The U.S. Supreme Court issued a long-awaited decision this week on securities class-action lawsuits—one that help companies defend against such suits, on the one hand, and serves as a partial victory for shareholders on the other.

In the case, Erica P. John Fund v. Halliburton, the Supreme Court raised the hurdles for shareholders to proceed forward with a securities class-action lawsuit. At the same time, however, the court upheld precedent set in its landmark 1988 decision in Basic v. Levinson, a case that for decades has provided the groundwork for most shareholder class actions, and has historically made it harder for companies to defend such lawsuits.

In Basic, the court established the so-called “fraud on the market” theory, which states that shareholders only have to show that a company's market price was misleading, rather than having to show that a misrepresentation affected the integrity of the market price.

The Halliburton case arose from a securities class-action lawsuit originally filed in 2002 over allegations that the oilfield services company understated its asbestos litigation liabilities while overstating the financial benefits of its merger with Dresser Industries, as well as revenues from its construction contracts.

According to the plaintiffs, the misstatements artificially inflated Halliburton's stock price, and then caused prices to fall when the company eventually made corrective disclosures. The lawsuit was filed on behalf of investors who purchased Halliburton stock between June 1999 and December 2001.

In the case before the Supreme Court, Halliburton argued that class certification was inappropriate because the evidence it had introduced earlier showed that its alleged misrepresentations had not affected its stock price. By demonstrating the absence of any “price impact,” Halliburton contended it had rebutted the Basic presumption.

In its June 23 decision, however, the Supreme Court disagreed with Halliburton's reasoning. “Before overturning a long-settled precedent…we require ‘special justification,' not just an argument that the precedent was wrongly decided,” Chief Justice John Roberts wrote for the majority. “Halliburton has failed to make that showing.” Thus, the court upheld its fraud-on-the-market theory established in Basic.

Not all the justices completely agreed with that part of the ruling. In a concurring opinion, Justice Clarence Thomas—joined by Justices Antonin Scalia and Samuel Alito—argued that Basic should be overruled, because developments in economic theory have undermined its premise.

“Both of the court's key assumptions are highly contestable and do not provide the necessary sup­port for Basic's presumption of reliance,” Thomas wrote.  “The first assump­tion—that public statements are 'reflected' in the market price—was grounded in an economic theory that has garnered substantial criticism since Basic. The second assumption—that investors categorically rely on the integrity of the market price—is simply wrong.”

Fighting Chance

At the same time, the court agreed with Halliburton that corporate defendants should have an opportunity before the class certification stage to contest the fraud-on-the-market theory, with evidence of a lack of price impact. “We see no reason to artificially limit the inquiry at the certification stage to indirect evidence of price impact,” Roberts wrote. “Defendants may seek to defeat the Basic presumption at that stage through direct as well as indirect price impact evidence.”

Legal experts say that part of the ruling effectively gives companies a fighting chance at preventing such lawsuits from moving forward, and potentially discouraging plaintiffs' lawyers from bringing weaker securities cases.

"For companies, this is good," Jennifer Spaziano, a securities and class action litigation partner with law firm Skadden, says. "Prior to today, in some circuits, if a plaintiff could get past a motion to dismiss, there was a good chance that a class would be certified and the case would settle; today, it may require a lot more work for plaintiffs to obtain class certification."

"When cases are brought, companies will have a better opportunity, following motions to dismiss, to curtail the scope of—and perhaps effectively end—the litigation because courts must now consider at the class certification stage evidence of lack of price impact," Spaziano adds. "As the Court held, absent evidence of a price impact, the fraud-on-the market theory collapses."

“The upshot is that defendants will now likely pull out all stops to litigate price impact at the class-certification stage,” Jonathan Richman, a partner with law firm Proskauer, says. “Advancing the fight on this issue from the merits stage to an earlier phase of the litigation could help dispose of meritless claims that might otherwise have squeaked through the class-certification stage under Basic's presumptions, but the new rule could also turn class certification into an epic battle, rather than a more subdued skirmish.”