Extracted from Law360
In an article published in the fall of 2013, we examined certain class actions filed against Anheuser-Busch In Bev in which plaintiffs accuse the brewer of watering down its beers and intentionally deceiving consumers. The article, "Constitutional Standing, Numerosity, and the Beer Drinker’s Burden," argued that the individualized nature of each beer drinker’s purchase decision should prevent these cases from proceeding as class actions. However, AB InBev faces a significant threat from these types of actions, particularly in certain courts that will avoid potential obstacles to class certification by simply presuming that a misrepresentation caused each class member harm.
With a case set for argument on March 5, the U.S. Supreme Court is poised to weigh in regarding similar “injury presumed” reasoning applied in the context of securities class actions (Halliburton v. Erica P. John Fund). The Halliburton case presents the Supreme Court with the opportunity to eliminate the only presumption of classwide injury under federal law, and consequently, to underscore the importance of actual injury among putative class members, including, for example, beer drinkers.
In re Anheuser-Busch Beer Labeling Litigation
In 2013, the trend of false labeling class actions expanded to the beer market, as plaintiffs in multiple states claimed that in Budweiser products, the beer does not match what is on the bottle. In eight consumer class actions, now consolidated in multidistrict litigation, plaintiffs accuse AB InBev of changing its brewing process and reducing the beer’s alcohol content to levels slightly below the percentage it promotes on its labels. See In re Anheuser-Busch Beer Labeling Mktg. and Sales Practices Litig. (N.D. Ohio Aug. 29, 2013).
The plaintiffs assert that if they had known the actual alcohol content — sometimes as little as a few tenths of one percent below that printed on the label — they would have demanded a lower price or purchased a different product. Although some class members may, in fact, have based their purchase decision on alcohol content, it is impossible to assume that each purchaser noticed, much less relied on the beer’s purported alcohol content. If a buyer would have purchased the same product for the same price, even if the stated alcohol content was slightly lower, he cannot claim that he suffered any injury from the misrepresentation on the label.
This variation in injury and reliance among beer drinkers should preclude class certification. However, some courts, particularly in the Ninth Circuit, avoid this issue by simply presuming that if a misrepresentation is material, each class member suffered an injury from the misstatement. See Mazza v. Am Honda Motor Co Inc. (9th Cir. 2012), noting that when material misrepresentations have been communicated to each member of a class, California law allows a presumption of reliance across the entire class. While courts often justify these presumptions as matters of state law, federal law only recognizes such classwide presumptions in one limited context — securities class actions.
The Fraud-on-the-Market Theory and the Viability of Classwide Presumptions
In Basic v. Levinson (1988), the Supreme Court adopted a construct called the fraud-on-the market theory which, in certain circumstances, allows a court to presume that stock purchasers relied on a misrepresentation to their detriment. The premise of fraud-on-the market is that the price of a security traded in an efficient market will reflect all publicly available information about the company; accordingly, the court may presume that each purchaser relied on the price of the stock, and by extension, the misrepresentation. See Amgen Inc. v. Conn Ret Plans & Trust Funds (2013). Like the recent presumptions in consumer class actions, Basic paves the way to class certification for securities fraud plaintiffs by allowing the court to avoid individual inquiries into each class member’s reliance, injury and standing.
Despite its central role in securities class actions, the fraud-on-the-market theory has come under fire in recent years, as economists, academics and even former securities regulators now argue that the underlying presumption — that a stock price reflects all available information — is fatally flawed. See e.g., Amgen, 133 S.Ct. at 1204, 1208 n.4 (Alito, J., concurring, and Thomas, J., Scalia, J., and Kennedy, J., dissenting) (citing Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 175–176); see also petition for writ of certiorari at 13-16, Halliburton, No. 13-317 (Sept. 9, 2013); brief for former SEC commissioners, et al. as Amici Curiae in Support of Petitioners at 5, Halliburton, No. 13-317 (Oct. 11, 2013).
The debate about fraud-on-the-market reached a tipping point on Nov. 15, 2013, when the Supreme Court agreed to revisit its decision in Basic. On March 5, the Supreme Court will consider Halliburton’s assertion that 25 years after Basic, the fraud-on-the-market theory and its presumptions of reliance do not reflect reality. Halliburton argues that even in an efficient securities market, not all misrepresentations will affect subsequent stock purchases. If the Supreme Court agrees and overturns Basic it could essentially rule that even in the most sophisticated, responsive markets, one cannot assume that all misrepresentations cause injury.
Application to False Labeling Class Actions
While plaintiffs will likely attempt to limit any opinion in Halliburton to the securities context, a Supreme Court decision eliminating this presumption of injury will call into question similar presumptions applied in cases involving other consumer transactions.
The fraud-on-the-market theory depends on the unique qualities of sophisticated, homogenous securities markets, where changes in demand are reflected instantly and, where at a particular point in time, all potential consumers face the same price and same supply for any given stock. If a presumption of injury is inappropriate in securities markets, it must also fail in the market for everyday consumer goods.
In AB InBev’s case, the market for Budweiser is not uniform like that for a particular stock. Instead, advertising, product availability and personal preferences create a varied market in which purchase decisions could be driven by any one of a number of factors.
For example, at a given time, two potential stock purchasers will face the same market environment, the same stock price and the same available products; two beer purchasers, on the other hand, could see different prices, or a different set of available beverage alternatives. Moreover, while a stock purchaser’s decision generally depends exclusively on a price-to-value calculus, brewers, such as AB InBev, spend millions of dollars per year on advertising and product promotion in an attempt to persuade consumers to choose beers not for any quantitative value, but for brand recognition, brand loyalty or individual tastes.
By agreeing to hear Halliburton, the Supreme Court is prepared to eliminate the only federal construct for presuming injury and reliance. If the Supreme Court declares that classwide presumptions are inappropriate in sophisticated securities transactions, it will be difficult to argue that similar presumptions accurately reflect transactions in the markets for everyday consumer goods.