This past summer, the United States Supreme Court handed down its decision in Halliburton v. Erica P. John Fund, Inc. (“Halliburton II”), in which the Court held that a defendant may establish lack of price impact at the certification stage to establish a lack of reliance based upon the fraud-on-the-market theory. This was the third decision in three years dealing with the fraud-on-the-market approach to establishing commonality with respect to reliance by plaintiffs on management’s misrepresentations. In so doing, the Supreme Court retained market efficiency as an element of the fraud-on-the-market theory, but also reflected a broader and less restrictive approach to market efficiency than had been adopted by some of the circuit courts.
By permitting defendants to establish a lack of price impact, which plaintiffs will certainly challenge, this Article asserts that, because price impact is linked to both loss causation and materiality, which previous Supreme Court decisions have determined need not be established at the certification stage, the Court has open the door to the litigation of complicated, fact-based issues at the certification stage, rather than at a trial on the merits where the litigation of such issues should properly take place.
While there has not been much litigation as of yet applying Halliburton II, courts thus far have held defendants to a substantial burden in establishing a lack of price impact. Nonetheless, this Article suggests that it is the misleading information injected into the market by defendants upon which plaintiffs rely, not the market price, and that certification should be a summary proceeding, leaving complicated and complex issues of price impact, materiality, and loss causation to a trial on the merits. Otherwise, the present approach raises as yet unresolved issues as to issue preclusion, law of the case, and the Seventh Amendment right to a jury trial.
Murdock, Charles W., The Significance and Impact of Price Distortion and the Fraud-on-the-Market Theory after Halliburton II, 46 Loy. U. Chi. L.J. 551 (2015)
Copyright 2015 Charles W. Murdock.