iOn February 27, the Supreme Court of the United States announced its long awaited decision in Amgen Inc. v. Connecticut Retirement Plans & Trust. In a 6-3 decision authored by Justice Ginsburg,[1] the Court found that, while plaintiffs asserting securities claims under SEC Rule 10b-5 claims must prove materiality in order to succeed on the merits, they need not prove materiality in order to succeed in certifying a class under Federal Rule of Civil Procedure 23. The decision resolves a longstanding circuit split on the issue. A copy of the decision is available here.
SEC Rule 10b-5 makes it illegal for anyone buying or selling securities to “make any untrue statement of a material fact” or to “omit to state a material fact necessary in order to make the statements made … not misleading.” 17 C.F.R. § 240.10b-5(b). Plaintiffs asserting claims under Rule 10b-5 must establish (among other things) that a statement or omission was: (1) relied on by the plaintiff; (2) material to the plaintiff; and (3) the cause of the plaintiff’s loss. In class actions asserted under Rule 10b-5, plaintiffs must also establish (among other things) that any individual issues do not predominate. To do so, plaintiffs generally invoke the “fraud-on-the-market” theory in order to establish a presumption of classwide reliance. That theory holds that, in an efficient market, the price of securities reflects all public information—and misinformation—and therefore anyone who buys or sells stock at the market price is presumed to have done so in reliance on that information.[2]
In this case, this plaintiff alleged that Amgen had artificially inflated the price of its stock by making misleading statements about the safety of its flagship products. The district court certified a class, finding that plaintiffs can invoke the fraud-on-the-market doctrine and establish a presumption of classwide reliance without actually proving materiality. It reasoned that materiality is a merits issue that is not proper to reach at the class certification stage. The Ninth Circuit affirmed.
Today, the Supreme Court affirmed as well. The Court found that, “[w]hile Connecticut Retirement certainly must prove materiality to prevail on the merits, … such proof is not a prerequisite to class certification.” It began by echoing its recent decision in Dukes, stating that “[m]erits questions may be considered to the extent—but only to the extent—that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.” It then found that materiality in Rule 10b-5 cases is not, in its view, relevant to determining whether Rule 23 is satisfied.
The Court offered two reasons for its decision. First, it found that the question of materiality in fraud-on-the-market cases “is an objective one,” meaning it “can be proved through evidence common to the class.” In other words, the materiality of a statement in such cases “is a common question for purposes of Rule 23(b)(3).” Second, it found that “there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating…. Instead, the failure of proof on the element of materiality would end the case for one and for all; no claim would remain in which individual reliance issues could potentially predominate.” It explained that “[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. In other words, they need not, at that threshold, prove that the predominating question will be answered in their favor.”
The Court then rejected Amgen’s argument that deferring a decision on materiality until after certification would increase the burden on the judiciary and the frequency of in terrorem settlements. “In this regard,” the Court found, “materiality does not differ from other essential elements of a Rule 10b-5 claim, notably the requirements that the statements or omissions on which the plaintiffs’ claims are based were false or misleading….” It also found that Amgen’s position “would necessitate a mini-trial on the issue of materiality at the class-certification stage,” which “would entail considerable expenditures of judicial time and resources….”
The dissenters argued that plaintiffs should be required to prove each predicate of the fraud-on-the-market presumption (even if it is also a merits issue) to satisfy their Rule 23 requirements. The majority disagreed, calling such a rule “Justice Scalia’s invention.” Notably, Justice Alito filed a concurring opinion that agreed with the majority but also suggested that it may be time to reconsider the viability of the fraud-on-the-market theory itself, which he said “may rest on a faulty economic premise.”
[1] Chief Justice Roberts and Justices Breyer, Alito, Sotomayor and Kagan joined in the majority opinion. Justice Thomas filed a dissenting opinion in which Justice Kennedy joined and Justice Scalia joined in part.
[2] See, e.g., Basic Inc. v. Levinson, 485 U. S. 224, 243-45 (1988) (“The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by early fraud cases, and our understanding of Rule 10b-5’s reliance requirement must encompass these differences…. Presumptions typically serve to assist courts in managing circumstances in which direct proof, for one reason or another, is rendered difficult. The courts below accepted a presumption, created by the fraud-on-the-market theory and subject to rebuttal by petitioners, that persons who had traded Basic shares had done so in reliance on the integrity of the price set by the market, but because of petitioners’ material misrepresentations that price had been fraudulently depressed. Requiring a plaintiff to show a speculative state of facts, i.e., how he would have acted if omitted material information had been disclosed, or if the misrepresentation had not been made, would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market.”) (internal citations omitted).
