In what is now the third interlocutory appeal in the course of class certification proceedings spanning more than a decade, the case of Erica P. John Fund, Inc. v. Halliburton Co. will head back to the United States Court of Appeals for the Fifth Circuit, with perhaps another trip to the Supreme Court to follow. The Fifth Circuit’s eventual decision on this latest interlocutory appeal could clarify—at least in the Fifth Circuit—just how far a defendant in a securities class-action can go in presenting indirect evidence of (a lack of) price impact to defeat class certification.
In August of this year, we wrote in this space that a Texas federal district court applied the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”) to allow defendant Halliburton to present evidence of a lack of price impact at class certification. After considering evidence from dueling experts, and in light of the Supreme Court’s holding in Halliburton II, the District Court held that Halliburton demonstrated a lack of price impact for five of six corrective disclosures. The sixth disclosure precipitated Halliburton’s current appeal.
On that sixth disclosure—concerning an adverse judgment in an asbestos-related suit—the district court held that Halliburton failed to demonstrate a lack of price impact. According to the district court, a defendant at the class certification stage may not present evidence that a specific disclosure preceding a stock-price decline was not corrective of an alleged misrepresentation, because such arguments go the merits of the claim, not the class prerequisites. Halliburton appealed.
While a three-judge panel of the Fifth Circuit unanimously agreed on November 5, 2015 to allow Halliburton’s third interlocutory appeal to proceed, Judge James L. Dennis penned a separate concurrence, expressing his view that the district court was correct.
Evidencing weariness for “a case that has remained in the class certification stage for thirteen years,” Judge Dennis nonetheless agreed to allow the appeal to proceed in order to achieve “added clarity” on the question of just how much indirect evidence of price impact (or lack thereof) a defendant can present at class certification. On this question, Judge Dennis noted the tension between the Supreme Court’s holding in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S. Ct. 1184 (2013) and its holding in Halliburton II. In Amgen, the Court held that any question as to materiality of an alleged misrepresentation should be left to the merits stage because it does not bear on the predominance requirement in Federal Rule of Civil Procedure 23(b)(3).
While the Court in Halliburton II held that defendants may introduce “direct as well as indirect” evidence of a lack of price impact to rebut the presumption of reliance at the class certification stage, Judge Dennis did not read Halliburton II to require a court to consider all evidence “somehow related to price impact” at class certification. To the contrary, Judge Dennis reasoned, the Supreme Court in Halliburton II did “not hold that issues that would otherwise be strictly merits issues under Amgen can be raised at the class certification stage merely because they bear on the issue of price impact.” Consequently, according to Judge Dennis, Halliburton II “only allows defendants to introduce at the class certification stage evidence of a lack of price impact that Amgen does not otherwise preclude.” In other words, because the question of whether a disclosure was corrective goes to materiality—not predominance—it is not properly considered at class certification.
Given the history of this case, Judge Dennis’s view that allowing yet another appeal will provide “added clarity” seems a bit optimistic. In any event, it may be several years before any clarity materializes.