A recent Fifth Circuit opinion that revived a securities class action and included language strongly supportive of securities plaintiffs is attracting plenty of attention,1 not least because retired Supreme Court Justice Sandra Day O’Connor sat on the panel.
In its per curiam decision in the Flowserve securities class action, the panel gave plaintiffs another opportunity to certify a class by reversing the lower court’s decision on summary judgment in part, vacating its denial of class certification and its remaining grounds for summary judgment, and remanding the case to the district court. See Alaska Electrical Pension Fund v. Flowserve Corp., Nos. 07-11303, 08-10071, 2009 WL 1740648 (5th Cir. June 19, 2009).
Justice O’Connor’s participation has made the decision required reading among securities litigators. Further interest stems from the sympathy the panel expressed for plaintiffs in its conclusion: “To be successful, a securities class action plaintiff must thread the eye of a needle made smaller and smaller over the years by judicial decree and congressional action. Those ever higher hurdles are not, however, intended to prevent viable securities actions from being brought.”
Plaintiffs will likely cite to the Flowserve decision well beyond the Fifth Circuit in an effort to encourage other judges to nudge the pendulum back toward their side, particularly since it comes from a circuit generally regarded as less friendly to securities plaintiffs. The panel’s reference to the role of “judicial decree” in tightening standards could even be viewed as a thinly veiled rebuke of the judicial activism of Justice O’Connor’s former Supreme Court colleagues and their long streak of securities decisions in favor of defendants. The conclusion also provides a strong rejoinder to District Court Judge Jane Boyle’s order, in which she referred to the length and cost of the litigation and expressed sympathy for securities defendants facing “the in terrorem power of the class action and the extraordinary leverage Plaintiffs wield…” Ryan v. Flowserve Corp., 245 F.R.D. 560, 583 (N.D. Tex. 2007).
Given her record as a moderate, her appointment by a Republican president, and her prior experience as a Republican legislator, Justice O’Connor’s views may also resonate in close cases, particularly among Republican-appointed judges who currently constitute a majority on federal appellate courts. As of March 2009, Republican-appointed judges held 100 of the 179 federal appellate seats, leaving 64 Democratic appointees and 15 vacancies, according to the Federal Judicial Center (www.fjc.gov). The Fifth Circuit is more lopsided, with 17 Republican appointees and five Democratic appointees.
While the exact nature of Justice O’Connor’s involvement in drafting the panel’s opinion can’t be determined conclusively, its language mirrored her engaged questions in oral argument, a recording of which was posted on the court’s website.2
The appellate case reviewed the lower court’s denial of class certification and subsequent grant of summary judgment in favor of the defendants, both of which turned on loss causation, an issue that has arisen several times in the Fifth Circuit since the Supreme Court’s decision in the landmark case of Dura Pharms., Inc. v. Broudo, 544 U.S. 336 (2005). The Fifth Circuit found that the district court, by requiring a fact-for-fact disclosure that completely corrected prior misstatements, had used the wrong standard to determine loss causation at the class certification stage. Flowserve, 2009 WL 1740648 at *6. According to the panel, such a standard would do away with the fraud on the market theory of reliance. “If a fact-for-fact disclosure were required to establish loss causation, a defendant could defeat liability by refusing to admit the falsity of its prior misstatements. And if a ‘complete’ corrective disclosure were required, defendants could ‘immunize themselves with a protracted series of partial disclosures.’ ” Id. (internal citations omitted). During oral argument, Justice O’Connor also noted this problem: “It’s an odd rule. … It says that if you don’t reveal what you’ve done, you’re safe, so don’t ever tell the truth here.” Audio Recording of Oral Argument at Minute 25, Flowserve, Nos. 07-11303, 08-10071 (5th Cir. argued Feb. 2, 2009), http://www.ca5.uscourts.gov/OralArgRecordings/07/07-11303_2-2-2009.wma.
The Fifth Circuit also found that the district court should not have applied its loss causation holding to the issue on the merits at summary judgment and “that a genuine fact issue exists on the material element of loss causation under the Exchange Act…” Id. at *11. On remand, plaintiffs must prove “that the market learned more than that Flowserve’s earnings guidance was lower and so its business seemed less valuable,” in order to “establish that its loss was caused by Flowserve’s misstatements.” Id. at 9.
Like residents of the Northeast hoping for a sunny forecast after weeks of rain, securities plaintiffs hope Justice O’Connor and the Flowserve decision will usher in a welcome bit of sun in an otherwise dreary period.
1 See D&O Diary, http://www.dandodiary.com/2009/06/articles/securities-litigation/rare-fifth-circuit-securities-case-reversal/ (June 22, 2009); AmLaw Litigation Daily, http://www.law.com/jsp/tal/digestTAL.jsp?id=1202431650631&Fifth_Circuit_Revives_Flowserve_Securities_Class_Action (June 22, 2009); SEC Actions, http://www.secactions.com/?p=1232 (June 24, 2009).
2 Justice O’Conner sat by designation pursuant to 28 U.S.C. § 294(a). Kevin LaCroix reported in his D&O Diary that a “reliable source” told him Justice O’Connor wrote the opinion, and one of his sharp-eyed readers noticed (and this author verified) that the metadata for the document posted on the Fifth Circuit’s website included the last name of Justice O’Connor’s clerk, Isaac Lidsky, in the author field.