Sixth Circuit Vacates Class Certification for Applying Affiliated Ute’s Reliance Presumption

At a Glance

• Affiliated Ute is limited: The Sixth Circuit held Affiliated Ute applies only to omission-based cases, using a four-factor test. If any factor is met, the stricter Basic standard applies.
• Class certification vacated: Plaintiffs’ claims were primarily focused on misrepresentations, so Affiliated Ute didn’t apply. The court also ordered a “rigorous” damages analysis under Comcast.

The Sixth Circuit recently joined the majority of federal appellate courts in deciding that the more lenient reliance presumption standard set forth in Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), does not generally apply to claims in “mixed” cases that allege both misrepresentations and omissions, including those alleging “half-truths.” Instead, Affiliated Ute applies only if plaintiffs can show that their claims are primarily based on omissions by negating a series of factors. The court directed that to determine the primary basis for plaintiffs’ claims, district courts within the circuit must engage in a two-step process of (1) classifying claims as either omissions or misrepresentations, and (2) applying a four-factor test. “If and only if the case fails all four factors” can it be deemed to be “primarily based on omissions” such that plaintiffs may avail themselves of the Affiliated Ute presumption (Op. at 22); in all other cases, Basic Inc. v. Levinson, 485 U.S. 224 (1988), applies.

In closely-watched In re: FirstEnergy Corp. Sec. Litig., Nos. 23-3940 /3943 /3945 /3946 /3947, the Sixth Circuit vacated the Southern District of Ohio’s grant of class certification based on a holding that plaintiffs were entitled to Affiliated Ute’s rebuttable presumption of reliance “if there is an omission of a material fact by one with a duty to disclose” and did not need to meet the more stringent “integrity of the market price” test set forth in Basic. Op. at 14 (internal quotation marks and citation omitted). In doing so, the court held that while a securities fraud case need not be purely based on omissions to invoke Affiliated Ute, i.e., it may be a “mixed case” of omissions and misrepresentations, it must be primarily based on them. To determine whether omissions are the primary basis for plaintiffs’ claims, the court looked to tests developed by other circuits and determined that three factors were common to all approaches and a fourth, from the Third Circuit’s Johnston v. HBO Film Mgmt., Inc., 265 F.3d 178 (3d Cir. 2001) decision, was particularly useful. Accordingly, it adopted a four-factor test that it held should be applied after a court determines whether “each claim or group of claims” alleges “either an omission or misrepresentation”: “(1) the alleged omissions are only the inverse of the misrepresentations, i.e., the only omissions are the truth that is misrepresented; (2) reliance is in fact possible to prove by pointing to an alleged misrepresentation and connecting it to an injury; (3) the preponderance and primary thrust of the claims involve alleged misrepresentations made by the defendant(s); or (4) the alleged omissions have no standalone impact apart from any alleged misrepresentation.” Op. at 11. The court concluded that “[i]f even one of these four factors is satisfied, the mixed case is primarily based on misrepresentations and thus subject to analysis under the Basic presumption. If and only if none of these four factors are satisfied, then the mixed case is primarily based on omissions and thus subject to analysis under the Affiliated Ute presumption.” Id.

Applying this analysis to Plaintiffs’ allegations, the court first categorized Plaintiffs’ Exchange Act Section 10(b) claims into 13 groups. It then analyzed each group and determined that all were allegedly false affirmative statements or half-truths or aspirational statements, which “must [also] be classified as misrepresentations for the purposes of applying a presumption of reliance at the class-certification stage.” Id. at 20. The court thus concluded that “this case is all about misrepresentations” and none of the four factors were “true for this case.” Id. at 33. First, the court explained, the alleged omissions were “only the inverse of the misrepresentations” because both the omissions and misrepresentations shared the same “core,” namely that FirstEnergy’s SEC filings did not include “full, comprehensive disclosure[s].” Id. Second, the court found that “reliance is in fact possible to prove here” because “Plaintiffs admit that most of their argument for application of Affiliated Ute is based on the statements that FirstEnergy did make,” and therefore they “need not prove reliance on something that never happened”; they can “point to a misrepresentation and connect it to the injury.” Id. at 34. Third, the court held that Plaintiffs’ claims, in both number and substance, were “based as much on what was stated as on what [was] purportedly missing,” and so misrepresentations were “the preponderance and primary thrust” of those claims. Id. at 34-35. Finally, the court determined that because the only “omissions” Plaintiffs alleged were actually half-truths and focused on the absence of “critical qualifying information,” the omissions did “not have standalone impact apart from this case’s alleged misrepresentations.” Id. at 35-36. Accordingly, the court held that Plaintiffs’ claims “satisf[ied] every single one” of the “four factors for determining whether a mixed case is primarily based on misrepresentations.” Id. at 26. Because plaintiffs’ claims “must satisfy none of” those factors in order “[t]o access Affiliated Ute,” the court concluded that “[t]his case is therefore subject to analysis under Basic.” Id. at 11, 36. 

In vacating the district court’s class certification decision based upon the reliance presumption, the Sixth Circuit was careful to characterize its remand as “limited” because it was doing so “only to the extent that the district court applied Affiliated Ute.” Id. at 36. The circuit court did not address the district court’s additional holding “that ‘Plaintiffs would be entitled to the Basic presumption of reliance’” as well. Id. (citation omitted). 

However, the court also remanded with direction that the district court must conduct a rigorous analysis, as prescribed by Comcast Corp. v. Behrend, 569 U.S. 27 (2013), to determine whether Plaintiffs “set forth a methodology for calculating damages on a class-wide basis” with respect to their Exchange Act claims “that is susceptible of measurement across the entire class and satisfies the predominance requirement of Rule 23(b)(3).” Op. at 39.  The Sixth Circuit held that the district court erred when it did not conduct such an analysis for Plaintiffs’ Exchange Act claims, referring instead to a prior section of its opinion that addressed only the Securities Act. The court reasoned that “the Securities Act and the Exchange Act calculate damages entirely differently,” with the latter “text lack[ing] any…damage-calculation formula” and requiring “proof of loss causation” that the Securities Act does not. Id. at 38. Accordingly, the Sixth Circuit remanded “for the district court to conduct a proper damages analysis under the standard set forth in Comcast.” Id. at 12.

Regardless of the outcome on remand, the Sixth Circuit’s decision in FirstEnergy adds to the line of appellate cases creating a “high hurdle” to accessing Affiliated Ute’s “narrowly viewed” reliance presumption and signaling that courts are on the lookout for “crafty pleading and claim design” in securities fraud cases involving alleged omissions. Id. at 11, 21, 40. Accordingly, plaintiffs will largely have to continue to grapple with the more challenging Basic standard in their pursuit of class certification for most cases involving so called “half-truths.”