The Supreme Court of the United States decided a long-anticipated and important securities-law case today, holding that plaintiffs in a federal securities-fraud class action need not prove materiality of a misrepresentation to obtain class certification. In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds,1 a divided Court affirmed a Ninth Circuit decision and resolved a circuit split on this issue critical in many securities-fraud class actions. This decision will make it more challenging for defendants to defeat class action lawsuits in those Circuits that had previously required a showing of materiality to obtain class certification, and thus may lead to more securities lawsuit filings. At the same time, however, language in the opinion may be read to signal that lower courts should apply closer scrutiny to materiality on motions for summary judgment, and thus defendants may have greater success defeating claims before trial.

The Amgen Decision

As observed in V&E's recent elert on the initial grant of certiori in  Amgen, materiality is relevant at the class-certification stage because it is a component of the "fraud-on-the-market" theory of reliance. In a securities-fraud case, requiring proof of reliance would likely preclude class certification because it would require raising questions as to whether each plaintiff relied on the alleged misrepresentation, and therefore could not be resolved on a class-wide basis. To resolve this issue, the Supreme Court held in Basic Inc. v. Levinson2 that a prospective class of plaintiffs could invoke a rebuttable presumption of reliance by resorting to the "fraud on the market theory," which provides that "[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price."3 In the intervening quarter-century since Basic was decided, Courts of Appeals have divided over whether plaintiffs must prove at the class certification stage that the misstatement at issue is "material." The First, Second, and Fifth Circuits have held that a materiality showing is required at the class certification stage,4 while the Third, Seventh, and Ninth Circuits have held that it is not.5

In Amgen, the Court sided with the Third, Seventh, and Ninth Circuits in rejecting a materiality requirement at the class-certification stage. In doing so, the Court acknowledged that materiality is an element of the fraud-on-the-market presumption. But the Court reasoned that it did not need to be proved at the class certification stage because "[t]he question of materiality . . . is an objective one . . .  materiality is a 'common questio[n]' for purposes of Rule 23(b)(3)."6 The Court also rested its decision on the fact that "there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating."7 Because materiality is an essential element of a Rule 10b-5 claim, if a plaintiff could not demonstrate materiality, the failure "would not cause individual reliance questions to overwhelm the questions common to the class" — rather, such failure would simply end the case.8

In reaching its decision, the Court rejected Amgen's argument that since market efficiency, publicity, and materiality can all be proved on a classwide basis and are all essential predicates of the fraud-on-the-market theory, they should all be proven at the class certification stage.9 Unlike materiality, market efficiency and publicity — which all parties agreed must be proven at class certification — are not also  elements of a Rule 10b–5 claim. "Materiality thus differs from the market-efficiency and publicity predicates in this critical respect: While the failure of common, classwide proof on the issues of market efficiency and publicity leaves open the prospect of individualized proof of reliance, the failure of common proof on the issue of materiality ends the case for the class and for all individuals alleged to compose the class.. . . 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."10

The Court also considered policy rationales in rejecting a requirement that materiality be proven before certifying a class. First, the Court reasoned that because Congress has recently considered, but rejected, legislation that would have eliminated Basic's fraud-on-the-market presumption of reliance, it was improper to impose judicially an additional class-certification requirement.11 Second, the Court rejected the notion that it would be more efficient to resolve the issue of materiality at class certification, explaining that a materiality inquiry at the early stage of class certification would "necessitate a mini-trial on the issue of materiality" that "would entail considerable expenditures of time and resources" that may need to be reexamined at trial.12 On these bases, the Court declared that "[w]e have no warrant to encumber securities-fraud litigation by adopting an atextual requirement of precertification proof of materiality that Congress, despite its extensive involvement in the securities field, has not sanctioned."13

Potential Consequences of the Amgen Decision


Today's Amgen decision may have several practical implications for litigants. First, it alters the prevailing, defendant-friendly rule in the First, Second, and Fifth Circuits, which had previously required proof of materiality at the class certification stage. For litigants in these Circuits, class certification will be awarded more readily, thus tending to increase the "in terrorem power"14 of class litigation and settlement pressure on defendants. This increase in settlement leverage, in turn, could increase plaintiffs' incentives to file securities class-action lawsuits.

Second, after a long line of pro-defendant securities-fraud case decisions,15 Amgen is the second consecutive decision favoring plaintiffs alleging securities fraud, following 2011's Erica P. John Fund v. Halliburton, which rejected the Fifth Circuit's requirement that a plaintiff prove loss causation to obtain class certification. It is important to note, however, that each of the last two decisions focused on the requirements for obtaining class certification, while the earlier decisions addressed pleading requirements. Thus, the Court may feel that having raised the bar to pleading a securities fraud claim, it does not want to keep the bar as high at the class certification stage, preferring to permit plaintiffs to advance to the proof stage and provide defendants an opportunity to defeat deficient claims on their merits on summary judgment or at trial.

Third, the decision also provides additional support for the contention that materiality can and should be resolved at the summary judgment stage. Thus, the Court stressed that materiality is an objective inquiry,16 and repeatedly stated that materiality may appropriately be addressed on summary judgment.17 Besides highlighting the importance of the materiality element in a Rule 10b-5 class action, these statements suggest that defendants may have greater success in challenging materiality on motions for summary judgment. 

Finally, Amgen is significant for what it did not decide — namely, the wisdom of maintaining the Basic framework at all. In a brief concurrence, Justice Alito stated that he joined the majority opinion "with the understanding that the petitioners did not ask us to revisit Basic's fraud-on-the-market presumption," and stressed that he and the three dissenting Justices believe that in light of post-Basic developments in economic theory, "reconsideration of the Basic presumption may be appropriate."18 If Justice Alito and the dissenters can gain a single vote in a case in which the issue is squarely presented, Basic's framework could be vulnerable.

Footnotes

1 No. 11-1085 (U.S. Feb. 27, 2013) [hereinafter Slip Op].

2 485 U.S. 224 (1988).

3 Id. at 247, 250. 

4 See In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008) (noting that the fraud-on-the-market presumption may be invoked when a purported class shows that "a defendant has (1) publicly made (2) a material misrepresentation (3) about stock traded on an impersonal, well-developed (i.e., efficient) market"); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 (5th Cir. 2007) ("Reliance is presumed if the plaintiffs can show that '(1) the defendant made public material misrepresentations. . . .'") (citation omitted), abrogated on other grounds by Erica P. John Fund v. Halliburton, 131 S. Ct. 2179, 2183, 2186 (2011); In re PolyMedica Corp. Sec. Litig., 432 F.3d 1, 8 n.11 (1st Cir. 2005).

5 See Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds,  660 F.3d 1170, 1177 (9th Cir. 2011); In re DVI, Inc. Sec. Litig., 639 F.3d 623, 631 (3d Cir. 2011) ("To invoke the fraud-on-the-market presumption of reliance, plaintiffs must show they traded shares in an efficient market, and the misrepresentation at issue became public.") (citations omitted); Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010) (noting that "whether statements were false, or whether the effects were large enough to be called material, are questions on the merits").

6 Slip Op. at 11 (quoting Basic, 485 U. S. at 242).

7 Id.

8 Id.

9 Id. at 16-17.

10 Id. at 17.

11 Id. at 19-21.

12 Id. at 21.

13 Id. at 22.

14 Oscar, 487 F.3d at 269, 266-67.

15 See, e.g., Janus Capital Group Inc. v. First Derivative Traders, 564 U.S. ___ (2011) (holding that persons who draft but do not issue false statements cannot be liable under rule 10b-5); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (holding that plaintiff must plead a "strong inference" of scienter under the Private Securities Litigation Reform Act); Stoneridge v. Scientific Atlanta, 544 U.S. 336 (2005) (holding that "aiders and abettors" of fraud cannot be held secondarily liable under §10(b) of the Exchange Act); Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (holding that plaintiffs must present facts in order to adequately allege that the fraud proximately caused actual economic loss, not just that the misrepresentations inflated the stock price).

16 Slip Op. at 2, 11.

17 Id. at 11, 14, 26.

18 Id. at 1 (Alito, J., concurring). In this regard, the Justices were following the lead of an amicus brief authored by Vinson & Elkins, which explained that the Basic framework is based on outdated economic theories and should be jettisoned in favor of a market-movement inquiry.  See Br. of Law Professors as Amici Curiae in Support of Petitioners, Amgen, Inc. v. Connecticut Ret. Plans & Trust Funds, No. 11-1085 (U.S. Aug. 14, 2012), available at http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs/11-1085_petitioner_amcu_lawprof.authcheckdam.pdf .  

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