On June 23, 2014, the Supreme Court issued its opinion in the second Halliburton appeal in which the Court vacated a prior class certification ruling in favor of requiring more rigorous scrutiny into a plaintiff’s ability to meet the requirements for certification under Rule 23 of the Federal Rules of Civil Procedure. This decision is the latest in a series of opinions in which the Supreme Court has made clear that plaintiffs face significant challenges at class certification, including the need to secure expert testimony to support their class certification motions. Halliburton II is, thus, further proof that the law has evolved beyond the point where plaintiffs may avoid defeat at class certification by simply arguing that the issues raised by defendants overlap with the “merits” and, thus, should be addressed by the court later in the case. Even though Halliburton II dealt with claims brought pursuant to the federal securities laws, this recent decision is helpful to any defendant facing class claims and can be cited as further support for requiring specific proof from plaintiffs that they have satisfied each Rule 23 requirement before granting certification. Halliburton II also makes clear a defendant’s right at class certification to challenge in a meaningful way the evidentiary support, or lack thereof, on which plaintiffs’ certification motion is based.
In Halliburton II, the plaintiffs sought to certify a class of investors in Halliburton’s common stock for claims brought pursuant to Section 10(b) of the Securities Exchange Act of 1934. The 5th Circuit had affirmed the district court’s conclusion that the plaintiff was entitled to invoke a presumption of reliance for purposes of its class certification motion and thereby satisfy Rule 23(b)(3)’s predominance requirement, which directs that a class may not be certified unless issues common to all class members predominate over issues that would require individualized scrutiny of each individual class member. Without the plaintiff’s ability to invoke this presumption of reliance, the law was clear that the proposed investor class in Halliburton II would flunk Rule 23’s predominance test and certification would be denied.
The Supreme Court refused in Halliburton II to overrule a prior decision that first recognized a presumption of reliance could be available to investors under certain circumstances for Section 10(b) claims. The Court instead chose to make clear that defendants have the right at class certification to come forward with specific evidence to rebut the application of this presumption and thereby defeat certification. The Court also reiterated that each of the requirements for invoking the presumption of reliance, which had been set forth in the Court’s prior rulings, must be affirmatively proven by plaintiffs (with the exception of the materiality requirement) or certification will be denied for that reason standing alone.
Consistent with the trends seen in other types of putative class cases, Halliburton II also addressed the use of expert testimony by plaintiffs to attempt to demonstrate compliance with Rule 23. The Court observed in Halliburton II that plaintiffs often offer expert prepared “event studies” in an attempt to show that a company’s stock price generally reacts to news about that company. The Court reasoned that it was only fair that defendants should also be allowed to offer the same type of evidence prior to certification for purposes of seeking to rebut the presumption. The Court refused to entertain the notion that requiring plaintiffs to come forward with expert testimony in support of certification (or requiring them to respond to such testimony when offered by defendants) was too burdensome or would require lower courts to delve into issues that need not be proven at the class certification.
The ruling that defendants must be afforded the opportunity to challenge the fundamental premise on which the presumption of reliance is based — i.e., the supposed impact that the defendants’ alleged misstatements had on the company’s stock price — was deemed necessary by the Court to make the use of the presumption consistent with Rule 23’s requirements. In this respect, the Court’s decision in Halliburton II is similar to its prior decisions in other types of class cases in which the Court stressed that plaintiffs bear the burden of proof under Rule 23, that compliance with that rule must be affirmatively proven, not presumed, and that plaintiffs may have to prove at class certification certain facts that they will again have to prove at trial.
In sum, Halliburton II represents a victory for defendants because it provides a clear road map to follow for opposing certification in securities cases that, if successful, has the ability, practically speaking, to end the case. No shareholder plaintiff can realistically pursue class claims under Section 10(b) once the court has held that the presumption of reliance is not available. Halliburton II likewise sends a strong signal from the Supreme Court that any ruling in favor of class certification in any type of case must be grounded in evidentiary submissions by plaintiffs that prove their compliance with all of the Rule 23 requirements.