The last argument of the March argument calendar, Halliburton Co. v. Erica P. John Fund, has the potential to become one of the most important business-law cases of the decade, but only if the Justices decide to overrule the 1988 decision in Basic Inc. v. Levinson. Given the significance of the case, perhaps readers will excuse a much longer than normal summary of the argument here.
As every securities and class-action lawyer in the country must know, Justice Blackmun, writing for a four-Justice Court (only six Justices participated), held in Basic that a Rule 10b-5 class action can proceed based on a misrepresentation alleged to have affected the price of a stock, without any proof that the individual members of the class were aware of the misrepresentation. Specifically, the Court held, it satisfied the “reliance” requirement of Rule 10b-5 that class members made purchases in a market presumably affected by the misrepresentation. After a flurry of separate opinions in recent years calling into question the underpinning of Basic, the Court granted review in this case to consider overruling Basic.
Aaron M. Streett for petitioner (Art Lien)
The argument displayed an active and prepared bench, which is no surprise given that over the years several of the Justices have been leading up to consideration of the question at issue here. Interestingly, although the grant of review suggests that at least four of the Justices think the case for overruling Basic is a strong one, they displayed little of that sentiment during the argument. The argument of Aaron Streett (for the class-action defendant Halliburton) was dominated by questions from Justices Ginsburg, Breyer, and Kagan, who seemed to be offering him every opportunity to rebut what they regarded as the strongest arguments for leaving Basic in place. First, Justice Ginsburg emphasized the idea that the Basic majority couched its analysis more in terms of “probability and common sense” than “strictly” in terms of “economic theory”; if the opinion relied on “common sense,” then changes in economic theory wouldn’t undermine it.
For her part, Justice Kagan challenged Streett’s argument for overruling Basic with the idea that Congress “had had every opportunity, and has declined every opportunity, to change Basic itself.” The Fund argues, predictably, that it should be even harder to overrule a decision like Basic in an area in which Congress so frequently micromanages the applicable legal rules.
Most ominously for class-action defendants, Streett’s argument closed with a question from Justice Breyer that could have come straight from the mouth of the lawyer for the Fund:
Now what we have here is a common issue. So we don’t have to decide . . . who’s right. We’ve just noticed it was a common issue. And so they make their case, at least prima facie that they have a side and the other side will rebut it on the merits. Well, similarly, here, they’re saying we don’t have to show that the markets incorporate every piece of information. We think they incorporate this information and as a general rule they do incorporate most information.The other side wants to show they didn’t incorporate this. That’s fine. It’s a common issue. We’ll decide it at the trial. All we’re trying to say is, is it a common issue and it’s not a red herring to throw in whether the markets incorporate information because normally they do. Now, what’s wrong with what I said.
Streett responded (after some helpful suggestions from Justice Scalia) that the Court often has required common issues to be required at the preliminary stage. But Justice Kagan jumped in to emphasize that under last year’s decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds (authored by Justice Ginsburg) the issues that are decided up front are the issues that would splinter the class if the plaintiff’s position failed. That wasn’t the case here, where a failure of the plaintiff’s proof would vitiate the entire action. Streett attempted to argue that her description was inconsistent with Basic itself, but Justice Kagan was having none of it and continued to press him until Justice Kennedy rescued him by taking him in a different direction.
One oft-raised topic of inquiry, presented to all three advocates, was whether the Court should modify Basic to require event studies at the certification stage, a position recommended in an amicus brief from a group of law professors. This was brought up repeatedly, by several Justices, but most commonly by Justice Kennedy, and seemed to interest the Justices much more than a complete rejection of Basic. Justice Kennedy seemed particularly interested in the practical consequences – how much more expensive would this be than current practice, how practical would it be, how much would it change the results in existing cases, and the like.
The centrality of that issue to the Court’s deliberations was plain from an exchange between Deputy Solicitor General Malcolm Stewart, who argued on behalf of the Securities and Exchange Commission. Justice Scalia tipped his hand pretty clearly to suggest that his vote won’t be on the table to overturn Basic. Specifically, he explained to Stewart that, because “the PSLRA [Private Securities Litigation Reform Act] assumes Basic[’s existence] . . . those provisions [of the PSLRA that depend on Basic] would sort of be useless if Basic were entirely overruled.” What he wanted to know, however, was whether those provisions would still be effective if the Justices adopted the law professors’ “Basic writ small.” Stewart replied that some of Congress’s recent enactments would make sense against the “writ small” version of Basic but that others (amendments in the Securities Litigation Uniform Standards Act) would not. Presumably, Streett sat listening to that exchange wondering where he possibly could find five votes to overrule Basic without support from Justice Scalia.
The argument from David Boies (representing the plaintiff Erica P. John Fund) was remarkable more than anything for the placidity of the bench. It wasn’t that they didn’t have questions for Boies. Much to the contrary, as with Streett, the Justices repeatedly laid out in front of him the strongest arguments from Streett’s briefing on behalf of Halliburton. The difference during Boies’s argument is that the Justices, after asking the questions, largely sat back and allowed Boies to answer the questions in great detail without interruption, going on for minutes at a time (an eternity in Supreme-Court-argument time).
David Boies for respondent (Art Lien)
For example, when Justice Sotomayor raised the event-study topic mentioned above, the Court allowed Boies to deliver the entirety of a lengthy, and presumably canned, response. To hear Boies discuss the topic (and the Justices quietly heard him out), it is common for the parties (as they did here) to argue about confounding factors for every day on which price changes. As a result, Boies asserted, litigation about the event studies in practice is quite factually detailed, often necessitating a trial with competing experts.
By contrast, he suggested, the norm of proving market efficiency in the weak sense (that the market reacts to new information) is trivially easy – conceded without dispute in this case. Continuing on without interruption, he argued that the markets incorporate information much more efficiently now than they did at the time of Basic: “In 1988, people were still sitting home reading Barron’s to try to figure out what was happening in the stock market. Today you have real-time information.” The point was telling, suggesting as it does that if anything changes since the time of Basic make that decision more sensible, not less.
Boies also managed another notably effective exchange with Justice Alito, who suggested that the admitted time delay between the release of information and its incorporation into the market price made it odd that a plaintiff purchasing just a few hours after the misrepresentation could recover as a class member. But Boies aptly explained that Justice Alito’s concern was misguided. In Boies’s view (again presented without interruption), the windows for class eligibility ordinarily are set far after the release of the information, giving the information a full chance to “permeate” the market. It well might be that Streett had substantial responses to the points Boies was allowed to present at such length, but he certainly had no opportunity to articulate them during his rebuttal.
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Two interesting exchanges of more general interest to Court watchers warrant mention in any summary of the argument, though they admittedly shed much more light on the Justices’ personalities than they do on their likely votes in this case. The first, during Streett’s argument for Halliburton, came when the Chief Justice commented that the parties in their briefs seem to be debating precisely how efficient markets really are thought to be by modern economists. Reminiscent of Justice Kennedy’s questions on Monday in the argument in Hall v. Florida about the relevance of expert psychiatric opinion, the Chief Justice asked Streett: “How am I supposed to review the economic literature and decide which of you is correct?” When Streett responded that “[w]e don’t think the Court needs to do that. We think the Court should get out of the business of reviewing economic literature,” he struck something of a raw nerve, eliciting the Chief Justice’s stern response:
No. Your submission is that we should jettison the Basic test because economists now believe that the efficient market theory is not sufficiently accurate or true to support it. . . . You review a lot of the economic literature in your briefs. I assume you wanted me to look at it.
Streett’s response that “the “economic theory shows that one of the basic premises is no longer even defended” did not seem to mollify the Chief Justice.
The second interchange came near the opening of Boies’s argument for the Fund. Responding to Boies’s contention that Congress’s support for Basic is evident from the provisions of the PSLRA that are founded on Basic’s existence, Justice Alito asked if Boies was aware of PSLRA § 203, which states that nothing in the PSLRA “shall be deemed to create or ratify any implied private right of action.” When Boies responded that the Amgen Court stated “just a year or so ago” that the PSLRA had ratified Basic, Justice Scalia asked if the Amgen Court had mentioned Section 203. Boies truthfully agreed that the Amgen Court did not mention the provision. Scalia commented, with an air of affable candour that must have pained Halliburton’s lawyers: “I think maybe we didn’t know about it, as the parties here seemingly did not know about it. I don’t think it was cited in the briefs.” Indeed, so far as I can tell, none of those arguing for the overruling of Basic mentioned such a useful provision in their briefs. Perhaps one of the Justices’ law clerks was more careful in research than counsel for Halliburton and its amici!
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In a case of this import it would be surprising if the Court showed much of its hand at the argument. Still, it has to be surprising that so many of the Justices so strongly suggested they weren’t ready to overturn Basic (Justices Scalia, Ginsburg, Breyer, and Kagan seemed strongly inclined in that direction), while none of the Justices who voted to consider the question expressed any firm preference in favor of rejecting Basic. So about all we can say from the argument is that the likelihood that the Court will overrule Basic looks a little less probable now than it did Wednesday morning before the argument.
[Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to this blog in various capacities, was among the counsel on an amicus brief in support of the Erica P. John Fund. However, the author of this post is not affiliated with the firm.]
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