For all the talk about market efficiency, and the dueling economic theories at the heart of the debate over the efficient capital markets hypothesis, Halliburton II ended up being decided on distinctly lawyerly grounds. Chief Justice Roberts’s opinion for the Court largely sidestepped thorny empirical questions about just how efficient markets are and instead relied on conventional judicial reasoning about precedent and the weight of authority. That is, over significant objection by Justices Thomas, Scalia, and Alito, the Court decided to be a court and not a peer review board.
After briefly describing the procedural history of the case, Justice Roberts immediately framed the issue in a way that was devastating to those who sought to topple Basic’s presumption of reliance. “Before overturning a long-settled precedent,” Roberts wrote, the Court requires a “special justification” and not merely an argument that the precedent was wrongly decided. (Slip op., at 4). More specifically, with regard to the idea that new economic research renders Basic’s logic untenable, Roberts declared that Halliburton failed to show the kind of “fundamental shift in economic theory” that would be required to overrule the Court’s previous holding. (Slip op., at 11). Right from the start, Halliburton had a steep hill to climb.
Although the Court has not been very consistent with regard to its application of stare decisis principles, Halliburton II shows just how powerful they can be. Stare decisis counsels the Court to adhere to its precedent unless there is a really good reason for not doing so. One way to put it is that precedent has a sort of entrenched “weight.” It is not enough that current Justices might think that, all things considered, a previous Court had gotten it wrong. Instead, the simple fact that the Court had decided an issue one way serves as an independently significant reason for sticking to that view.
In Halliburton II, principles of stare decisis provided something of a lifeboat for the Court. None of the Justices are economists, and certainly none of them are qualified to adjudicate whether Robert Shiller or Eugene Fama have the better view. At oral argument, Chief Justice Roberts signaled his discomfort when he asked, “How am I supposed to review the economic literature and decide which [theory] is correct?” When the Court has such limited confidence in its ability to make complicated judgments, the idea of precedent becomes particularly attractive. By requiring a “special justification” from Halliburton, Roberts was able to stack the deck in his favor. His arguments didn’t have to be persuasive – they just had to be minimally plausible.
And so, the answer to Roberts’s question at oral argument is that the Court isn’t even going to try to decide exactly how efficient markets are. Rather, the Court is going to do something with which lawyers are typically more comfortable – reason from authority. The simple fact that the Court had already decided the issue (rightly or wrongly) was going to carry the day. That might not be intellectually satisfying to some, and it might leave us stuck with poor decisions by previous Courts, but given the Justices’ limited economic prowess, perhaps it’s the best we can hope for.
James D. Nelson is a Postdoctoral Fellow in Corporate Governance at Columbia Law School.