The defendants in Halliburton Co. v. Erica P. John Fund, Inc. failed to show the US Supreme Court the “special justification” necessary to overturn settled precedent.
As we explained in a previous post, the Supreme Court in this case agreed to reconsider its 1988 decision in Basic v. Levinson, which allowed a shareholder class in a securities fraud lawsuit to satisfy statutory “reliance” requirements by invoking a presumption that stock prices traded in “efficient” markets incorporate all material information, including alleged misrepresentations.
But between then and now, academics, economists, and commentators chipped away at the economic theory underlying this presumption, which is based upon “the efficient capital markets hypothesis.”
So if a legal precedent depends upon an economic theory that now appears less valid than it did before, do you overrule it or keep it in place because it has ingrained itself into a larger legal structure?
Here is a similar question from real estate: If part of the wood in a load-bearing wall has started to rot, do you replace it? The Supreme Court held that you do, if you can show a “special justification.”
I won’t go further than that into the Supreme Court’s reasoning in Halliburton, other than to point out that this is another example where the Court is moving substantive issues to the pre-class certification phase of a case. Check out my article on Comcast Corp v. Behrend for a recent example in the antitrust context.
What does the Supreme Court’s decision mean for antitrust law?
Reading the Court’s discussion about overruling precedent and changing economic theories from the perspective of an antitrust lawyer is interesting because that is the path of antitrust law over the last century.
The economic foundations of antitrust law have changed over the years, particularly relating to vertical restraints. Back in the olden days, courts and commentators viewed much of what anyone with market power did with major suspicion. That is why my area of law started out with the title “Anti-Trust” law—to limit the old trusts in steel and oil, for example.
Economic theory has a much greater influence nowadays on antitrust law and as the perspectives of economists change, the law often follows. Whereas in Halliburton, the Supreme Court stressed that it was interpreting an actual statute, where “stare decisis” has special force, it tends to treat the Sherman Act, with its general minimal language, as a federal common-law piece of clay that it can mold as both economic theory and, importantly, experience develop.
The clearest example of this difference is the Supreme Court’s 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. In that case, similar to Halliburton, the Supreme Court confronted the question whether to overrule a precedent based upon a theory that is out of fashion. Of course, the precedent Leegin examined was almost 100-years old.
In 1911, the Supreme Court in Dr. Miles Medical Co. v. John D. Park & Sons Co. held that it is per se illegal under the Sherman Act for a manufacturer to agree with its distributor to set the minimal price the distributor can charge for the manufacturer’s goods. This was called resale-price maintenance (RPM) and until Leegin, it was as illegal as price-fixing and market-allocation among competitors.
The Supreme Court in Leegin overruled the per se nature of the violation and therefore Dr. Miles. Contrary to the view of some, however, the Court did not, in any way, state that vertical price fixing through resale-price maintenance agreements is necessarily legal. It is, instead, subject to the rule of reason. So maybe it is legal, maybe it isn’t. Best to ask an antitrust lawyer before you do it. Many states still completely outlaw it.
Anyway, the Court’s opinions in Leegin were fascinating because they delved into the economic theory and featured a great debate between Justice Anthony Kennedy for the majority and Justice Stephen Breyer—an antitrust scholar in academia—for the dissent.
The bottom line is that because of the nature of the Sherman Act, the Supreme Court is much more willing to change its precedents to conform to prevailing views of economics and experience than it is for other federal statutes.
On a completed unrelated note, if you haven’t already, please check out my (relatively) new law firm website.