Today, the United States Supreme Court decided Halliburton Co. v. Erica P. John Fund, Inc., No 13-317 (U.S. June 23, 2014). Here’s a link to the
opinion. As we mentioned in our prior post, one of the questions the Supreme Court took the case to decide was whether to abolish altogether the so-called “fraud on the market” presumption of reliance in securities cases that the Court had recognized, 4-3, in Basic, Inc. v. Levinson, 485 U. S. 224 (1988).
The Court didn’t do that. The vote on that point was six-to-three. A combination of stare decisis (slip op. at 4, 7-8, 11), that Congress could have abolished the presumption itself but hadn’t (id. at 12-13, 15-16), and the Court’s emphasis on the rebuttable nature of the presumption – its “modest premise” (id.
at 10, see id. at 7, 10, 14-15) preserved it in cases where the evidence supported the existence of an “efficient” securities market.
We’re not securities lawyers here. We’re interested in Halliburton primarily for its effect in keeping “fraud on the market” presumptions out of our sandbox – the manifestly non-“efficient” market for prescription medical products, where patients cannot even buy these products without a learned intermediary physician first prescribing them. As we laid out at some length in a prior post (one of our 50-state surveys) back in 2010, the fraud on the market theory has been roundly rejected by courts applying state law, even in securities cases. Our chief concern at present isn’t state law, but rather the abominable RICO-based liability theories that the First Circuit embraced in its Neurontin trilogy. We discussed at length here how that court had allowed expert testimony that didn’t just presume reliance in a RICO case claiming off-label promotion, but allowed expert testimony amounting to a conclusive presumption of reliance – a presumption that that court held overcame the testimony of every prescribing physician who testified that they had not relied on the promotion. What’s more, the First Circuit in Neurontin even allowed that expert to impugn the credibility of the physician witnesses before the jury.
What happened in Neurontin was unprecedented, and we hope that, after what we gleaned from today’s Supreme Court decision, it remains that way. There’s a chance of that because the Supreme Court today had a lot to say about rebuttable presumptions of reliance, even in the sometimes “efficient” securities market.
Even though “fraud on the market” survived in some sense, the Court voted 9-0 to reverse class certification in Halliburton. The Court unanimously found error in the court of appeals’ effectively treating the fraud on the market presumption as irrebuttable at the class certification stage.
As to the rebuttability of presumptions of reliance, the Court first emphasized that, from the beginning, fraud on the market was rebuttable in a number of ways:
Basic emphasized that the presumption of reliance was rebuttable rather than conclusive. Specifically, “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.”
Halliburton, slip op. at 7 (citation to Basic omitted).
That’s “any showing.”
The ready rebuttability of the fraud on the market presumption is what made it a “modest premise” that – properly applied – could coexist with the reliance requirement imposed by the relevant securities statutes:
To recognize the presumption of reliance, the Court explained, was not “conclusively to adopt any particular theory of how quickly and completely publicly available information is reflected in market price.” The Court instead based the presumption on the fairly modest premise that “market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices.”
Id. at 10 (citations to Basic omitted).
Because the fraud on the market presumption that Basic recognized is always rebuttable by any evidence that bears upon its underlying assumptions, in the second part of Halliburton, the Court unanimously concluded that it was error not to allow the defendant to rebut it at the class certification stage.
First, in language that applies equally to prescription medical product liability cases, the Court reiterated that the defendant was always entitled to prove that the relevant market didn’t actually have the “efficient” (that is to say, purely responsive to information) characteristics on which the fraud on the market presumption was predicated:
Nor is there any dispute that defendants may introduce price impact evidence at the class certification stage, so long as it is for the purpose of countering a plaintiff’s showing of market efficiency, rather than directly rebutting the presumption.
Slip op. at 18-19.
Letting defendants rebut the premises of the presumption, but not the presumption itself, at the class certification was a “restriction [that] makes no sense, and can readily lead to bizarre results.” Id. at 19. Fraud on the market was, at best “an indirect proxy for price impact” in the stock market. Id. at 20. Fine, but such proxies remain no substitute for direct evidence of reliance, where such evidence exists:
[A]n indirect proxy should not preclude direct evidence when such evidence is available. . . . Any showing that severs the link between the alleged misrepresentation and the price received (or paid) by the plaintiff will be sufficient to rebut the presumption of reliance because “the basis for finding that the fraud had been transmitted through market price would be gone. And without the presumption of reliance, [the litigation] cannot proceed as a class action: Each plaintiff would have to prove reliance individually, so common issues would not “predominate” over individual ones, as required by Rule 23(b)(3).
Id. (Basic citation and quotation marks omitted). There you have it. Reliance presumptions, even in the securities field – which we believe is a fortiori to anything involving the market for prescription drugs – are rebuttable, and when rebutted mean that class action status is impossible. A mere presumption “does not require courts to ignore a defendant’s direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock’s market price.” Id. at 21.
The Court in Halliburton went on to distinguish proof of reliance from proof of some other element of fraud (such as materiality) that was inherently capable of being established on a aggregate, or class-wide, basis. The two elements “differ . . . in a crucial respect.” Id. Precluding defenses to a common issue at the certification stage doesn’t affect the class action requirement of predominance, because proof as to one remains proof as to all – whichever way that proof points. The same is not true of an inherently individualized element like reliance:
Price impact is different. The fact that a misrepresentation was reflected in the market price at the time of the transaction” − that it had price impact − is Basic’s fundamental premise. It thus has everything to do with the issue of predominance at the class certification stage. That is why, if reliance is to be shown through the [fraud-on-the-market] presumption, the publicity and market efficiency prerequisites must be proved before class certification. Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.
Id. at 22 (citation and quotation marks omitted). Thus, “defendants must be afforded an opportunity before class certification to defeat the presumption
through evidence that an alleged misrepresentation did not actually affect the market price.” Id. at 23.
How do we think that this ruling affects the Neurontin Trilogy? In general, we believe that the Court’s insistence on the rebuttability of a presumption of reliance – even in the securities market where such a presumption is far more factually plausible than in a market characterized by independent, professional intermediaries – means that the expert opinions central all three of the Neurontin opinions would never pass muster before the Supreme Court. More specifically, we believe that (if it hadn’t settled) the remand required by In re Neurontin Marketing & Sales Practices Litigation, 712 F.3d 60 (1st Cir. 2013),
would necessarily have produced the same result – denial of class certification – because under the rationale in Halliburton there is no way that any
presumption of reliance could have survived under the standards just established for such presumptions by the Supreme Court.