The Supreme Court on Monday is set to hear arguments in a case that could dramatically raise the bar for shareholders seeking to file class-action lawsuits against public companies. The issue is especially timely, because dozens of shareholder class actions stemming from the financial meltdown are now making their way through the courts.
The central issue in the case, Erica P. John v. Halliburton, is how courts should set the threshold for certifying a shareholder class action alleging securities fraud. A group of mutual and pension fund investors sued Halliburton in 2002, alleging that the oilfield services company understated its vulnerability to asbestos-related lawsuits and that it overstated its revenues. Those misstatements, the suit alleged, artificially pumped up Halliburton's stock price.
A federal trial court in Texas threw out the case, ruling that shareholders hadn't proved that their losses were tied to a particular statement made by the company or its officers -- a concept known as loss causation. That decision essentially imposed a new test for plaintiffs to meet at the class-certification stage. An appeals court upheld the ruling. Plaintiffs' and defense lawyers agree that a Supreme Court ruling upholding the lower courts could radically change the dynamic of shareholder lawsuits.
A ruling for the company could have a "devastating effect" on shareholders' ability to survive the class-certification stage, said Arthur Miller, a professor at New York University Law School who also practices law at Milberg LLP, which represents plaintiffs in shareholder cases.
Having to prove loss causation at that early stage of a case -- when plaintiffs have limited power to demand information from the other side -- would make it difficult for many classes to be certified, which is bad news for investors, Miller said. "Most securities cases are economically unviable with individual plaintiffs," he said.
The issue has particular resonance for shareholders who sued companies in the wake of the financial crisis: Many defendants in these cases have argued that large stock drops were caused by the broader financial situation, not by company misstatements. If the Halliburton ruling is affirmed, "plaintiffs are going to be required to separate market losses from particular alleged misstatements," said Scott Musoff, a lawyer at Skadden, Arps, Slate, Meagher & Flom, a defense firm.
"That's why this is such a significant case." A win for Halliburton could also change the balance of power when it comes to settling cases. Most shareholder class actions do not go to trial, but rather are resolved through settlements. If the Supreme Court imposes the loss-causation test at the class-certification stage, plaintiffs would have less leverage, because companies would know that the case might very well get thrown out.
"What it does is counter the huge damages number the plaintiffs try to work with when they want to settle these cases at the early stages," said William Sullivan, a partner at Paul, Hastings, Janofsky & Walker, which represents defendants in shareholder class actions.
Sullivan also said that a pro-defendant ruling could curtail the size and scope of any classes that are certified, since plaintiffs might have a harder time proving that they qualify for the class.
STRICTER ON SHAREHOLDER CASES
With the stakes so high, the case, not surprisingly, has attracted many high-powered lawyers and interest groups. The petitioner's case will be made by David Boies, who represented Al Gore before the Supreme Court in the disputed 2000 presidential election. The U.S. government wrote a brief supporting the petitioners, arguing that the lower courts erred in establishing additional hurdles for plaintiffs at the class-certification stage. The oral argument on behalf of the company will be conducted by David Sterling of Baker Botts. An array of industry trade groups including the Securities Industry and Financial Markets Association and U.S. Chamber of Commerce, have filed briefs for the company.
The Halliburton case comes before a Supreme Court that in recent years has issued a string of decisions curtailing shareholder lawsuits. These have included rulings that made it harder for plaintiffs to survive motions to dismiss and that limited the kind of third parties, such as lawyers and accountants, that shareholders can sue.
This is the second significant case involving class-action certification to come before the Supreme Court in a month. In late March the Court heard arguments in a case stemming from a lawsuit brought by female employees of Wal-Mart Inc that could determine the scope of class action lawsuits in employment discrimination cases. Decisions in both cases are expected by the end of June.
Monday's case is Erica P. John Fund v. Halliburton, No. 09-1403.