246–47, 108 S.Ct. 978. The presumption applies if a Rule 10b–5 plaintiff demonstrates "(1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed." Halliburton II, 134 S.Ct. at 2408 ; see Basic, 485 U.S. at 248–50, 108 S.Ct. 978. If a defendant rebuts the presumption, "a Rule 10b–5 suit cannot proceed as a class action" because individual questions of reliance will predominate over common questions of law and fact. Halliburton II, 134 S.Ct. at 2416. Thus, establishing the Basic presumption is critical to a Rule 10b–5 plaintiff's Rule 23 burden to establish that a class action should be certified.

Plaintiffs' motion for class certification relied on Basic's fraud-on-the-market presumption to prove the reliance element of their Rule 10b–5 claims...