Halliburton and the Dog that Didn’t Bark

The Duke Journal of Constitutional Law & Public Policy recently published a symposium issue on the implications of the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”).[1] In my contribution, I discuss how the Court’s reasoning represents a compromise position that reveals the theoretical tensions that lie behind class certification doctrine.

In Basic Inc. v. Levinson,[2] the Supreme Court endorsed the fraud on the market doctrine. That doctrine provides that when a security trades in an “efficient” market, plaintiffs bringing Section 10(b) claims gain the benefit of two rebuttable legal presumptions that satisfy the element of reliance: first, that material information about the security will impact its price, and second, that investors subjectively “rely” on the price as an unbiased assessment of the security’s value.

The doctrine is controversial because it removes the major barrier to class certification of securities fraud claims. The only significant individualized issue in Section 10(b) litigation – the extent to which each investor relied on the false statements – is transformed into a common inquiry regarding the objective characteristics of the market in which the security traded. As a result, plaintiffs and defendants have frequently locked horns over Basic’s contours, with defendants insisting that the doctrine’s presumptions should be both difficult to obtain and easy to rebut, and plaintiffs insisting the reverse.

In Halliburton II, the Supreme Court moved the needle by holding that at the class certification stage, courts may entertain evidence offered by defendants to rebut the presumption of price impact – i.e., that price impact may be litigated before a class is certified.[3] In so doing, the Court needed to explain why price impact is appropriate for resolution at the class certification stage, but – per its earlier decision in Amgen Inc. v. Conn. Ret. Plans & Trust Funds[4] – materiality is not.

There is, in fact, a natural point of distinction: Price impact, unlike materiality, is not a necessary part of a Section 10(b) claim. Absent price impact, it may be impossible for plaintiffs to establish reliance on a common basis, but some investors may have personally heard the false statements, and so can establish reliance in the traditional manner. Thus, a lack of price impact creates individualized issues. This is different from materiality because a lack of materiality destroys plaintiffs’ claims across the board.

Surprisingly, however, this it is not the explanation that the Court offered. Instead, the Court held that because courts must consider publicity and market efficiency at class certification, and these factors are merely prerequisites for an indirect showing of price impact, courts should also consider direct evidence of price impact.[5]

The Court’s unwillingness to distinguish Amgen on the simplest grounds gives rise to the suspicion that the Court doubts individual plaintiffs can bring claims based on actual reliance for false statements made in an efficient market, at least not without also demonstrating price impact.

If this is the correct interpretation of Halliburton II, it means fraud on the market is more than just an alternative mechanism for establishing reliance: it is the only mechanism for establishing reliance, at least for securities that trade “efficiently.”

This interpretation raises two concerns.

First, it is indeed possible for an investor to be harmed by a lie on which she personally relied, even in the absence of price impact. An investor who is misled into thinking that a stock is less risky than it actually is, for example, may be defrauded when she suffers a loss beyond her tolerance levels.[6] To suggest that such claims are foreclosed invites mischief, especially given the imprecise tools available for identifying (or refuting) price impact, the truncated inquiry into price impact endorsed by the Halliburton II Court, and Halliburton II’s apparent expansion of the concept of “efficiency.”[7]

But more significantly, Halliburton II’s procedural rationale – that since courts consider “indirect” measures of price impact (efficiency and publicity) at class certification, they should also consider “direct” measures – begs the question why courts should consider even indirect measures. The efficiency inquiry will be revisited by a jury on the merits,[8] and if the evidence is sufficiently clear, the matter can be resolved via summary judgment. Since the question of market efficiency is itself common to the class, why is it appropriate for consideration at class certification in the first place?

This problem is actually a specific instance of a broader theoretical uncertainty in class-action procedure. Certification is appropriate when the questions raised are “capable of classwide resolution,”[9] but whether a question is capable of classwide resolution depends on the level of generality at which the question is posed.[10] The initial question of which questions must be considered can only be answered via a functional analysis of Rule 23’s commonality and predominance inquiries.

The basic justification for the commonality/predominance aspects of Rule 23 is that courts must protect absent plaintiffs from being bound by a judgment in a proceeding where their interests were not represented.[11] Yet it is doubtful that investors need this protection. Investors who wish to avoid being bound – generally because their losses are large enough to make an individual action economically feasible – are likely to be well counseled about the benefits and drawbacks of opting out. Moreover, the court could try the issue of efficiency first, and if efficiency is lacking, either decertify the class, or certify only as to the remaining elements under Rule 23(c)(4).

The true rationale for requiring an efficiency determination at class certification, then, likely lies in a desire to protect defendants, rather than plaintiffs. But defendants should not need such protection, because they can challenge market efficiency (and price impact) before the fact-finder. Therefore, courts can only be protecting defendants against the fact-finder itself—against the risk that a fact-finder (namely, a jury) will reach an incorrect determination, or the risk that the unpredictability of a jury’s determination will lead to increased discovery costs and a coerced settlement on a meritless claim.

In Halliburton II, and Amgen before it, the Court rejected the argument that securities class-action procedures should be modified to avoid unwarranted settlement pressure, on the grounds that Congress has already enacted screening mechanisms to prevent frivolous lawsuits.[12] Yet the Court’s odd exercise in line-drawing suggests it was more concerned about protecting defendants than it was willing to admit. A more sound conclusion may have been that not only should courts not consider price impact at class certification, but also that they should not stand sentry over the efficiency determination—at least so long as plaintiffs have enough evidence of efficiency to avoid summary judgment. Yet the Halliburton II Court did not probe the underlying purposes of Rule 23, and did not consider this possibility.


[1] 134 S. Ct. 2398 (2014).

[2] 485 U.S. 224 (1988).

[3] 134 S. Ct. at 2416-17.

[4] 133 S. Ct. 1184 (2013).

[5] Halliburton II, 134 S. Ct. at 2416-17.

[6] Ludlow v. BP, P.L.C., 800 F.3d 674, 690 (5th Cir. 2015).

[7] See Donald C. Langevoort, Judgment Day for Fraud-on-the-Market?: Reflections on Amgen and the Second Coming of Halliburton, 57 Ariz. L. Rev. 37, 53 (2015).

[8] See Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2552 n.6 (2011).

[9] Id. at 2551.

[10] Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L. Rev. 97, 131–32 (2009).

[11] See, e.g., Amchem Prods. v. Windsor, 521 U.S. 591, 621 (1997); Gen. Tel. Co. of the Southwest v. Falcon, 457 U.S. 147, 160–61 (1982).

[12] Amgen, 133 S. Ct. at 1200–01; Halliburton II, 134 S. Ct. at 2413.

The preceding post comes to us from Ann M. Lipton, Associate Professor of Law at Tulane Univesity Law School.  The post is based on her paper, which is entitled “Halliburton and the Dog That Didn’t Bark” and available here.