During last week’s oral argument in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 (“Halliburton II”), the Supreme Court justices sent a strong signal that they would not overrule Basic, but may seek to strengthen defendants’ ability to contest class certification. The two questions presented are (1) whether the fraud-on-the-market presumption established in Basic Inc. v. Levinson, 485 U.S. 224 (1988), should be overruled, and (2) whether the defendants may rebut the fraud-on-the-market presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of their stock.

Going into the argument, defendants knew they likely had three justices on their side: Justices Scalia, Thomas and Alito. In a prior decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (2013), Justice Thomas remarked, “Basic is a judicially invented doctrine based on an economic theory adopted to ease the burden on plaintiffs bringing claims under an implied cause of action.” Justice Alito further noted in his Amgen concurrence, “[M]ore recent evidence suggests that the presumption may rest on a faulty economic premise. In light of this development, reconsideration of the Basic presumption may be appropriate.” Justice Scalia’s dissent in Amgen specially noted the “regrettable consequences” of Basic. Although Justice Thomas remained silent, Justice Alito focused on how rare it is for defendants to be successful in rebutting the fraud-on-the-market presumption (Transcript at 8). Justice Scalia emphasized how few securities class actions continue to trial once certified (Tr. at 23). Shortly into oral argument, it became clear that the position seeking to overrule Basic would be unlikely to garner a majority vote.

Three justices plainly sided with the position of the investor plaintiffs at oral argument: Justices Breyer, Sotomayor and Kagan. Justices Breyer and Kagan focused on the idea that price impact (justifying the presumption of reliance) was really a common question and thus a certifiable class issue that can be decided at trial (Tr. at 13-15, 22). Justice Sotomayor was so unpersuaded by the defendants’ argument distinguishing loss causation from price impact that she commented that defendants’ position “makes no sense” (Tr. at 12).

Justices Kennedy and Roberts forged the “midway position” (Tr. at 17). Justice Kennedy suggested that plaintiffs should be required to show before a class action is certified that the stock was actually affected by whatever false statements are alleged. He indicated that an “event study” could be used by plaintiffs to make such a showing. Justice Roberts appeared to reject defendants’ argument that economic literature disproves the fraud-on-the-market presumption and suggested that both sides were dealing at the margins (Tr. at 10).

In the end, the decision will likely come down to two issues. First, whose burden will it be to prove price impact: will plaintiffs be required to perform an event study to invoke the presumption, or will defendants be required to rebut the presumption with an event study? Second, the Court will likely determine when that proof must be presented—at class certification, summary judgment, or trial. One issue is certain: when the Supreme Court likely issues its opinion in June, investors and corporations will have to play by the new rules of the securities class certification game.