By W. Brantley Phillips, Jr. and Shayne R. Clinton 

The Supreme Court recently heard oral argument in two cases that could potentially impact the role of loss causation and the use of experts at the class certification stage.  On March 29, 2011, the Supreme Court heard oral argument in Wal-Mart Stores, Inc v. Dukes, No. 10-277, 131 S. Ct. 795 (2010), regarding the extent courts analyze expert testimony and the merits of a case at the class certification stage.  On April 25, 2011, the Supreme Court heard oral argument in Erica P. John Fund v. Halliburton Co., No. 09-1403, 131 S. Ct. 856 (2011), on the question of whether loss causation must be proven at the class certification stage in order to rely on the fraud-on-the-market presumption of reliance.

Both cases implicate the Supreme Court’s earlier decisions in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) and General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982).  In Eisen, the Supreme Court explained that “nothing in either the language or history of Rule 23 [] gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.”  417 U.S. at 177.  Later, the Supreme Court clarified that class actions “may only be certified if the trial court is satisfied, after a rigorous analysis, that the prerequisites of Rule 23(a) have been satisfied.”  457 U.S. at 161.  This rigorous analysis often “involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff’s cause of action.”  Id. at 160 (internal quotation marks omitted).

The Ninth Circuit’s en banc decision in Dukes, 603 F.3d 571 (9th Cir. 2010), analyzed the extent expert testimony may be used at the class certification stage to delve into the merits of the case.  In passing, the Ninth Circuit explained that, in fraud-on-the-market cases, where “a plaintiff typically must show the six ‘basic elements’ of a securities fraud action . . . and the efficient market component of the causation element overlaps with the merits.”  Id. at 591; see also Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 597 F.3d 330, 335 (5th Cir. 2010), cert. granted sub nom. Erica P. John Fund v. Halliburton Co., 131 S. Ct. 856 (2011) (holding that plaintiffs must “establish loss causation in order to trigger the fraud-on-the-market presumption.  And we require this showing ‘at the class certification stage by a preponderance of all admissible evidence’” which included expert testimony) (citation omitted).  But see Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010) (Judge Easterbrook declining to adopt the Fifth Circuit standard and holding that “plaintiffs need not establish loss causation before a class can be certified”); In re DVI, Inc. Sec. Litig., --- F.3d ---, 2011 WL 1125926, at *7 (3d Cir. March 29, 2011) (same).

When experts are needed at the class certification stage, the Ninth Circuit upheld an analysis that “delve[s] into the substance of the expert testimony” but does not decide the actual merits to determine if a common question exists. 603 F.3d at 605.  Whether or not one expert is more persuasive creates a “disagreement [that] is the common question, and deciding which side has been more persuasive is an issue for the next phase.”  Id. at 609.  Wal-Mart has contested this result, arguing that the disagreement among experts is not the common question but the plaintiff carries the burden to produce the necessary proof and courts should “resolve such disputes at the certification stage relating to Rule 23 factors.”  Brief for Petitioner, Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 795 (2010) (No. 10-277), 2011 WL 201045, at *25.

In Halliburton Co., the Supreme Court will decide the extent to which loss causation triggers the fraud-on-the-market presumption.  Most commentators think that the Supreme Court will reverse the Fifth Circuit’s decision.  However, the Justices’ questions at oral argument indicated that the ruling will likely analyze what plaintiffs must show under Basic, Inc. v. Levinson, 485 U.S. 224 (1988), to trigger the presumption of reliance at the class certification stage.  To the extent expert testimony is used to make such determinations, a decision in the Dukes case will hopefully provide further guidance for how courts should delve into the merits of a case when analyzing disagreements among experts at the class certification stage.

(Brant Phillips is a Member of Bass, Berry & Sims PLC, where his practice focuses on complex business litigation, including securities and shareholder class action defense, derivative actions and business fraud, as well as regular work in various administrative proceedings on behalf of education, healthcare and utility industry clients. Shayne Clinton is an attorney at Bass, Berry & Sims PLC, focusing his practice on corporate and securities litigation, including cases involving class action defense, officer and director liability, and corporate and partnership disputes).