United States: Litigation Alert: Amgen: A Pyrrhic Victory For Plaintiffs In Securities Class Actions?

In a 6-3 decision issued last week, the Supreme Court ruled in Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 568 U.S. ___, 2013 WL 691001 (Feb. 27, 2013), that shareholders bringing class actions under Section 10(b) of the Securities Exchange Act of 1934 need not prove that alleged misstatements are material in order to invoke the fraud-on-the-market presumption. Several lower courts had held that the fraud-on-the-market theory – long used by plaintiffs to justify class certification – was not applicable absent a threshold showing of materiality. In rejecting that approach, the Amgen decision removes one potential weapon from companies defending shareholder class actions. However, after reading the various opinions by the members of the Court, plaintiffs may conclude that modest victory is outweighed by a far more significant threat: the possibility of a challenge to the fraud-on-the market presumption itself.

The Issues Raised In Amgen

The Amgen decision pivots on the interplay between the requirements for class certification and the substantive elements of a Section 10(b) claim – and, in particular, the element of reliance.1 To certify a class action, a plaintiff must not only satisfy the requirements of numerosity, commonality, typicality, and adequacy of representation, but must also establish that "the questions of law or fact common to class members predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3).

Securities fraud traditionally required a showing of direct reliance – i.e., that a plaintiff was aware of a defendant's statement and relied on that statement in his or her purchase or sale of a security. Applied strictly, however, the reliance element would present enormous challenges to shareholders seeking to show that common issues predominate over individual ones: after all, direct reliance is almost always an inherently individualized inquiry (i.e., one requiring an analysis of the circumstances of particular shareholders and what they may or may not have relied upon in buying or selling securities). Consequently, courts have held that reliance in Section 10(b) cases may be presumed in certain circumstances – a judicial gloss on the statute that has permitted hundreds of shareholder class actions to be filed every year. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court endorsed the "fraud-on-the-market" presumption of reliance. The fraud-on-the-market presumption allows courts to "presume that investors trading in efficient markets indirectly rely on public, material misrepresentations through their 'reliance on the integrity of the price set by the market.'" Amgen, 2013 WL 691001, at *5 (citing Basic, 485 U.S. at 245). The fraud-on-the-market presumption is based on the premise that "the market price of shares traded on well-developed markets reflects all publicly available information, and hence, any material misrepresentations." Basic, 485 U.S. at 246. To invoke the presumption, plaintiffs must show (1) an efficient market, (2) a public statement, (3) that the stock was traded after the statement was made but before the truth was revealed, and (4) the materiality of the statement. Id. at 248 n.27.

Thus, under Basic and its progeny, materiality of alleged misstatements is one of the "essential predicates" to the invocation of the fraud-on-the-market presumption. Amgen, 2013 WL 691001, at *7. Notwithstanding that, courts have generally been willing to certify classes without any real examination of materiality.2 In recent years, though, a number of courts – most notably the Second Circuit – have undertaken an analysis of materiality, permitted evidence on that issue, and have held that a presumption of reliance is inapplicable where the allegedly actionable statements are not shown to be material.3

The Amgen Opinion: Fraud-On-The-Market May Be Applied At The Class Certification Stage Without A Showing Of Materiality

In Amgen, Connecticut Retirement Plans and Trust Funds ("plaintiff") brought a putative securities class action for money damages against the Company and several of its officers alleging that, by misstating and failing to disclose safety information about two Amgen products used to treat anemia, they violated Sections 10(b) and 20(a) of the 1934 Act. The District Court granted plaintiff's motion to certify a class under Rule 23(b)(3). Amgen appealed, arguing that the District Court erred by not requiring plaintiff to prove that Amgen's alleged misrepresentations were material in order to invoke the fraud-on-the-market presumption at class certification, and, by refusing to consider evidence rebutting the materiality of the alleged misrepresentations. The Ninth Circuit affirmed. The Supreme Court then granted certiorari in order to resolve the split that had arisen among the Circuit Courts on that issue.

Although Justice Ginsburg (writing for the majority) conceded that materiality is "indisputably" a predicate to the fraud-on-the-market presumption, Amgen, 2013 WL 691001, at *8, she noted that any suggestion that plaintiffs must first prove that they will prevail on the merits of the case (e.g., on the substantive element of materiality) before a class is certified, was tantamount to putting the "cart before the horse." Id. at *4. That is so because "the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the method best suited to adjudication of the controversy." Id. To that end, the question before the Court was whether proof of materiality is necessary "to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members.'" Id. at *8 (citing Fed. R. Civ. P. 23(b)(3)). The majority found the answer to this question was "clearly no." Id.

First, because materiality can be proved based on objective evidence, whether a statement is or is not material can be proven using evidence common to the class – thus making it a "common question" for purposes of Rule 23(b)(3). Id. Second, because materiality is itself a substantive element of a claim under Section 10(b), failure to prove the materiality of a statement at a later stage in the litigation would end the litigation for the entire class. For that reason, individual issues of reliance would never threaten to overwhelm common issues to the class should materiality be lacking – the entire class would sink or swim together as to materiality. Id.4

In addition to holding that plaintiffs need not prove materiality at class certification in order to invoke the fraud-on-the-market presumption of reliance, the Court also held that defendants cannot submit evidence rebutting materiality at the class certification stage. The Court found such merits-based evidence is better saved for summary judgment or trial. Id. at *15.

Notably, in making its ruling, the majority rejected several of Amgen's policy-based arguments. Amgen asserted that because certification of a class placed enormous in terrorem settlement pressures on defendants, if materiality were not required to be proved at class certification, it may never be adjudicated. The Court, however, pointed out that the same was true for any other substantive element of a Section 10(b) claim. Id. at *12. Moreover, the majority noted that in enacting the Private Securities Litigation Reform Act of 1995, Congress had considered these settlement pressures and put into place a number of protections for defendants, including, inter alia, heightened pleading standards, a discovery stay, and a safe harbor for forward-looking statements. Congress did not, however, require proof of materiality at the class certification stage as an antidote to in terrorem settlements. Id. Nor did the Court accept Amgen's argument that requiring proof of materiality at class certification would result in judicial efficiencies. To the contrary, the Court found that a requirement that materiality be proved at class certification would waste judicial resources, necessitating a "mini-trial" on the issue of materiality. Id. at *13.

Putting aside the fact that the majority opinion removes a potential argument from defendants' arsenal at class certification, the most significant issue to arise out of Amgen comes not out of the majority opinion itself, but rather out of Justice Alito's concurrence and several statements made by the dissenters regarding the continuing viability of the fraud-on-the-market presumption. In his concurrence, Justice Alito suggests that, in light of recent evidence suggesting that the fraud-on-the-market presumption might rest on a faulty economic premise, "reconsideration of the Basic [fraud-on-the-market] presumption may be appropriate." Id. at *16. Similarly, Justice Thomas' dissent (which was joined by Justices Scalia and Kennedy) asserts that "[t]he Basic decision itself is questionable" given that "the Court 'is not well equipped to embrace novel constructions of a statute based on contemporary microeconomic theory.'" Id. at *19 n.4 (quoting Basic, 485 U.S. at 252-53 (White, J., concurring in part and dissenting in part)).

What Amgen Means For Securities Class Actions

Although Amgen does remove one potential obstacle facing plaintiffs seeking to establish class certification, its holding does not substantially change the realities of defending a securities class action. That is especially true in California and elsewhere in the Ninth Circuit, where even before Amgen plaintiffs were not required to prove materiality at the class certification stage. Defendants can still attack application of the fraud-on-the-market presumption at class certification on various grounds, including showing that the stock was not traded in an efficient market (an argument that has been successful in a number of cases). Moreover, defendants can still challenge materiality on motion to dismiss, at summary judgment, and at trial.

Indeed, the majority's holding in Amgen may ultimately be much less significant than the concurring and dissenting opinions of Justices Alito and Thomas, which invite a challenge to the fraud-on-the-market presumption. As noted above, without the fraud-on-the-market presumption, class certification becomes highly problematic for shareholders bringing suit under Section 10(b). Thus, while plaintiffs may be able to claim a minor victory in Amgen, that victory may eventually prove to be Pyrrhic.

Footnotes

1. The elements of a Section 10(b) claim are: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct. 1309, 1317 (2011).

2. See, e.g., Connecticut Ret. Plans &Trust Funds v. Amgen Inc., 660 F.3d 1170, 1175-77 (9th Cir. 2011) (plaintiffs need not prove materiality in order to invoke the fraud on the market presumption of reliance for purposes of class certification; refusing to consider evidence rebutting materiality at class certification stage); Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010) (materiality need not be proved at class certification stage).

3. See, e.g., In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 483-84 (2d Cir. 2008) (plaintiff must prove materiality before class certification; defendant may present evidence rebutting materiality at class certification). See also In re DVI, Inc. Sec. Litig., 639 F.3d 623, 631-32, 637-38 (3d Cir. 2011) (although plaintiff need not prove materiality at class certification, defendant may present rebuttal evidence on that issue at class certification).

4. Justice Thomas' dissent points out the fallacy in this logic and urges that it is the Court, not Amgen, who is attempting to "put the cart before the horse." Id. at *22 (Thomas, J., dissenting). Justice Thomas explains that "[t]he materiality of a specific statement, is ... essential to the fraud-on-the market presumption, which in turn enables a plaintiff to prove reliance." Id. at *20. "Without materiality, there is no fraud-on-the market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible." Id. at *22. Thus, "[a] plaintiff who cannot prove materiality does not simply have a claim that is 'dead on arrival' at the merits, he has a class that should never have arrived at the merits at all because it failed Rule 23(b)(3) certification from the outset." Id. Justice Thomas goes on to argue that "[t]he Court reverses that inquiry, effectively saying that certification may be put off until later because an adverse merits determination will retroactively wipe out the entire class." Id.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
30 Nov 2017, Conference, San Francisco, United States

The 2017 agenda addresses significant pending legislative and regulatory changes along with our annual substantive updates.

5 Dec 2017, Webinar, California, United States

This highly interactive colloquium will provide a deep understanding and practical advice regarding major e-discovery challenges facing organizations today.

6 Dec 2017, Seminar, California, United States

Network and be seen as an information security thought leader. “The Exchange” colloquium is designed for senior business executives and security practitioners from both the public and private sector.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.