Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—3d Cir.: Class certification upheld on appeal in Johnson & Johnson talc litigation, (Jul 31, 2025)

By Rebecca E. Hoffman, J.D.

A separate dissenting opinion said the court should vacate and remand to allow the district court to properly evaluate the defendants’ evidence offered to rebut the presumption of reliance.

In a nonprecedential split decision, the Third Circuit affirmed a district court ruling granting class certification in a securities fraud action, in which the plaintiffs allege that Johnson & Johnson made misleading statements as part of a long-running scheme to conceal the truth from investors that the company’s talc products were contaminated with asbestos and that talc was linked to cancer (San Diego County Employees Retirement Assoc. v. Johnson & Johnson, No. 24-1409 (3d Cir. July 30, 2025)).

According to the plaintiffs, the misleading statements led to a drop in the stock price when the truth came out. The court of appeals agreed with the district court that “common issues predominate” and thus class certification was warranted.

Presumption of reliance. The disputed issue was whether reliance on the alleged misrepresentations for their stock purchases was a common question for the members of the class, and whether the defendants succeeded in rebutting the presumption of that reliance with corrective disclosures.

The plaintiffs had the burden of showing the predominance of common questions, as to the reliance element, over questions of individual members, which they could show using a “fraud-on-the-market theory” rather than showing specific trading behavior, the court explained. This created a presumption of reliance, which J&J attempted to rebut by showing corrective disclosures.

Link not severed. The court pointed out that the disclosures at issue here related to J&J’s alleged misrepresentations concerning the safety of its products or the presence or absence of asbestos in the talc. J&J argued that the disclosures, such as press releases discussing product liability suits, lacked price impact, meaning that they did not cause the price to fall, but the Third Circuit rejected the argument, finding that “[e]ach disclosure could have communicated new, value-relevant information to investors and was followed by a stock price decline for which there was no other explanation but the disclosure itself.” Therefore, it concluded, the lower court did not err in finding that the defendants failed to “sever the link” between the misleading statements and the share price.

Dissent. A dissenting opinion pointed out that the court below should have examined the defendants’ evidence purporting to show that the disclosures that allegedly precipitated the stock drop did not contain newly public information and were not corrective, which, if credited, could have “severed the link.”

“The District Court largely declined to address either argument squarely and, in fact, repeatedly stated that it would not consider whether J&J’s evidence demonstrated that disclosures were not corrective nor resolve whether the disclosures were new,” the dissent said. Without this, the court could not determine whether there was actual price impact, it said.

The case is No. 24-1409.

Judge: Shwartz, P.

Attorneys: James E. Cecchi (Carella, Byrne, Cecchi, Brody & Agnello, P.C.) for San Diego County Employees Retirement Association. Laurence M. Rosen (The Rosen Law Firm) for Frank Hall. Neil H. Conrad (Sidley Austin LLP) for Johnson & Johnson, Alex Gorsky, Dominic J. Caruso, Joan Casalvieri, Sandra Peterson, Tara Glasgow, Michael Sneed, and Carol Goodrich.

Companies: San Diego County Employees Retirement Association; Johnson & Johnso

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