Halliburton Decision by Supreme Court: Middle Path means Muddle

Each side is claiming victory after the Supreme Court’s ruling of Halliburton v. Erica P. John Fund.  The Court ruled that corporations have the chance to fend off class certification of a securities class action suit, with evidence that their stock price was not affected by their misrepresentation.

We first blogged about Halliburton in January (post can be found here).

Corporations and securities defense lawyers were hoping for a reversal of the landmark Basic Inc. v. Levinson, decided by the Court 25 years ago, which had created a momentum-shifting uptick in the number of securities class suits.  That did not happen.

Plaintiff lawyers were hoping the Court would not address class certification at all.  That did not happen either.

Legal pundits were predicting a middle ground based on the justices’ line of questioning during oral arguments on March 5.  They had predicted plaintiffs who wanted to sue as a class would be required to show that misstatements had an impact on stock price.  Instead, the Court ruled defendants could potentially argue against certification by showing there was no price impact.

The middle ground happened, but not the way anyone had predicted.  Defendants claim a slight victory in having another tool to knock out a class suit earlier for a select few defendants (likely where the corporation’s stock didn’t move or drifted down slowly over time).  Plaintiffs, breathing a sigh of relief for their livelihood, admit that the cost of the price impact studies which they currently conduct at the summary judgment stage, will now be shifted earlier to the class certification stage.  The trade-off allows plaintiffs to have more negotiating leverage earlier in settlement discussions since a class would have been certified earlier, an uncertainty that defendants previously used to their advantage in settlement discussions.

During a panel discussion hosted by the Rock Center for Corporate Governance today, both defense attorneys and plaintiff lawyers jockeyed and showed a preview of their strategies in how they would take advantage of the Court’s opinion.  They respectfully agreed to disagree for now, knowing it will be played out in lower district and appellate courts over the next few years.

Halliburton’s near-term impact to defendant corporations and insurance:

  • Defense costs will escalate quicker in defending against new Halliburton-inspired strategies by plaintiffs
  • D&O insurers, already sensitive to rising defense costs, may look to increase premiums and/or retention amounts
  • Insurers who had believed the Court would materially curb securities class actions may rethink their appetite for covering D&O liability of publicly traded companies
  • One insurer has pre-emptively offered $0 retention toward class certification event study expenses
  • Corporations, together with their defense attorneys and D&O insurers, will need to assess whether their situation warrants using price impact studies at the certification stage, and the possible attendant consequences of opening the door to discovery earlier and losing negotiating leverage at settlement

One certainty, aptly captured by a notable plaintiffs’ lawyer, is that plaintiffs have always managed to survive legislative and judicial challenges, from the Private Securities Litigation Reform Act of 1995 to now.  He said “Halliburton could have been a big game changer, yet we survived again to sue for another day.”

We will continue to monitor developments and consequences of this case, and keep looking ahead for our clients and partners.

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