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
16 Nov 2018, Other, California, United States

Join leading dealmakers for a complimentary ​live video webcast panel on cross border M&A.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions