The question of who belongs in a class action deserves a lot of think about it time. A good class definition may save class plaintiffs lots of trouble in winning certification of the class — a do-or-die event in the life of the class action.

A new ruling by the Second Circuit highlights that true fact. In re Petrobras Securities, No. 16-1914-cv (2d Cir. July 7, 2017).

Something rotten in the state of Brazil

Petrobras involved the government-owned Brazilian oil giant Petroleo Brasileiro S.A. (Petrobras). By 2015, the one-time $310 billion behemoth had shrunk into a sluggard worth just $39 billion. The cause? A “cartel” of vendors had for many years charged the entity far too much for goods and services. Cartel members kicked back excess payments to execs and government officials, inflating the carrying value of assets way above their actual worth while also pumping up the market price of Petrobras securities.

After discovery of the scheme, the prices of Petrobras securities plunged. Class action lawsuits for securities fraud ensued.

The cases landed before U.S. District Judge Jed Rakoff in Manhattan. The class-action complaints alleged fraud claims under the Securities Exchange Act of 1934 with respect to purchases of Petrobras American Depository Receipts (equity). They also asserted claims under the Exchange Act and its more dangerous sibling, the Securities Act of 1933, for purchases of Petrobras “notes” (debt) in over-the-counter transactions traceable to the notes’ initial public offerings.

Unlike the ADRs, which traded on the New York Stock Exchange, the notes changed hands not in over-the-counter transactions.

Two big issues arising from Supreme Court decisions confronted the parties and the court: an “extraterritoriality” question under Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010) and one about a “presumption of reliance” under Basic Inc. v. Levinson, 485 U.S. 224 (1988).

Morrison

In Morrison (post here), the Supreme Court held that federal securities laws generally reach only “domestic” purchases and sales. Applying Morrison, the Second Circuit held that “for ‘securities that are not traded on a domestic exchange,’ a transaction is considered ‘domestic if [1] irrevocable liability is incurred or [2] title passes within the United States.'” Petrobras, slip op. at 22 (quoting Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 67 (2d Cir. 2012)).

Basic

Basic addressed a key concern in securities class actions. Plaintiffs must show that members of the class relied on false information when they bought the securities. But no class action could proceed if the plaintiffs have to prove the “reliance” element on an individual basis. Individual issues would likely overwhelm ones common to the class (the making of false representations or omissions, intent to defraud, and materiality of the false information).

The Supreme Court ruled in Basic that a court may presume that all purchasers relied if they alleged that defendants withheld important facts from public disclosures and purchased at a “market” price that reflected all publicly available information.

As the Court confirmed in Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2414 (2014) (post here), the presumption applies if the security traded in a “generally efficient market”.

Certification

Judge Rakoff granted the plaintiffs’ motion to certify the case as a class action for damages. He held that common issues predominated over individual ones.

Although touching on the Morrison “domesticity” question, Judge Rakoff did not expressly tie it to the predominance issue. But he did specifically rule on the “efficient market” element of the Basic presumption, holding that on balance the plaintiffs had shown market efficiency.

Appeal

Petrobras urged the Second Circuit to reverse because, it claimed, the Morrison and Basic issues made the case too messy to handle as a class action.

Speaking through U.S. District Judge Nicholas G. Giraufis, who sits in Brooklyn, the 3-0 panel made four notable rulings:

  • The court does not review grants of class certification more leniently than denials.
  • Rule 23 does not impose an “administrative feasibility” test for determining who qualifies as a member of the class (the “ascertainability” requirement the court recognized in Brecher v. Republic of Argentina, 806 F.3d 22, 24 (2d Cir. 2015)).
  • Judge Rakoff erred in not expressly addressing whether the methods for proving the domesticity of securities purchases by class members would make individual issues predominate under Rule 23(b)(3).
  • Judge Rakoff did not err when he found the market in Petrobras securities efficient in spite of shortcomings in expert evidence (event studies) aiming to show by direct means that the prices of the securities responded to disclosure of material information.

What it means

Petrobras helps class actions more than it hurts them. The panel’s rejection of a new requirement — the Third Circuit’s nightmarish “administrative feasibility” test — assures that conclusion on its own.

The court’s handing out of a passing grade on the Basic gives further cause for happiness on the plaintiff side.

Even the panel’s handling of the Morrison question went fairly well. Rather than rule that proving “domesticity” will defeat predominance of common questions, Judge Giraufis’s opinion merely vacates the certification order and remands the case for Judge Rakoff to grapple with how best to address the need to show that irrevocable liability or passage of title occurred in the United States with respect to the Petrobras notes.

Which brings us back to the importance of class definition. A class that involves only ADR buyers will have no Morrison issue; all relevant sales took place on the NYSE.

A class that also covers notes may require further evidence, possibly specific to the individual buyer. If standard forms of documentation can make the process a mechanical one, no real difficulties should arise. But the availability of documentation that clinches the domesticity question may apply to some but not all of the issuances of the notes and may apply to some types of buyers but not others.

Revising the class definition to address the practical availability-of-proof concern may therefore make a ton of sense. If redefinition makes for a smaller class that is nonetheless certifiable, the loss in size will not matter. Because the alternative could be losing all.

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Photo of Barry Barnett Barry Barnett

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck…

Clients and colleagues call Barry Barnett an “incredibly gifted lawyer” (Chambers and Partners) who is “magic in the courtroom” (Who’s Who Legal), “the top antitrust lawyer in Texas” (Chambers and Partners), and “a person of unquestioned integrity” (David J. Beck, founder of Beck Redden).

Barnett is a Fellow in the American College of Trial Lawyers, and Lawdragon has named him one of the top 500 lawyers in the United States three years in a row. Best Lawyers in America has honored him as “Lawyer of the Year” for Bet-the-Company Litigation (2019 and 2017) and Patent Litigation (2020) in Houston. Based in Texas and New York, Barnett has tried complex business disputes across the United States.

TRIAL COUNSEL
Barnett’s background, training, and experience make him indispensable to his clients. The small-town son of a Texas roughneck and grandson of a Texas sharecropper, Barnett “developed an unusual common sense about people, their motivations, and their dilemmas,” according to former client Michael Lewis.

Barnett has been historically recognized for his effectiveness and judgment. His peers chose him, for example, to the American College of Trial Lawyers and American Law Institute. His decades of trial and appellate work representing both plaintiffs and defendants have made him a master strategist and nimble tactician in complex disputes.

Barnett focuses on enforcement of antitrust laws, the “Magna Carta of free enterprise,” in Supreme Court Justice Thurgood Marshall’s memorable phrase. “Barry is one of the nation’s outstanding antitrust lawyers,” according to Joseph Goldberg, a member of the Private Antitrust Enforcement Hall of Fame. Named among Texas’s top ten antitrust lawyers of 2023, Business Today calls Barnett a “trailblazer” among the “distinguished legal minds” who “dedicate their skill and expertise to the maintenance of healthy competition in various sectors” of the Lone Star State’s booming economy. Barnett is also adept in energy and intellectual property matters and has battled for clients against a Who’s Who list of corporate behemoths, including Abbott Labs, Alcoa, Apple, AT&T, BlackBerry, Broadcom, Comcast, Dow, JPMorgan Chase, Samsung, and Visa.

Barnett commands a courtroom with calm and credibility and “is the perfect lawyer for bet the company litigation,” said Scott Regan, General Counsel of former client Whiting Petroleum. His performance before the Supreme Court in Comcast Corp. v. Behrend prompted the Court to withdraw the question on which it had granted review. The judge in a trial involving mobile phone technology called Barnett “one of the best” and that his opening statement the finest he had ever seen. Another trial judge told Barnett minutes after a jury returned a favorable verdict against the county’s biggest employer that he was one of the two best trial lawyers he’d ever come across—adding that the other one was dead.

COMPLETE PACKAGE
A versatile trial lawyer, Barnett knows how to handle a case all the way from strategic pre-suit planning to affirmance on appeal. He’s tried cases to verdict and then briefed and argued them when they went before appellate courts, including the Second, Third, Fifth, and Tenth Circuits, the Supreme Court of Louisiana, and (in the case of Comcast Corp. v. Behrend) the Supreme Court of the United States.

Barnett is a sought-after public speaker, often serving on panels and talking about topics like the trials of antitrust class actions and techniques for streamlining complex litigation. He also comments on trends in commercial litigation and the implications of major rulings for outlets such as NPR, Reuters, Law360, Corporate Counsel, and The Dallas Morning News. He’s even appeared in a Frontline program about underfunding of state pensions, authored chapters on “Fee Arrangements” and “Techniques for Expediting and Streamlining Litigation” (the latter with Steve Susman) in the ABA’s definitive treatise on Business and Commercial Litigation in Federal Courts, 5th, and commented on How Antitrust Enforcers Might Think Like Plaintiffs’ Lawyers.

HARD GRADERS
Clients and other hard graders have praised Barnett for his courtroom skills and legal acumen.

A client in a $100 million oil and gas case, which Barnett’s team won at trial and held on appeal, said Barnett and his team “presented a rare combination of strong legal intellect, common sense about right and wrong, and credibility in the courtroom.” David McCombs at Haynes and Boone said Barnett “has a natural presence that goes over well with juries and judges.”

Even former adversaries give Barnett high marks. Lead opposing counsel in a decade-long antitrust slugfest said “Barry is a highly skilled advocate. He understands what really matters in telling a narrative and does so in a very compelling manner.”

CIVIC ENGAGEMENT
Barnett relishes opportunities to collaborate with all kinds of people. At the Center for American and International Law (CAIL), founded by a former prosecutor at Nuremberg in 1947 and headquartered in the Dallas area, he has served on the Executive Committee, co-chaired the committee that produced CAIL’s first-ever strategic plan, supported CAIL’s Institute for Law Enforcement Administration and other development efforts, and proposed formation of a new Institute for Social Justice Law. CAIL’s former President David Beck said “Barry is extremely bright” and is “very well prepared in every lawsuit or professional task he undertakes.”

Barnett is also a Trustee of the New-York Historical Society, a Sterling Fellow at Yale, a member of the Yale University Art Gallery’s Governing Board, a winner of the Class Award for his work on behalf of his college class, and a proud contributor to the Yellow Ribbon Program at Harvard Law. Barnett’s pro bono work includes leading the trial team representing people who are at greatest risk of severe illness and death as a result of being exposed to the novel coronavirus SARS-CoV-2 while being detained in the Dallas County jail—work for which he received the NGAN Legal Advocacy Fund RBG Award.

At Susman Godfrey, Barnett has served on the firm’s Executive Committee, Employment Committee, and ad hoc committees on partner compensation, succession of leadership, and revision of the firm’s partnership agreement. He also twice chaired the Practice Development Committee.

KEEPING PERSPECTIVE
Barnett understands that clients face many pressures. Managing the stress is important, especially in matters that take years to resolve. He encourages clients to call him whenever they have a question or concern and to keep the inevitable ups and downs in perspective. He wants them to know that he will do his level best to help them achieve their goals. He also strives to foster trust and to make working with him a pleasure.

Cyrus “Skip” Marter, the General Counsel of Bonanza Creek in Denver and a former Susman Godfrey partner and client, said Barnett is “excellent about communicating with clients in a full and honest manner” and can “negotiate for his clients from a position of strength, because he is not afraid to take a case through a full trial on the merits.” Stacey Doré, the President of Hunt Utility Services and a former client, said that Barnett is “an excellent trial lawyer and the person you want to hire for your bet-the-company cases. He is client focused, responsive, and uniquely savvy about trial and settlement strategy.” A New York colleague said, “Barry is a joy to work with as co-counsel. He tackles complex procedural and factual hurdles capably, efficiently, and without drama.”

PERSONAL
Barnett’s wide-ranging experience and calm, down-to-earth approach enable him to connect with clients, judges, jurors, witnesses, and even opposing counsel. He grew up in Nacogdoches, Texas. He co-captained his high school varsity football team as an All-East Texas middle linebacker while also serving as the Editor of Key Club’s Texas-Oklahoma District, won the Best Typist award, took the History Team to glory, and sang in the East Texas All Region Choir. As Dan Kelly of client Vistra Corp. put it, Barnett is “a great person to be around.”

Barnett is steady and loyal. He has practiced at Susman Godfrey his entire career. He and his wife Nancy live in Dallas and enjoy spending time in Houston and New York. Their daughter works for H-E-B in Houston, and their son is a Haynes and Boone transactions lawyer in Dallas.

As a member of Ivy League championship football teams in his junior and senior years at Yale and a parent of two Yalies, Barnett has no trouble choosing sides for “The Game” in November. And he knows how important fighting all the way to the end is. On his last play from scrimmage, in the waning minutes of The Game on Nov. 22, 1980, he recovered a Crimson fumble.

Yale won, 14-0.