COLUMN-Damages debate heats up in FirstEnergy and Boeing securities battles

By Jenna Greene

Jan 14 (Reuters) - Two pending shareholder lawsuits with billions of dollars at stake could make it more difficult for investors to bring class actions as courts wrangle with the scope of a decade-old U.S. Supreme Court ruling.

Ohio utility FirstEnergy and aircraft maker Boeing each face class action lawsuits by investors who allege the companies inflated their stock prices through misstatements or omissions, only to see the shares plunge once the truth emerged.

The looming question in both cases is whether the plaintiffs provided enough information at the outset about how they’ll calculate damages to support proceeding as a class.

It’s a technical inquiry, and one that many courts have skated past despite a 2013 Supreme Court ruling laying out guidelines. But the cases could rewrite a big part of the securities litigation playbook if the companies prevail, making the all-important step of class certification harder for plaintiffs to obtain.

In FirstEnergy’s case, pending in federal court in Columbus, Ohio, the stock drop followed revelations of the company’s role in a political bribery scandal. Boeing was sued by its shareholders in the Eastern District of Virginia after a door panel blew off one of its 737 airplanes mid-flight in 2024, allegedly belying corporate safety pledges.

FirstEnergy declined to comment and Boeing did not respond to a request for comment.

Both companies hired the same Wall Street law firm – Sullivan & Cromwell – to fight the cases. And both argue that courts have made it too easy for securities class action plaintiffs “to leave the hard questions for later” when proposing a method for calculating damages, Sullivan co-chairman Robert Giuffra Jr. told me.

An appeals court decertified the FirstEnergy class in August partly on these grounds, sending the case back to the trial judge for a closer look at the damages methodology. In the Boeing case, another circuit court has taken the unusual step of hearing an appeal on the same question before the case runs its course in the trial court, with oral arguments likely this spring.

Lawyers from Robbins Geller Rudman & Dowd represent the investors in both cases. They declined to comment aside from pointing to the court record, where partner Jason Forge has argued that the appellate inquiry is narrow and urged the court not to "create delay." Co-counsel in the Boeing case from Labaton Keller Sucharow and Gupta Wessler did not respond to requests for comment.

To understand the fight, it’s necessary to look back to the U.S. Supreme Court's decision in Comcast Corp. v. Behrend, an antitrust class action over how much Comcast charged its cable TV subscribers.

Writing for the majority, the late Justice Antonin Scalia held that in order for a class to be certified, plaintiffs must prove that damages “are capable of measurement on a classwide basis” rather than requiring individual determinations.

“Calculations need not be exact,” Scalia said, but district court judges at the class-certification stage must apply “rigorous analysis” to ensure the plaintiffs’ damages model is consistent with their theories of liability.

In practice, those instructions have sometimes proved ambiguous. As former U.S. Securities and Exchange Commission officials and law professors put it in a friend-of-the-court brief in the Boeing case, “Few Supreme Court opinions have been as aggressively and unnecessarily misinterpreted and circumscribed” as the Comcast decision.

Too often, the amici said, district courts have “rubber-stamped” promises by plaintiffs’ experts that they’ll come up with a methodology for calculating damages at a later stage. And considering how few securities class actions go to trial, such detailed number crunching is rarely needed by judges or juries.

In the FirstEnergy case, the 6th U.S. Circuit Court of Appeals demanded more. “The district court failed to conduct any analysis at all, let alone a rigorous one” regarding the investors' damages model, the panel wrote in remanding the case to U.S. District Judge Algenon Marbley in Columbus for further proceedings.

Last week, both sides submitted briefs to Marbley that dug deep into the issue.

Shareholders sued FirstEnergy in 2020 in connection with what turned out to be the biggest political corruption scandal in Ohio history. The company eventually paid $230 million to the U.S. government to resolve a federal criminal investigation into allegations that it bribed Ohio lawmakers to enact a bailout of two aging nuclear power plants.

As the scandal unfolded, FirstEnergy’s share price plunged from nearly $42 to less than $23.

Calculating damages, however, is more complicated than subtracting the low price from the high.

The plaintiffs say their expert will use a so-called event study -- a statistical analysis to determine whether the release of particular information has a significant effect on a company’s stock price. “Every court in every circuit to consider this question has confirmed that an event study is a reliable way to measure damages,” the plaintiffs' lawyers wrote, adding that their expert would use the study in tandem with other tools to fine-tune the damage calculations.

Defense lawyers counter that the case spans 860 trading days, noting that the plaintiffs allege 46 misstatements by FirstEnergy over the 3.5-year period artificially boosted the company’s stock price by hiding the bribery scheme from investors.

The information that allegedly should have disclosed "changed dramatically" over the proposed class period, impacting the damages to investors, the Sullivan & Cromwell lawyers wrote. The plaintiffs’ expert “has never explained how he would address that problem,” which they argue is fatal to his methodology.

The Boeing case raises similar questions.

Last year, U.S. District Judge Leonie Brinkema in Alexandria, Virginia, certified a shareholder class against the aerospace company.

According to the plaintiffs, Boeing falsely reassured nervous investors after 737 MAX crashes in 2018 and 2019 that safety was its top priority -- pledges that allegedly propped up the company’s stock price until the door incident.

Again, Sullivan & Cromwell lawyers invoked the Comcast decision in arguing the plaintiffs' damages model at the class certification stage fell short. The 4th U.S. Circuit Court of Appeals last year agreed to intervene in the Boeing case to consider the question. Oral arguments are scheduled for the court's March or May session depending on the lawyers' availability.

Some of the share price decline had nothing to do with Boeing’s allegedly misleading statements on safety, defense lawyers said, and was the result of the door accident itself. The damages methodology doesn’t take that into account, they said, among other shortcomings.

Plaintiffs’ co-counsel Deepak Gupta countered in an appellate brief that the lower court correctly found their expert outlined a general loss-causation analysis that’s capable of measuring the damages.

If the court accepts Boeing’s theory that plaintiffs must present a full damages analysis before fact-gathering is complete, he warned, it “would render even run‑of‑the‑mill securities cases virtually uncertifiable."