Burdens of Production and Persuasion on Price Impact After Halliburton II

The following post comes to us from Wendy Gerwick Couture, Associate Professor at the University of Idaho College of Law.  It is based on her recent paper entitled “Answering Halliburton II’s Unanswered Question: Burdens of Production and Persuasion on Price Impact,” which is forthcoming in the Securities Regulation Law Journal and is available here.

In Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), 134 S. Ct. 2398, 2407 (2014), the Supreme Court held that a defendant can rebut the fraud-on-the-market presumption of reliance at class certification by showing the absence of price impact.  As Professor Meyer Eisenberg noted here, left unanswered by the Court is the allocation of the burdens of production and persuasion with respect to price impact at class certification.  Somewhat naively, the Court appears to view price impact as binary: either price impact exists or it does not, and the district court can just look at “the evidence” at class certification and discern whether it exists.  In reality, however, as Professor John C. Coffee, Jr. noted here, price impact is a fact question like any other, and the allocation of burdens of production and persuasion is potentially outcome-determinative.  I seek to answer this question, analyzing (1) the plaintiff’s burden of production on the merits at class certification and (2) the effect of a presumption about the merits on burdens of production and persuasion.

First, drawing from the Court’s guidance in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, (2011), and Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), I argue that the plaintiff has the burden at class certification of showing that price impact is “capable of” classwide resolution.  As the Court clarified in Wal-Mart and Comcast, only those components of the plaintiff’s merits case that impact the commonality and predominance requirements must be addressed at class certification, and the inquiry at that stage is “the capacity of a classwide proceeding” to resolve the litigation.  In Wal-Mart, the Court held that the class should not have been certified because the plaintiffs were not “capable of” proving disparate impact; and in Comcast, the Court held that the class should not have been certified because the plaintiffs were not “capable of” establishing damages attributable to their theory of liability.  I argue that this “capable of” test, which the Court applied in Wal-Mart and Comcast, is akin to the court’s inquiry when ruling on a defendant’s motion for summary judgment or judgment as a matter of law.  In the context of securities fraud then, class certification should be granted unless no reasonable factfinder could find the existence of price impact.

Second, I argue Federal Rule of Evidence 301’s allocation of the burdens of production and persuasion with respect to presumptions, as applied in the context of a defendant’s motion for summary judgment or judgment as a matter of law, should guide courts’ inquiry into price impact at class certification.  Helpfully, in a series of opinions, the Supreme Court has clarified the operation of Rule 301 in the context of the McDonnell Douglas framework for proving intentional discrimination.  In short, once the plaintiff has proven the “basic facts” to invoke the presumption of a “presumed fact,” the defendant can rebut the presumption by producing enough evidence that a reasonable factfinder could find the non-existence of the presumed fact.  If the defendant meets that burden of production, the presumption disappears.  Then, the court should examine any natural inferences arising from the basic facts, the defendant’s evidence of the non-existence of the presumed fact, any reasons to find the defendant’s evidence unconvincing, and any additional evidence of the existence of the presumed fact, and grant the defendant’s motion for summary judgment or judgment as a matter of law only if no reasonable factfinder could find the presumed fact.  This same framework should guide courts when determining whether a plaintiff is “capable of” proving price impact at the class certification stage.

In sum, I argue that, when analyzing the element of price impact for purposes of class certification, courts should apply Wal-Mart and Comcast’s “capable of” test to determine the capacity of a classwide proceeding to generate common answers.  When making that “capable of” determination, the Court should apply Rule 301’s guidance on burdens of production and persuasion with respect to presumptions.  My recommendation can be summarized in the following analytical pathway:

Step One:  Has the plaintiff established the basic facts giving rise to the presumption of price impact (i.e., public dissemination of the alleged misrepresentation and market efficiency)?  If not, the plaintiff has failed to show that a reasonable factfinder could find price impact, and class certification should be denied.  If so, the court should proceed to Step Two.

Step Two:  Has the defendant offered any rebuttal evidence of the non-existence of price impact?  If not, the court should certify the class because the defendant has failed to rebut the presumption of price impact and a reasonable factfinder could thus find the existence of price impact.  If so, the court should proceed to Step Three.

Step Three:  Based on the defendant’s rebuttal evidence, could a reasonable factfinder find the non-existence of price impact?  If not, the court should certify the class because the defendant has failed to rebut the presumption of price impact and a reasonable factfinder could thus find the existence of price impact.  If so, the court should proceed to Step Four.

Step Four:  Examining all of the evidence, including the natural inferences from the public dissemination of the alleged misrepresentation into an efficient market, the defendant’s evidence of lack of price impact, any reasons to find the defendant’s evidence of lack of price impact unconvincing, and any additional evidence of price impact offered by the plaintiff, could a reasonable factfinder find the existence of price impact?  If so, the court should certify the class because it is “capable of” classwide resolution.  If not, the court should not certify the class.

I hope that my recommendation will guide courts and litigants as they seek to answer Halliburton II’s unanswered question.