A new U.S. Supreme Court decision makes it slightly harder for companies in some states to push back against securities lawsuits becoming classified as class actions. In a unanimous decision on Monday, the justices rejected a lower court’s decision that Halliburton shareholders could not sue the oil giant as a group.
The issue before the court was timing. Plaintiffs in securities cases need to show they suffered economic loss because of a company’s deceptive acts; however, the justices ruled that this point does not have to be raised at the class-action certification stage, as the Fifth Circuit Court of Appeals believed. Lawyers watching the case say the Fifth Circuit, which covers just a few southern states, was the sole holdout among other federal courts in thinking that “loss causation” has to be shown before shareholders can combine their claims into a class action.
The case warranted attention because the Supreme Court rarely takes securities lawsuits, says Jordan Eth, a partner at Morrison & Foerster. However, adds Eth, “don’t jump to the conclusion that plaintiffs have gained the upper hand,” since many observers of the court believe it tends to rule in favor of businesses over investors.
To be sure, the decision was largely predictable. “Clearly the Supreme Court is not interested in reexamining its basic securities-law jurisprudence,” says Harold Hirshman, a partner at law firm SNR Denton.
Still, the case was closely watched, given the stakes involved. The matter of class-action certification is always a key milestone in these types of lawsuits, explains Eth. “If it’s certified as a class action, then you are facing the claims of every single person or institution that bought your stock during the entire class period. It could be millions or tens of millions of shares translated to hundreds of millions or billions of dollars in potential damages.”
In the Halliburton case, investors who bought stock from mid-1999 through the end of 2001 claim the company’s stock price fell after the company corrected previous misstatements. These concerned possible liabilities from asbestos litigation, predicted revenue from construction contracts, and the upside of a merger. The lower court had expected the investors to show that because of Halliburton’s corrections, the stock price fell and directly led to losses.
In a statement, Halliburton noted that the class-action certification could still be knocked out when the lower court takes on the case again. The high court “did not address the question of whether proof that alleged misrepresentations had no impact on the stock price rebuts the presumption of reliance and prevents class certification,” the company said in a press release.