In a case eagerly watched by publicly traded companies regularly sued by investors, the U.S. Supreme Court will on Wednesday consider overruling a 26-year-old precedent that made it easier for plaintiffs to negotiate large class action settlements.

If the court rules broadly in a way favored by the defendant in the case, energy giant Halliburton Co, it could herald a decline in the booming securities class action industry, some experts say.

The case gives the justices an opportunity to re-appraise and possibly overturn a 26-year-old precedent, Basic v. Levinson, that made it easier for securities class action cases to go beyond the preliminary certification stage.

The court in the 1988 precedent embraced the “fraud on the market” theory. This assumes that public information about a company is known to the market – and plaintiffs do not have to show that they relied on a specific misrepresentation, only that they purchased shares before the truth came out.

Business groups such as the U.S. Chamber of Commerce and the National Association of Manufacturers were eager for the court to take up the case. In a Chamber-commissioned report issued to coincide with Wednesday’s one-hour oral argument, Navigant Consulting said such lawsuits cost almost $39 billion a year and recover only $5 billion a year. The act of filing a lawsuit alone decreases shareholder value by 4.4 percent, the report said.

Supporters of the plaintiffs question the study, saying its estimation of losses does not appropriately account for the damage done to the stock price by the misrepresentations that prompt investors to sue.

Plaintiffs’ Lawyers

The business lobby says the main beneficiaries of the securities class action bonanza are plaintiffs’ lawyers, who take up to a 25 percent cut of any settlement. The settlements can reach hundreds of millions of dollars.

Plaintiffs’ lawyers have long been the target of criticism from both business groups and Republicans in Congress, who say they benefit disproportionately from the litigation. They are among the top donors to Democratic politicians, who generally support class action lawsuits on a wide range of subjects, including employment discrimination and product liability.

Securities class action lawsuits are mostly filed on behalf of large institutional investors, like the Erica P. John Fund Inc, which sued Halliburton in 2002 for allegedly understating its asbestos liabilities while overstating revenues and the benefits of its merger with Dresser Industries. A total of 21 states, represented by both Republican and Democratic governors, filed a brief backing the plaintiffs, citing the importance of the litigation to state pension funds.

Supporters of the plaintiffs, including the administration of Democratic President Barack Obama, say securities class action lawsuits hold companies accountable to their shareholders.

A decision overturning or narrowing the impact of the 1988 precedent would not end securities class action litigation, but it would usher in a new era that favors defendants more, said George Conway, a defense lawyer with Wachtell, Lipton, Rosen & Katz.

“There will be plenty of securities litigation after this,” he said. “It won’t be the same. It won’t be as lucrative for plaintiffs’ lawyers.”

The 1988 ruling effectively kickstarted the securities class action industry that exists today. There were 3,050 private securities class action cases between 1997 and 2012 leading to settlements worth more than $73.1 billion, according to a brief Conway filed on behalf of former U.S. Securities and Exchange Commission members who support Halliburton.

If the court were to overrule the 1988 precedent, investor plaintiffs would have to show they actually relied on specific false statements when making investment decisions before any lawsuit could go ahead. Some experts say it would be hard for many current securities class actions to meet that burden.

At a minimum, plaintiffs’ lawyers would need to make much more detailed claims at the preliminary stage of each case.

Donald Langevoort, a professor at Georgetown Law Center in Washington, D.C., who supports the plaintiffs, defended the lawsuits, saying the threat of multi-million dollar payouts serves to deter potential wrongdoing.

“There’s no doubt that when the company writes a check for $500 million, it hurts,” he said.

Current Court

What worries plaintiffs in particular is that four of the nine Supreme Court justices have signaled they have concerns about the “fraud-on-the-market” theory. Justice Samuel Alito said the court should consider overruling the 1988 case in a separate opinion he wrote after concurring with the majority in a securities class action case decided in February last year in favor of plaintiffs, Amgen v. Connecticut Retirement Plans.

Alito wrote in his opinion that there was recent evidence the fraud-on-the-market theory “may rest on a faulty economic premise.” Amgen Inc, which lost that case, has filed a brief backing Halliburton.

Halliburton is before the court for a second time. In January 2011, the court unanimously ruled that a U.S. appeals court erred in rejecting class certification. When the case returned to lower courts, Halliburton argued that the class could still not be certified, this time on different grounds, prompting the latest wave of appeals.

A ruling is expected by the end of June. The case is Halliburton Co. v. Erica P. John Fund, U.S. Supreme Court, No. 13-317.

(Reporting by Lawrence Hurley; Editing by Howard Goller and Ken Wills)