On September 8, 2015, in Ludlow v. BP, P.L.C., the US Court of Appeals for the Fifth Circuit upheld the district court's certification of one subclass of investors and the district court's refusal to certify a second subclass in the BP oil spill securities litigation (No. 14-20420, (5th Cir. Sept. 8, 2015)).

This case stems from events related to the 2010 Deepwater Horizon oil spill. BP stockholders sued the company and its two former executives claiming that BP made two distinct sets of misrepresentations in violation of federal securities laws: one regarding its pre-spill safety procedures, and one regarding the amount and the spill rate of the oil after the accident.

The plaintiffs who sought to certify the pre-spill subclass, asserted the "materialization of risk" theory of damages. According to the plaintiffs, if BP had not understated the risk of an accident, they would not have purchased the stock and would therefore have avoided the losses they incurred when the stock price fell after the accident.

The post-spill plaintiffs' certification request was based on the "out of pocket" measure of damages, an assertion that because BP understated the amount and rate of oil spillage, its stock price was artificially inflated and caused losses for the shareholders who purchased the stock at the inflated price. The plaintiffs' expert produced a study calculating damages under each of the theories.

The district court certified the post-spill class, concluding that the shareholders had established a model of damages consistent with the FRCP Rule 23(b)(3)'s requirement that the damages methodology be sound and produce commonality of damages, articulated recently in Comcast Corp. v. Behrend (133 S. Ct. 1426 (2013)). The district court refused to certify the pre-spill class, however, holding that the plaintiffs had not met the Comcast's commonality of damages requirement. Both sides appealed and the Fifth Circuit affirmed.

The purported post-spill class of plaintiffs was comprised of stockholders who claimed that they based their purchase of BP securities on BP's understatements regarding the magnitude of the spill. The plaintiffs' expert calculated the damages as the difference between the inflated price at which the plaintiffs bought their stock and the price at which the BP stock would have traded if the magnitude had been properly disclosed. To calculate the "true" stock price, the expert focused on the decline in BP's stock price after six events that divulged to the public that the amount of oil spilling was far greater than what BP represented. But in his report the expert characterized the stock price decline to a "true" price as "possible," and BP challenged the calculation as speculative and arbitrary. BP further challenged the damages calculation as flawed because the expert report did not adequately tie each of the corrective events to the specific alleged misstatements by BP. In other words, BP argued that the plaintiffs failed to prove loss causation.

Reviewing the district court's ruling for abuse of discretion, the Fifth Circuit rejected the challenge to the report as uncertain and speculative, holding that, under Comcast, courts were merely required to analyze at the class certification stage whether the damages theory was consistent with the liability case, not whether it was completely accurate. Here, the court concluded that the district court did not abuse its discretion in concluding that the damages methodology was sound and consistent with the theory of liability.

The court also discussed the level of proof required for the loss causation element at the class certification stage, emphasizing that under Haliburton I, the plaintiffs did not need to prove loss causation at the class certification stage (131 S. Ct. 2179 (2011)). Further, the panel noted that under Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, a plaintiff does not need to prove at the certification stage an element of its case whose resolution is common to the class (133 S. Ct. 1184 (2013)). The court then concluded that because each plaintiff's theory of damages remains tied to a theory of liability common to all plaintiffs, the Amgen commonality requirement was satisfied.

The Fifth Circuit also affirmed the district court's refusal to certify the class of investors who purchased BP securities before the spill. The plaintiffs' "materialization of risk" damages theory hinged on the assumption that each plaintiff would have refrained from buying BP stock at all if it were not for BP's alleged understatements of risk. However, because different investors likely have different risk preferences, the damages calculation required an individual determination and could not be considered common to the subclass. Therefore, the pre-spill plaintiffs' certification request did not meet Comcast's commonality requirement.