Monday, March 3, 2014
Torts scholars John Goldberg (Harvard) and Benjamin Zipursky (Fordham) have written a thoughtful analysis of the fraud-on-the-market issue that the Supreme Court will consider this week when it hears oral argument in Halliburton v. Erica P. John Fund. They gave me permission to post their analysis here, which I thought readers would find worthwhile. By breaking down the issues in fraud-on-the-market securities class actions, Goldberg and Zipursky help clarify the link between a defendant's allegedly wrongful conduct and widespread harm that plaintiffs allege was caused by that conduct -- a link that is at the core of mass tort disputes as well as securities litigation.
Parsing Reliance in Securities Fraud
John C.P. Goldberg, Harvard Law School
Benjamin C. Zipursky, Fordham Law School
In Halliburton v. Erica P. John Fund, Inc., to be argued before the Supreme Court on March 5, the Justices could drastically curtail federal-court class-action lawsuits for securities fraud. At issue in Halliburton is the Supreme Court’s 1988 decision in Basic v. Levinson. Basic held that it is not necessary for investors such as the Erica P. John Fund to prove that they actually read and relied upon the particular fraudulent statements alleged to have caused the their losses. Public misstatements by a company like Halliburton have the capacity to defraud the market as a whole and distort the prices for all investors. Basic’s “fraud-on-the-market” theory, as it is called, affords investors who can prove that the defendant made misrepresentations about important matters a presumption that the misrepresentations negatively affected the stock’s value. It is widely agreed that, without Basic’s presumption, securities fraud suits could rarely proceed as class actions. For a variety of reasons – the fact that Congress has weighed in extensively on securities fraud and left Basic untouched, the substantial pro-defendant changes that the Court and Congress have already made to securities fraud law, the expressed wishes of the S.E.C. to retain Basic because of the indirect regulatory force private actions supply, and the value of stare decisis – we think the Court would do best to leave Basic intact. It appears, however, that while some of the Justices may be similarly inclined, others are leaning toward overruling Basic, and others may be looking for a middle ground. With the fate of Basic in play, it is worth getting clear on some aspects of fraud-on-the-market doctrine that have typically been confused, and were in fact confused in Justice Blackmun’s Basic opinion itself.
The first and most important point to make about Basic’s so-called “presumption of reliance” is that it is not one presumption (as we have explained in a recent article offering a detailed analysis comparing securities fraud to common law fraud, see John C.P. Goldberg & Benjamin C. Zipursky, The Fraud-on-the-Market Tort, 66 Vanderbilt L. Rev. 1756 (2013)); Basic’s “presumption” is actually two presumptions (both favoring plaintiffs) and one affirmative defense (favoring defendants). Thus, if the Court decides to rethink “the presumption of reliance,” it will actually be rethinking two or three ideas, not one.
Basic’s first presumption allows a plaintiff to establish a legally cognizable injury by establishing that she bought or sold securities at a market price that was distorted by the defendant’s misrepresentations. This is an important departure from common law fraud, the tort from which the law of securities fraud has evolved. In a suit for common law fraud, it is critical for the plaintiff to establish that she, personally, made a decision in reliance on the information contained in the defendant’s misrepresentations. This is because the core injury at the heart of common law fraud is an interference with a person’s right to make decisions free from deception. Basic’sso called “presumption” of reliance – like many presumptions in the law – departed substantively from this aspect of the common law. A securities fraud plaintiff need not demonstrate that she was misled into believing that certain false propositions were true. Instead, according to Basic, she need only prove economic loss caused by the misrepresentation—that she bought or sold the defendant’s stock at a price distorted by the defendant’s misrepresentations, irrespective of whether she ever learned of the content of the defendant’s false statements.
Basic’s second presumption is evidentiary rather than substantive. It allows securities fraud plaintiffs to use a certain kind of circumstantial evidence to prove that the defendant’s misrepresentations in fact distorted market prices. If a misrepresentation is “material” and disseminated to the public, and if the securities are sold on an “efficient” market, it will be presumed that the misrepresentation caused a price distortion. Like many evidentiary presumptions, the materiality-based presumption of price distortion may be rebutted by evidence that the misrepresentation had no effect.
Justice Blackmun’s opinion in Basic also bundled a third idea into the so-called “presumption of reliance,” but this idea is actually an affirmative defense for the defendant, one akin to the consent defense to the tort of battery and the assumption of risk defense to the tort of negligence. Even if it is established that the defendant’s misrepresentations caused a price distortion and a loss to the plaintiff, the defendant can nonetheless escape liability by proving that the plaintiff was actually aware of the falsity of the misrepresentation and chose to engage in the market transaction nevertheless. Defendant Halliburton’s petition to overrule Basic has nothing to do with this third aspect of Basic.
Halliburton’s challenge to Basic’s presumption of reliance relates to the combination of the substantive and evidentiary presumptions described above. The Court in Basic allowed that materiality (given an efficient market) was enough, from an evidentiary point of view, to create a rebuttable presumption of price distortion, and it additionally concluded – as a substantive matter – that distortion suffices to replace the impact-on-plaintiff finding that reliance fulfills in the common law tort of fraud. It is these two ideas, taken together, that have permitted securities fraud plaintiffs to go forward without direct proof of reliance. Crucially, although Basic itself describes the combined effect of these two presumptions as establishing indirect proof of reliance, that description is inaccurate. Taken together, they instead amount to indirect proof of distortion, not of reliance.
Clarifying the distinction between the evidentiary and substantive aspects of the presumption in Basic is critical for evaluating what is and what is not at issue in Halliburton. Halliburton contends that Basic should be overruled because the efficient-market hypothesis has been rejected by economists during the quarter century since Basic was decided. Whether the efficient-market hypothesis actually has been rejected is a highly contentious issue. Even assuming, however, that it is unsound, that affects only the evidentiary aspect of the presumption of reliance—that is, only the part of Basic which states that material representations in an open market will be reflected in the market’s pricing of securities, and hence can be presumed to have distorted their price. If the evidentiary side of Basic is rejected or modified, that still leaves intact the substantive side of the presumption of reliance – the side which states that price distortion caused by the misrepresentations will suffice in place of individual reliance.
Appreciating the irrelevance of the efficient-market hypothesis to the substantive side of Basic is critically important for two reasons. First, the substantive side of Basic has received little cogent criticism over the decades. The courts that first recognized private rights of action under federal securities laws did so on the ground that those laws were established in the midst of the Great Depression to protect investors from losses resulting from deceptive practices. Under these circumstances, it was eminently sensible for these courts to interpret federal law as including an individual right to be free from economic harm caused by deceptive practices, whether through price distortion or individual reliance. And since then, both Congress and the Court have shown a steady commitment to the substantive side of Basic.
Second, price distortion is a common issue of fact in securities fraud litigation. This means that the securities defense bar’s effort to undermine securities class actions through a critique of the efficient-market hypothesis is misconceived. The alleged shakiness of the efficient-market hypothesis is an argument against the evidentiary side of Basic, not against its substantive side. But the substantive side -- the move from reliance to price distortion – is what makes class actions an appropriate vehicle for 10b-5 claims. If the Court is truly persuaded by the efficient-market hypothesis critique, and is not moved by stare decisis or any other reasons to leave Basic untouched, then it is, at most, the evidentiary side of the presumption of reliance that might bear revisiting. Of course, new questions might then arise at or before trial as to whether event studies or other sorts of evidence will suffice to establish price distortion, but that is a different matter, unconnected to the general question of whether distortion-based 10b-5 claims can be adjudicated as class actions.
The wrong of causing economic loss through misrepresentations that distort market prices is not identical to common law fraud. But it is closer to what Congress actually sought to protect in the Securities Exchange Act, it is consistent with what Congress has very thoughtfully kept alive in its more recent securities legislation, and its justifiability has nothing to do with the soundness of the efficient-market hypothesis. So long as this wrong remains the core of 10b-5 claims, class actions will continue to be an appropriate means for resolving them.
Friday, January 24, 2014
Tuesday, January 21, 2014
You can find the Room for Debate segment here, with input from a number of law professors including Michele Landis Dauber (Stanford), Betsy Grey (Arizona State), and Stephen Shugerman (UC Berkeley)
Tuesday, January 14, 2014
The Fifth Circuit issued a decision on January 10th affirming the class action settlement in the In re Deepwater Horizon litigation. You can find the opinion here.
This opinion is the result of objections to the settlement, but BP intervened to argue that there was an Article III standing problem with the way the settlement agreement had been interpreted. That interpretation was very generous to claimants in its interpretation of how they must prove economic loss to collect. The problem BP faces now is that it didn't cap the settlement amount in the agreement (yes, you read that right, and furthermore this was a selling point of the settlement). As a result, BP has a classic "if you build it, they will come" problem and is trying to upend the settlement as a result. At the moment, the Fifth Circuit in a separate opinion by a separate panel has stayed the settlement adminsitration as it considers the interpretation of the agreement. In that separate opinion, the panel (which couln't quite agree) indicated that the agreement interpretation may be too generous and remanded for reconsideration. You can find that opinion here.
In the opinion issued on Friday, this panel indicated the interpretation may be just fine, and sent a strong hint to the District Judge about what he should do.
So here's the question, why did BP agree to these terms? It was an open ended settlement with a broad geographic reach and a flexible standard for compensation - that was clear from the start. I'm sure BP's excellent counsel knew this was a risk. So what happened? Were the economists predictions dead wrong? Is this just a case of buyer's remorse?
The WSJ has some coverage, here.
The Supreme Court issues two decisions this morning, one on personal jurisdiction and the other on mass actions under CAFA.
In Mississippi ex rel Hood v. AU Optronics, the Court issued a unanimous opinion authored by Justice Sotomayor holding that an action brought by the Mississippi AG could not be removed to federal court under CAFA's mass action exception because the AG is a single plaintiff. The opinion is based on a formal reading of the statute. You can find the opinion here.
In Daimler AG v. Bauman, the Court held that the parent company was not subject to general personal jurisdiction in California for a human rights lawsuit relating to the company's conduct in Argentina's dirty war. The opinion, written by Justice Ginsburg, was nearly unanimous with a concurrence from Justice Sotomayor.
The Court held over (again) petitions relating to consumer class actions alleging that washing machines cause mold. They are now scheduled for conference on January 17th.
Sunday, December 15, 2013
Wednesday, November 27, 2013
Mass harm exerts enormous pressure on civil justice systems to provide efficient but fair procedures for redress. In this context, settlement of mass disputes is easily understood as a common good. Yet settlements involving hundreds or thousands of claims, often across jurisdictions, raise concerns about the substantive fairness of the compromise reached by lawyers, and the ability of the court system to ensure meaningful oversight. Unburdening the judicial system from mass claims comes at a price; how much rough justice are we prepared to accept?
The difficulty of balancing these competing interests is ubiquitous. Canadian class action settlement practice is no exception. In this book chapter, I first explore the realities of this form of litigation, and to some extent debunk the myth that class actions inevitably result in large monetary settlements. I then turn to a brief discussion of the incentives and disincentives to settle large claims, for both plaintiffs’ lawyers and defendants. In Part III, I describe and critique the judicial framework for the approval of proposed settlements. I finish by pointing out the lack of alternatives to class proceedings and conclude that, though not perfect, the Canadian class action settlement system stands as a model for consideration by other jurisdictions wrestling with the problem of mass disputes.
The chapter is part of the forthcoming book, Resolving Mass Disputes: ADR and Settlement of Mass Claims (Edward Elgar 2013), edited by Christopher Hodges and Astrid Stadler.
Tuesday, November 26, 2013
The Wall Street Journal has an article on the ongoing asbestos cleanup by W.R. Grace in Libby, Montana: In Montana Town, a Shut Mine Leaves an Open Wound, by Dionne Searcey. The Journali also has a related slideshow. The cost of the cleanup has so far been approximately $400 million.
Tuesday, November 19, 2013
Johnson & Johnson has agreed to terms for settling hip implant claims, according to multiple news reports. The New York Times article reports that under the agreement, J&J "will pay some $2.475 billion in compensation to an estimated 8,000 patients who have been forced to have the all-metal artificial hip removed and replaced with another device." The article states that a typical claimant settlement, before legal fees, would be about $250,000 plus all medical costs. The article also states that the deal requires the participation of 94 percent of eligible claimants.
The lawsuits addressed by this settlement involve the Articular Surface Replacement, or A.S.R., a product of the DePuy Orthopaedics division of J&J. A couple of news sources reported a settlement of this litigation six days ago but without confirmation from defendants or plaintiffs. Today's reports come on the heels of a hearing in the multidistrict litigation (MDL 2197) before Judge David Katz in the Northern District of Ohio.
Update: For DePuy's and J&J's press release about the settlement program, see here and here. For the settlement website, see here. For an overview of the settlement terms, including settlement eligibility, settlement amounts, and deadlines, see here.
Thursday, November 14, 2013
As the trial continues to unfold in New York in Chevron's RICO lawsuit against plaintiffs' lawyer Stephen Donziger -- amid accusations of judicial bribes, ghostwritten opinions, and sex scandals -- it is worth noting what happened in Ecuador this week.
On Tuesday, Ecuador's high court, the National Court of Justice, affirmed the underlying judgment against Chevron but reduced the amount from about $19 billion to $9.5 billion. The court eliminated the portion of damages that had been imposed as punishment for Chevron's failure to apologize. Here are news accounts from the Wall Street Journal and Reuters. Chevron's suit against Donziger contends that he engaged in fraud and other misconduct to obtain the massive judgment in the Lago Agrio environmental litigation.
Wednesday, November 13, 2013
The New York Times and Bloomberg are reporting that Johnson & Johnson has agreed to settlement terms to resolve thousands of DePuy metal hip implant claims. According to the Bloomberg article, J&J Said to Reach $4 Billion Deal to Settle Hip Lawsuits, and the New York Times article, Johnson & Johnson Said to Agree to $4 Billion Settlement Over Hip Implants, the deal would provide about $300,000 to $350,000 in compensation for each claimant who underwent surgery to replace the DePuy hip implant, which could be as many as 8000 cases. The amount for each claimant would depend on age, medical condition, and other factors. According to the articles, the settlement has not been formally announced.
The Depuy hip implant cases are pending in Multidistrict Litigation (MDL 2197) before Judge David Katz in the Northern District of Ohio, as well as in state courts in Ohio, California, and New Jersey. Two cases have gone to trial, with one plaintiff victory and one for the defense. Seven more trials are scheduled. This would be the largest settlement ever for medical device litigation, and one of the largest mass tort settlements.
Update: See here for Nov. 19 info.
Thursday, November 7, 2013
Yesterday, the Supreme Court heard oral arguments on whether parens patriae actions brought by state attorneys general are removable as mass actions under the Class Action Fairness Act. (Mississippi ex rel. Hood v. AU Optronics Corp., U.S., No. 12-1036) The lower courts have split on the issue, with the Fifth Circuit holding that such actions are removable when the citizens are the "real parties in interest," and the Fourth, Seventh, and Ninth Circuits reaching the opposite conclusion. The Fifth Circuit, in Louisiana ex rel. Caldwell v. Allstate Insurance Co., held that because the attorney general sought damages on behalf of insurance policy holders, the policy holders were the real parties in interest to that relief. But other courts, even within the Fifth Circuit, have distinguished that reasoning. Judge Fallon, for example, in some of the Vioxx cases, held that the Kentucky attorney general's action against Merck was not removable as a class action. He distinguished Caldwell, reasoning that it was decided under CAFA's mass action provision and the citizens of Kentucky were not the real parties in interest. Instead, the Kentucky attorney general was requesting injunctive relief and civil penalties, not damages as was the case in Caldwell.
The issue is an important one as the standard for certifying a class action has become more rigorous. Many commentators have argued that state attorneys general should step into the breach to provide relief and deterrence when actions aren't certifiable as class actions. Yet, questions remain about this approach. Specifically, most parens patriae statutes do not contain the same protections as Rule 23 does with regard to adequate representation. Plus, courts are often unsure how to evaluate issue or claim preclusion when a private citizen sues in the wake of a parens patriae action.
For the interested reader, yesterday's BNA Class Action Litigation Report had an article by Jessie Kokrda Kamens about the oral argument. Her take was that even though some justices questioned state attorneys generals' motives in bringing parens patriae actions, they weren't ready to declare them removable under CAFA.
Friday, October 25, 2013
According to the New York Times, the jury had also determined that Toyota had acted with "reckless disregard" and was about to begin deliberations on punitive damages when the settlement was announced. The New York Times article also appropriately emphasizes that the case is noteworthy because plaintiffs' tried their claims of electronic throttle control problems.
Though the New York Times article notes the ages of the plaintiff driver was 82 (the Los Angeles Times says she was 76), the New York Times article does not note that there have been in the past been particular concerns of pedal misapplication by older drivers, and the article does not reference a government report that found no problems in Toyota's electronic throttle control system. According to CNNMoney, Toyota apparently argued that the plaintiff in Oklahoma case hit the gas, rather than the brake. In response, plaintiffs pointed to long skid marks on the road, suggesting the driver was hitting the brake. One wonders if the event data recorder in this car might have shed more light on the issue. Toyota would certainly want to avoid having juries deciding unintended acceleration cases based on the believability of the testimony of a driver who claims to have hit the brake, rather than the accelerator. If Toyota is unable to exclude plaintiffs' proferred expert testimony of electronic throttle control defect on the grounds that such testimony is not scientifically reliable, then Toyota should also be concerned that the jury may be unable to grasp the arcane details of software code design. I'm reminded of the line by Robert Duvall's character in the film, A Civil Action, depicting the Woburn water contamination case; waiting for a jury decision, his character opines, "[I]t's not going to have anything to do with dates or groundwater measurements or any of that crap, which nobody can understand anyway. It's going to come down to people like it always does."
Tuesday, October 15, 2013
Friday, October 11, 2013
Defendants in the moldy washers cases have filed cert petitions once again after the 6th and 7th Circuits reinstated those liability only (or issue) class actions. You can find the briefs here and here.
It doesn't make sense for the Supreme Court to grant cert, but stranger things have happened.
Why don't I think the Court should grant cert? Commonality is clear, there aren't real damages issues because its an issue class action and the circuits are coming together on the question of issue class actions and their parameters (coalescing around the ALI proposals and the Manual on Complex Litigation) and these are squarely in the field where class actions are most useful - consumer claims. In other words, there's nothing adventuresome here for the Court to consider.
For more defense side links with a different point of view see the Volokh Conspiracy.
Wednesday, October 2, 2013
The New York Times reports that an appellate panel has remanded the BP settlement appeal for "clarification" of the settlement in response to BP's allegations that the settlement adminstrator was paying claims to non-injured claimants and engaging in other wasteful conduct.
Update: Here's the Fifth Circuit decision in the case.
In the human rights litigation over Argentina's "dirty war" of the 1970s and 1980s, a dispute over personal jurisdiction has reached the Supreme Court and will be argued on October 15 (DaimlerChysler AG v. Bauman). A group of Argentinian plaintiffs sued DaimlerChrysler AG, alleging that the company's Argentinian subsidiary participated in kidnappings and other serious wrongdoing. They sued in the Northern District of California. On the question of personal jurisdiction, the Ninth Circuit held that DaimlerChrysler was subject to general jurisdiction in California based on the contacts of its US subsidiary, Mercedes Benz USA. The Supreme Court granted certiorari to resolve the jurisdictional question.
The Vanderbilt Law Review has published an online roundtable concerning the case, and the initial papers -- by Donald Childress, Burt Neuborne, Suzanna Sherry, Linda Silberman, and myself -- are now available on the Vanderbilt Law Review En Banc website. My own contribution, entitled The Home-State Test for General Personal Jurisdiction, takes a strong view that the Ninth Circuit got it wrong. General jurisdiction over corporations requires a home-state relationship; it should not be founded merely on the contacts of a subsidiary acting as an agent, or on the fact that a company has a substantial presence or does substantial business in the forum state (even if that business is "continuous and systematic," to use the ambiguous and misleading language that the Supreme Court should finally abandon as a description of the sort of relationship that justifies general jurisdiction).
Thursday, September 26, 2013
The Supreme Court is set to hear arguments this term on the mass action exception as it relates to parens patriae suits in Mississippi ex rel Hood v. AU Optronics (see the coverage on scotusblog). The issue in that case is "Whether a state’s parens patriae action is removable as a “mass action” under the Class Action Fairness Act when the state is the sole plaintiff, the claims arise under state law, and the state attorney general possesses statutory and common-law authority to assert all claims in the complaint."
In another case percolating up, the 9th Circuit ruled on Tuesday that a collection of cases all brought in state court against one drug manufacturer with similar allegations of injury do not fall within the mass action exception and aren't removable. The case, Romo v. Teva Pharmaceuticals USA can be found on the 9th Circuit website. It involves a number of cases filed against the generic drug manufacturer in California. The plaintiffs moved to coordinate the cases in California courts. The defendant responded by trying to remove to federal courts, arguing that this falls under the jurisdiction of the federal courts because CAFA provides that more then 100 cases cases sharing common issues of fact or law proposed to be tried jointly may be removed -- the "mass action" exception. In In re Abbott Laboratories, Inc., 698 F.3d 568 (7th Cir. 2012) the 7th Circuit held that coordinated cases set to be consolidated "through trial" were subject to the mass action exception and were removable. The 9th Circuit distinguished Abbott and agreed with the plaintiffs that a consolidation for discovery purposes is not the same as a request to try the cases jointly, underscoring that jurisdictional provisions are strictly construed.
Tuesday, September 24, 2013
Monday, September 23, 2013
Marketplace has a segment about lead paint litigation today featuring our own Elizabeth Burch. The trigger is a lead paint trial that closed in California today. See here for a news story. The question posed is how the lead paint manufacturers have escaped the kind of liability that tobacco or asbestos. What's the difference? Here are some theories. Caveat: These are just some ruminations, not a definitive work on lead paint by any stretch.
1. Who's doing the suing?
Municipalities vs. victims: Beth points out that in these lead paint suits municipalities or states are pursuing a public nuisance theory against the paint manufacturers and this makes them different than some more successful mass torts. Some courts think that this doctrine is a bad fit with the wrong at issue. But not all lead paint cases have been brought by municipalities. In the beginning, much like tobacco or asbestos, these cases were brought on behalf of victims. This is a late-stage litigation after failures at the individual or group victim level.
Poor children vs. workers: The victims of lead paint were poor children who ingested the paint chips, whereas in the tobacco and asbestos cases they were adult workers. This is not a doctrinal explanation but a socio-political one.
Scienter: In tobacco there was evidence of misrepresentation and manipulation. That seems to be a big part of the argument in the California courtroom from press reports: what did the lead manufacturers know and when?
2. What's the doctrine?
Market share liability. First, and I think most importantly, the idea of market-share liability failed to gain traction after some initial gains early on. Without being able to tie a particular manufacturer to the apartment where the paint was ingested, plaintiff can't show that this manufacturer caused the harm. In that sense lead not like asbestos (where work places kept records) or tobacco (where people know what brand they smoked).
Public nuisance doctrine is a relatively novel theory for this type of mass tort. That doesn't make it wrong, but it doesn't make it an easy sell to courts either.
3. Is there insurance? The asbestos manufacturers had more insurance coverage than you'd think due to some loose underwriting in mid-century. What is the lead paint manufacturers' coverage and how is this affecting these suits?
More theories welcome.