On February 27, 2013, the Supreme Court held plaintiffs in a Rule 10b-5 securities fraud class action for damages need not prove materiality to obtain class certification. The 6-3 decision, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, resolved a circuit split and held that materiality, an essential element of a securities fraud claim, is an objective question subject to common proof across all class members, thus making class certification appropriate even if materiality is disputed. Amgen thus should make it easier for securities fraud class actions to pass the class certification stage and proceed into merits discovery, potentially increasing the settlement value of such claims, notwithstanding possible questions about the materiality of the alleged misrepresentations underlying the claims.
The plaintiffs in Amgen, various retirement plans and funds and individuals, filed securities fraud claims in federal court in Los Angeles under Section 10(b) and Rule 10b-5 against Amgen. They alleged that Amgen made "certain misrepresentations and misleading omissions regarding the safety, efficacy, and marketing of two of its flagship drugs," that this artificially inflated Amgen's stock price, and that once the truth purportedly became public, Amgen's stock price dropped.
The trial court granted plaintiffs' motion to certify the class and a unanimous panel of the Ninth Circuit affirmed. The Supreme Court granted certiorari "to resolve a conflict among the Courts of Appeals over whether district courts must require plaintiffs to prove, and must allow defendants to present evidence rebutting, the element of materiality before certifying a class action under §10(b) and Rule 10b-5."
To recover damages for securities fraud, plaintiffs must prove, inter alia, "a material misrepresentation or omission by the defendant" and "reliance upon the misrepresentation or omission." These two elements are linked by the "fraud-on-the-market" presumption that the Supreme Court endorsed 25 years ago in Basic Inc. v. Levinson, 485 U.S. 224 (1988). In Basic, the Court held that if the market for securities is efficient, then courts can presume traders in the securities relied on any public misrepresentations that were "material" because the market would have priced these statements into the prices of the securities. Basic's rule is frequently critical to class certification. Absent the fraud-on-the-market presumption, plaintiffs would have to prove individual reliance on the alleged misstatements by each class member - and in so doing create individual questions of proof that would predominate over common questions - fatally undermining class certification.
Although Amgen conceded that its securities traded in an efficient market that incorporated all publicly available information into their prices, it challenged the fraud-on-the-market presumption on grounds that the alleged misstatements were not "material," and that if not material then they could not impact Amgen's stock price - such that the plaintiffs could not utilize the fraud-on-the-market presumption. Proving reliance would then require individualized evidence, which would preclude class certification.
Amgen therefore asserted that plaintiffs must prove materiality before the court could certify the class. To that end, Amgen argued that the district court erred by (1) certifying the class without first requiring the plaintiffs to prove materiality, and (2) refusing to consider certain evidence that, "in Amgen's view, demonstrated that the market was well aware of the truth regarding its alleged misrepresentations and omissions at the time the class members purchased their shares."
The Supreme Court's Ruling
The Supreme Court, in an opinion written by Justice Ginsburg, held that plaintiffs need not prove materiality to certify a class seeking damages. Referencing the procedural mandate that "questions of law or fact common to class members" must "predominate over any questions affecting only individual members" in order for class certification to be appropriate, the Court grounded its analysis in how proof of materiality would impact the class as a whole:
Contrary to Amgen's argument, the key question in this case is not whether materiality is an essential predicate of the fraud-on-the-market theory; indisputably it is. Instead, the pivotal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will "predominate over any questions affecting only individual members" as the litigation progresses. Fed. Rule Civ. Proc. 23(b)(3). For two reasons, the answer to this question is clearly "no."
The Court relied on prior precedent from Basic and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 445 (1976), to conclude that materiality is an objective and common question capable of proof through evidence common to all members of the class. Because materiality is an essential element of a securities fraud claim, the Court reasoned, the ultimate resolution of this merits question would not change the common, class-wide nature of its proof: "A failure of proof on the common question of materiality ends the litigation and thus will never cause individual questions of reliance or anything else to overwhelm questions common to the class. Therefore, under the plain language of Rule 23(b)(3), plaintiffs are not required to prove materiality at the class-certification stage."
The Court rejected Amgen's arguments that the fraud-on-the-market theory and policy considerations require proof of materiality at the class certification stage. First, Amgen claimed that because other predicates of the fraud-on-the-market presumption must be proven for class certification, e.g., market efficiency and publicity, materiality must be proven at that stage as well. The Court reasoned, however, that while failing to prove these other predicates would simply deprive plaintiffs of the benefit of the fraud-on-the-market presumption and require individualized proof of reliance, thus precluding Rule 23(b)(3) class certification, the underlying causes of action could still be viable. In contrast, materiality is a required element to prove securities fraud for which proof will be outcome-determinative: "[T]here can be no actionable reliance, individually or collectively, on immaterial information. Because a failure of proof on the issue of materiality, unlike the issues of market efficiency and publicity, does not give rise to any prospect of individual questions overwhelming common ones, materiality need not be proved prior to Rule 23(b)(3) class certification."
Amgen also claimed that certain policy considerations militated in favor of requiring proof of materiality before class certification can be granted. These policy concerns include (1) certifying classes before finding materiality will pressure defendants to settle before any judicial determination that the alleged misstatements were material, and (2) judicial resources would be conserved by eliminating large class proceedings where reliance ultimately cannot be proven using class-wide evidence. The Court rejected Amgen's arguments, holding that Congress addressed Amgen's securities litigation concerns by enacting reform legislation, i.e., the Private Securities Litigation Reform Act of 1995 and Securities Litigation Uniform Standards Act of 1998, and that Amgen's suggestions would waste judicial resources by requiring mini-trials on the merits of materiality at the class certification stage.
The Court applied the same reasoning to hold that the district court did not err in refusing to consider evidence proffered by Amgen to rebut allegations of materiality. Here again, the Court focused on the point that a class would rise and fall together based on common evidence of materiality: "[I]ndividual reliance questions will not overwhelm questions common to the class, for the class members' claims will have failed on their merits, thus bringing the litigation to a close. Therefore, just as a plaintiff class's inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class."
Three Justices (Thomas, Kennedy and Scalia) dissented, arguing that materiality was a precondition to the applicability of Basic's fraud-on-the-market presumption. Justice Scalia warned that "[t]oday's holding does not merely accept what some consider the regrettable consequences of the four-Justice opinion in Basic; it expands those consequences from the arguably regrettable to the unquestionably disastrous." Justice Alito, while joining in the majority opinion, wrote separately to suggest that it may be appropriate to reconsider Basic's fraud-on-the-market presumption because "more recent evidence suggests that the presumption may rest on a faulty economic premise."
Implications from Amgen
The reflexive reaction to Amgen is that it eases the path for plaintiffs to certify securities fraud class actions and to extract settlements from defendants. On the other hand, defendants remain free to attack materiality before trial with motions to dismiss or for summary judgment.
Another possibility, however, is that the Court may seek an opportunity to reexamine Basic's fraud-on-the-market presumption in a future case. Justice Alito questioned the theory's continued viability and a footnote in the majority opinion recognizes that more recent research suggests differences in efficiency can exist within a single market. In addition, three dissenters suggested that the presumption had grown far beyond what Basic originally intended. In Amgen, the defendant conceded that the market for its securities was efficient and digested all publicly available information. Perhaps the next defendant in a case reaching the Court will not make the same concession, and the Court will take the opportunity to revisit its 25-year-old holding in Basic.