March 4, 2014
Halliburton at the Supreme Court
What’s at Stake in Halliburton Co. v. Erica P. John Fund
Ten years ago, Justice Scalia and then-Vice President Dick Cheney took the duck-hunting trip
that became a national scandal.1 The duck hunt took place a mere three weeks after the Supreme
Court agreed to decide a case in which Mr. Cheney was the defendant, and that involved
questions about the private meetings of Cheney’s energy taskforce.2 Environmental
organizations were concerned about the influence of big oil and drilling companies on taskforce
decisions, and the duck-hunting trip raised the same concerns about the Supreme Court. After
all, Vice President Cheney served as C.E.O. of the massive oil company Halliburton from 1995
until 2000.3
This week, Halliburton itself is at the Supreme Court, and the stakes are enormous. In
Halliburton Co. v. Erica P. John Fund, Inc., the company is being sued by an investment fund
that supports the Archdiocese of Milwaukee’s programs for inner city youth and the mentally ill.
In defending the suit, Halliburton is asking the Justices to overturn a decades-old precedent that
has set the “foundation for modern, private securities litigation.”4 A ruling in Halliburton’s favor
would eviscerate the ability of shareholders to use class action lawsuits to challenge fraudulent
conduct. 5 Halliburton deserves attention not just for the specific questions of law it presents, but
also for the broader implications it has for access to justice in our courts, and whether justice will
be dispensed equally to all or reserved only for the privileged few. The Court should—contrary
to some of its recent decisions—use the Halliburton case as an opportunity to stand up not just
for shareholder rights, but also for access to justice for all Americans.
1
David Savage, Trip With Cheney Puts Ethics Spotlight on Scalia, L.A. TIMES, Jan. 17, 2004, available at
http://articles.latimes.com/2004/jan/17/nation/na-ducks17; see also Steve Twomey, Scalia Angrily Defends his Duck
Hunt with Cheney, N.Y. TIMES, Mar. 18, 2004, available at http://www.nytimes.com/2004/03/18/politics/18CNDSCAL.html; A QUESTION OF INTEGRITY: POLITICS, ETHICS, AND THE SUPREME COURT (Alliance for Justice 2011),
available at http://www.afj.org/multimedia/first-monday-films/films/a-question-of-integrity-politics-ethics-and-thesupreme-court-2011; Alliance for Justice, The Code of Conduct for U.S. Judges should be Applied to the Supreme
Court (2011), available at http://www.afj.org/wp-content/uploads/2013/11/code-of-conduct-full-report.pdf.
2
Cheney v. U.S. District Court for the District of Columbia, 542 U.S. 367 (2004).
3
Jarrett Murphy, Cheney’s Halliburton Ties Remain, CBSNEWS.COM, Sept. 26, 2003,
http://www.cbsnews.com/news/cheneys-halliburton-ties-remain/.
4
Brief of Respondents in Opposition at 5, Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (U.S. 2014).
5
See Stephen M. Davidoff, A Push to End Securities Fraud Lawsuits Gains Momentum, The New York Times,
DealBook (Oct. 15, 2013) (describing the Halliburton litigation and observing that “it could just end shareholders’
ability to sue companies for securities fraud.”), available at http://dealbook.nytimes.com/2013/10/15/a-push-to-endsecurities-fraud-lawsuits-gains-momentum/?_php=true&_type=blogs&_php=true&_type=blogs&_r=2. See also
Alliance for Justice, An Uncertain Future: The 2013-14 Supreme Court Docket at 5, available at
http://www.afj.org/wp-content/uploads/2014/02/2013-2014-Supreme-Court-Docket-1.30.2014.pdf.
Halliburton Co. v. Erica P. John Fund, Inc.: What’s at Stake
The Halliburton case puts in question a longstanding precedent upholding the rights of investors
defrauded out of their savings by the very company they have chosen to back.
To succeed on a claim of securities fraud, plaintiffs generally must prove “reliance”—that is, that
they relied on a fraudulent misrepresentation when they invested in certain securities. In its 1988
decision Basic Inc. v. Levinson,6 however, the Supreme Court recognized that this poses a nearly
insurmountable task for investors who buy securities on an open exchange, and is particularly
unfair when applied to shareholder class actions. Using pragmatic logic, the Court explained that
requiring each individual investor to prove actual reliance “would place an unnecessarily
unrealistic evidentiary burden on the [securities fraud] plaintiff who has traded on an impersonal
market,”7 and would effectively serve as a “barrier to class certification, since each of the
individual investors would have to prove reliance on the alleged misrepresentation.”8
To avoid this absurd result, the Court recognized a rebuttable presumption of reliance based on
the “fraud-on-the-market” theory. This doctrine presumes that a stock’s market price “reflects
all publicly available information,” including any “public material misrepresentations.”9
Consequently, when an investor purchases stock at the market price, she presumptively relies on
the integrity of that price as influenced by the alleged misrepresentation. Defendant corporations
can rebut this presumption by showing either that the stock price never in fact incorporated the
misrepresentation, or that the plaintiffs were aware of the misrepresentation when purchasing the
stock. Importantly, the fraud-on-the-market presumption can be invoked collectively by putative
class members to show reliance when seeking class certification.
Since the Court’s Basic, Inc. decision, the “fraud-on-the-market” presumption has been a critical
mechanism for allowing shareholders to sue big businesses for fraud through class action
lawsuits. Moreover, Congress has since reformed securities litigation on multiple occasions
without abandoning or modifying the presumption.10
In Halliburton, the fraud-on-the-market theory serves as the basis for an investor class action
against Halliburton. As noted earlier, the lead plaintiff, the Erica P. John Fund, Inc. (“EJP
Fund”),11 supports the Archdiocese of Milwaukee’s programs for inner city youth and the
mentally ill. The EJP Fund filed suit against Halliburton and its president and CEO on behalf of
a class of investors, alleging, among other things, that the company knowingly understated its
liability for claims from asbestos victims, resulting in investor losses.12
6
485 U.S. 224 (1988).
Id. at 245.
8
Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2552 n.6 (2011).
9
485 U.S. at 246-47.
10
See, e.g., the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4 (1995), and the Securities Litigation
Uniform Standards Act, 15 U.S.C. § 78bb (1998).
11
Formerly known as the Archdiocese of Milwaukee Supporting Fund, Inc. Brief of Erica P. John Fund, Inc., in
Opposition to Petition for a Writ of Certiorari at 6-7, Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (U.S.
2014).
12
Asbestos companies, including Dresser Industries (now Halliburton) notoriously lied for decades about the risks
of asbestos exposure for workers and consumers. The Environmental Working Group, “Something in the Air: the
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2
However, Halliburton has asked the Court to do away with the time-honored precedent
established in Basic and, with it, any realistic possibility that shareholders can hold their
executives accountable for harmful fraudulent conduct. Unfortunately, the Roberts Court has
already undone longstanding precedents in areas ranging from pleading standards to arbitration
to voting rights.13 Halliburton is counting on the Court to do so again here.
Yet the Court can do serious damage to investors even without overruling or limiting precedent.
In the event that the Supreme Court upholds Basic, Halliburton has a back-up plan to disarm the
securities class action. Halliburton argues that it should be able to rebut the presumption of
reliance to block class certification with evidence that the alleged misrepresentations had no
“price impact”—meaning that the stock price neither increased because of the
misrepresentations, nor dropped down when the truth was revealed. But as the Fifth Circuit
Court of Appeals correctly explained in its opinion below, this contention is a naked attempt to
force shareholders to prove the merits of their claims at the class certification stage, and to
relitigate an issue that the Supreme Court has already decided.
At class certification, the question “is not whether the plaintiffs will fail or succeed, but whether
they will fail or succeed together.”14 Allowing plaintiffs to form a class is appropriate when the
questions of law and fact they have in common predominate over those they have individually.15
Accordingly, the Supreme Court has already held that there is no need for shareholders to prove
the essential elements of “loss causation”16—that revealing the truth caused the stock price to
drop—or “materiality”17—that the misrepresentation was material to the stock price—in order to
certify a class and move forward to the merits of their claims. There’s no point in resolving
these issues at class certification because they necessarily apply to the class as a whole, and do
not turn on the circumstances of each individual investor. Thus, if the class later fails to
establish either loss causation or materiality, then all their claims fail on the merits, and there is
no risk that individual plaintiffs will go it alone in another round of litigation.
The same is true of “price impact.” Whether a misrepresentation affected the stock price (in
either direction) depends on evidence common to every plaintiff who purchased the stock during
the relevant period.18 Indeed, if there was no price impact then the plaintiffs could never prove
that the misrepresentation caused their loss—an element the Supreme Court has expressly held
belongs in the later merits stages of litigation, like trial or summary judgment, and not at class
Asbestos Document Story,” available at http://www.ewg.org/asbestos/facts/fact3.php (“It took more than just Johns
Manville and W.R. Grace lying to their workers to produce the ten thousand Americans currently dying each year of
asbestos diseases. It took similar behavior at Exxon, Dow (Union Carbide), DuPont, Bendix (now Honeywell), The
Travelers, Metropolitan Life, Dresser Industries (now Halliburton), National Gypsum, Owens-Corning, General
Electric, Ford, and General Motors, just to name a few.”). It is hardly inconceivable that the lies about asbestos
would extend to companies’ own investors.
13
See Alliance for Justice, The Roberts Court and Judicial Overreach at 9-11 (2013), available at
http://www.afj.org/wp-content/uploads/2013/09/the-roberts-court-and-judicial-overreach.pdf.
14
Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d 423, 431 (5th Cir. 2013).
15
Fed. R. Civ. P. 23(b). Rule 23 also sets forth additional requirements for class certification that are not relevant
here.
16
Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2186 (2011).
17
Amgen Inc. v. Conn. Ret. Plans and Trust Funds, 133 S. Ct. 1184, 1191 (2013).
18
See Erica P. John Fund, 718 F.3d at 434.
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certification.19 The Supreme Court has previously rejected this very attempt at dismantling the
shareholder class action, and it should do so again.
A decision in favor of Halliburton would have severe implications for all individuals and
organizations seeking to hold businesses accountable for misconduct. If the Supreme Court were
to overturn or substantially modify its seminal holding in Basic Inc. v. Levinson, it would be
reaching back more than 25 years to pull the rug out from under investors everywhere who have
been defrauded by executives with a fiduciary duty to act in shareholders’ interests. In many
instances, it would essentially be giving businesses like Halliburton a “get out of jail free” card
to defraud their own shareholders without consequence. And more broadly, it would be another
instance of the Supreme Court’s making it increasingly difficult for individuals and organizations
harmed by corporate wrongdoers—including the very stockholders on whose investments the
corporations rely—to access justice in America.
The Roberts Court’s Record on Access to Justice
The Roberts Court has repeatedly ruled against everyday Americans seeking access to the courts,
from upholding forced arbitration clauses that erect an impenetrable barrier between wronged
individuals and the courts; to narrowing consumers’ ability to form class action suits against
employers and big businesses; to creating extra and unnecessary burdens for plaintiffs in the
pleading stage of a case, making it harder for an individual to bring her case at all.
More and more consumers and workers are being kept out of court by the increasing use of
forced arbitration clauses in the fine print of contracts—and by the Roberts Court’s decisions
upholding this insidious practice. In AT&T Mobility v. Concepcion, the Supreme Court upheld a
forced arbitration clause that barred AT&T’s customers from filing a class action suit.20 This
decision dealt a severe blow to consumers, who are often unknowingly bound by these
boilerplate contracts when purchasing a good or service. Consequently, many cases that would
bring corporate abuse and misconduct to light in an open court proceeding are forced into
arbitration. These proceedings are usually held in private, conducted by arbitrators hired by the
corporation, with no pre-trial discovery to unearth necessary evidence, and thus with little chance
of fairness for the wronged consumers.
The Roberts Court further expanded the ability of corporations to dodge liability through forced
arbitration clauses in American Express Co. v. Italian Colors Restaurant.21 In American
Express, a case brought by small businesses alleging antitrust violations, the Court held that the
Federal Arbitration Act precludes courts from invalidating arbitration agreements—even in cases
where the cost of individual arbitration would prevent the vindication of rights under federal
law.22 In an example of the Roberts Court overreaching to overrule established precedent,23 this
decision nullified the longstanding “effective vindication” doctrine, which allowed courts to
invalidate arbitration agreements that would impede parties’ ability to protect their rights under
19
Amgen, 133 S. Ct. at 2186.
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).
21
133 S. Ct. 2304 (2013).
22
133 S. Ct. at 2311-12.
23
See The Roberts Court and Judicial Overreach, supra note 13, at 11.
20
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federal law. As a result of AT&T Mobility and American Express, the Supreme Court has made
it increasingly difficult for individuals to bring corporate misconduct to light and hold these
corporations accountable for violations of the law.
Even if individuals are able to bypass forced arbitration, the Roberts Court has erected further
barriers limiting their ability to band together to seek justice. Beyond the securities fraud context
presented in Halliburton, the class action tool has long been effective in allowing similarlysituated plaintiffs to pool their resources and form a class. This device is especially useful in
cases where small monetary amounts are at stake and it is not economically feasible to proceed
with an individual suit. But in Wal-Mart Stores, Inc. v. Dukes, a case in which more than one
million women alleged discrimination in pay and promotions,24 the Supreme Court significantly
limited Americans’ ability to form a class by raising the threshold requirements for a class
certification.25 As a result, in cases where individual recoveries do not justify the costs of
litigation, big businesses that have acted illegally will likely escape liability for misconduct, even
when, as in Wal-Mart, the conduct allegedly harms more than one million victims across the
country.
In addition to restrictions on class actions, the Roberts Court has made it harder for individuals to
sue by raising the pleading standard for civil complaints. In Bell Atlantic Corp. v. Twombly26
and Ashcroft v. Iqbal,27 the Supreme Court imposed a new “plausibility” standard. This new
standard means that, to survive a motion to dismiss and earn plaintiffs access to discovery,
claims must give rise to a “reasonable inference” of liability. 28 Before these cases, a motion to
dismiss would succeed only when it “appear[ed] beyond doubt that the plaintiff can prove no set
of facts in support of his claim which would entitle him to relief.”29 Following Twombly and
Iqbal, fewer cases are able to survive the initial stages of litigation, and fewer individuals have
their day in court.30
Finally, proposed amendments to the Federal Rules of Civil Procedure threaten to tip the scale
even further.31 Some of these proposed rules would limit the amount of information parties are
able to request at the outset of a case, requiring parties to seek permission from a judge to request
additional information. In cases where one party disproportionately holds the evidence needed
for the plaintiff to prove his or her case—consumer, employment, and discrimination cases, for
example—it can be impossible, without access to the discovery process, to obtain the
information necessary to survive the heightened pleading standard established in Iqbal. The
result will be even more victims who cannot get past the initial stages of litigation, and more
24
See UNEQUAL JUSTICE: WAL-MART V. DUKES (Alliance for Justice 2012), available at
http://www.afj.org/multimedia/videos/content/unequal-justice-wal-mart-v-dukes.
25
Dukes, 131 S. Ct. at 2541.
26
550 U.S. 544 (2007).
27
556 U.S. 662 (2009).
28
556 U.S. at 678.
29
Twombly, 550 U.S. at 561.
30
See Arthur R. Miller, Simplified Pleading, Meaningful Days in Court, and Trials on the Merits: Reflections on the
Deformation of Federal Procedure, 88 N.Y.U.L. Rev. 286, 331-332 (2013) (discussing the impact of Twombly and
Iqbal on the early disposition of cases).
31
Committee on Rules of Practice and Procedure of the Judicial Conference of the United States, Preliminary Draft
of Proposed Amendments to the Federal Rules of Bankruptcy and Civil Procedure (proposed Aug. 15, 2013),
available at http://www.uscourts.gov/uscourts/rules/preliminary-draft-proposed-amendments.pdf
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corporate wrongdoers who evade accountability.32 Although these changes were not proposed
by the Supreme Court as such, they were proposed by the Judicial Conference’s Advisory
Committee on the Federal Rules of Civil Procedure—a committee whose members are all
appointed by the Chief Justice.33 In addition, if, despite an outpouring of fierce opposition,34 the
Advisory Committee continues to recommend these changes, they will need to be approved and
officially promulgated by the Supreme Court before they go into effect.35
In fighting litigation at all costs and urging the courts to erect these barriers, corporations have
been known to assert that they are simply aiming to protect their shareholders. In Halliburton,
however, the Roberts Court is being asked protect corporations from even their own investors.
***
Given the Roberts Court’s record thus far, the question in Halliburton Co. v. Erica P. John Fund
is whether the Court will continue to support corporate interests over individuals’ ability to seek
justice. In Halliburton, it is not just consumers versus corporate interests, or employees versus
employers; it is a Fortune 500 corporation that brings in more than $28 billion in revenue
annually36 attempting to shut the courthouse doors on the very people who have invested in the
company’s success.
This time around, there is no need for there to be a duck-hunting trip to raise alarms about what
may be influencing the Supreme Court’s decisions. In deciding Halliburton the Court should
buck its own trend by upholding precedent and affirming shareholders’ ability to band together
and access justice.
32
See generally Michelle D. Schwartz, Changing the rules for federal civil trials: The proposals are arcane – but
the stakes are enormous, Alliance for Justice Justice Watch Blog (Nov. 7, 2013), http://www.afj.org/blog/changingthe-rules-for-federal-civil-trials-the-proposals-are-arcane-but-the-stakes-are-enormous; Testimony of Michelle
Schwartz, Director of Justice Programs, Alliance for Justice Before the Advisory Committee on the Rules of Civil
Procedure (Nov. 7, 2013), available at http://www.afj.org/wp-content/uploads/2013/11/Michelle-Schwartztestimony-on-civil-procedure.pdf; Letter from Michelle D. Schwartz to the Honorable Jeffrey S. Sutton & the
Honorable David G. Campbell (Nov. 4, 2013), available at http://www.afj.org/wp-content/uploads/2013/11/AFJComments-FRCP-November-2013.pdf.
33
J. Douglas Richards & Michael B. Eisenkraft, Pro-Business and Anti-Efficiency: How Conservative Procedural
“Innovations” Have Made Litigation Slower, More Expensive, and Less Efficient, CPI Antitrust Chronicle, 7 (May
2013).
34
See, e.g., http://www.regulations.gov/#!docketDetail;D=USC-RULES-CV-2013-0002 (more than 2,350
comments received regarding proposed amendments); Tony Mauro, Lawyers Spar Over Discovery Rules, NAT’L
LAW J. (Feb. 24, 2014), available at http://www.nationallawjournal.com/id=1202644114459/Lawyers-Spar-OverDiscovery-Rules#ixzz2uG6qrdcX; Brian Mahoney, BigLaw, Corporations Push For Discovery Rule Changes,
Law360 (Nov. 7, 2013), available at http://www.law360.com/legalindustry/articles/487035/biglaw-corporationspush-for-discovery-rule-changes-.
35
28 U.S.C. § 2074.
36
Fortune 500 2013: Full List–Fortune –CNN Money, MONEY.CNN.COM, May 2013, available at
http://money.cnn.com/magazines/fortune/fortune500/2013/snapshots/2214.html?iid=F500_fl_list.
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