In a much anticipated ruling in the Amgen securities class action litigation, the U.S. Supreme Court, in a 6-3 majority opinion written by Justice Ginsburg, held that a securities plaintiff is not required to prove that the allegedly misleading statements are material as a prerequisite to class certification. Justice Thomas, Scalia and Kennedy dissented. A copy of the court’s February 27, 2013 opinion can be found here.
As detailed here, the plaintiffs alleged that Amgen and certain of its directors and officers has issued misrepresentations and omissions regarding the safety, efficacy and marketing of two of its flagship drugs. The plaintiffs moved for class certification. The District Court granted the motion to certify a class, rejecting the defendants arguments that the before certifying the class, the plaintiff should be required first to prove that the alleged misrepresentations were material, or in the alternative that the defendants should be permitted to present information rebutting the contention that the class certification was material. The defendants pursued an interlocutory appeal to the Ninth Circuit, which affirmed the district court. The Supreme Court granted the defendants’ petition for a writ of certiorari.
The questions before the Supreme Court had to do with the “predominance” requirement under Rule 23(b)(3) of the Federal Rules of Civil Procedure. This Rule provides that as a prerequisite to certifying a class, the court must determine that “questions of law of fact common to class members predominate.” Because it would be difficult for securities claimants to show that a class of shareholders had all relied on misrepresentations, the Court has recognized the “fraud on the market” presumption, which holds that investors rely on an efficient market to include into a company’s share price the public information about the company.
The defendants argued that because “materiality” is a requirement for the applicability of the “fraud on the market” theory, plaintiffs should be required to prove that the allegedly misleading statements were material in order to use the “fraud on the market” presumption (and thereby allow a Court to determine that common issues of reliance predominate for class certification purposes).
In raising these arguments, the defendants relied on a split within the Circuits on these questions. The Second Circuit, for example, had held that plaintiffs must prove and defendants may rebut materiality before class certification. The Third Circuit had held that plaintiffs need not prove materiality before class certification, but that the defendant may present rebuttal evidence. The Ninth Circuit had held that the plaintiff need not prove materiality before class certification.
Justice Ginsberg, writing for the majority, held that “proof of materiality is not required to establish that a proposed class is sufficiently cohesive to warrant adjudication by representation.” The plaintiff is “not required to prove materiality of Amgen’s alleged misrepresentations and omissions at the class-certification stage.” While the plaintiff “certainly must prove materiality to prevail on the merits,” such proof “is not a perquisite to class certification.”
Because materiality is judged “according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a common questions to al members of the class.” The plaintiffs’ failure to proved materiality “would not result in individual questions predominating. Instead, a failure of proof on the issue of materiality would end the case, given that materiality is an essential element of the class members’ securities fraud claim.”
Justice Ginsberg’s added that the dissent view that the plaintiffs must first establish materiality to gain certification “would have us put the cart before the horse.”
The majority opinion also specifically rejected Amgen’s public policy argument that because of the enormous economic pressure that the mere existence of a securities class action lawsuit creates, plaintiffs should be required to prove materiality at the class certification state. Justice Scalia endorsed this view in his dissenting opinion. The majority rejected this argument, noting that this argument could be made for any element of a securities class action claim, yet the Court has previously held that other common elements – such as loss causation and the falsity or misleading nature of the defendant’s alleged misrepresentations — “need not be adjudicated before a class is certified.”
Justice Ginsburg also noted that Congress had amended the federal securities laws in the PSLRA, based on a recognition that securities suits were subject to abuse, yet Congress had “rejected calls to undo the fraud on the market presumption” and “did not decree that securities-fraud plaintiffs” must “prove each element of their claim before obtaining class certification.” Justice Ginsberg added that “we have no warrant to encumber securities-fraud litigation by adopting an atextual requirement of precertification proof of materiality that Congress, despite extensive involvement in the securities field, has not sanctioned.”
While commentators will be digesting the Court’s opinion in coming days, and while it appears that there might be much fruitful inquiry in analyzing the interplay between the majority, concurring and dissenting opinions, the bottom line is that plaintiffs seeking class certification in a securities suit will not be required to prove materiality. This outcome not only spares plaintiffs the burden of a pre-certification contest on one of the merits issues, but is relieves the plaintiffs of that burden in the judicial circuits that up until now had imposed that requirement. Securities class action defendants, on the other hand, will now be deprived of one of their tools in trying to block class certification – a blow that will be felt particularly in those circuits (like the Second Circuit) that had held that proof of materiality is a prerequisite to class certification in a securities suit.
If nothing else, this case proves that even with the Court’s current line-up, the Court’s grant of certiorari in a securities suit is not invariably bad news for securities plaintiffs. Though plaintiffs have taken a number of defeats before the Court in recent years, the outcome have not been uniform. The outcome here may not have been entirely unexpected – summaries of oral argument (refer for example here) suggested that some of the justices were skeptical of the defendants’ arguments. Nevertheless, it is noteworthy that a Court that is perceived as favoring the defendants in securities cases has entered a majority opinion favorable to plaintiffs.
One final note is that the Court did not (at least on first reading) appear to do anything to alter the existence of the fraud on the market theory. As always, a close reading of Supreme Court cases is required and a closer reading of this case might reveal subtle signals. There had been some speculation that the Court might use this case as an occasion to reconsider or alter the fraud on the market theory. But at least based on the initial reading it does not appear that the Court did so.
Special thanks to a loyal reader for alerting me to the Supreme Court’s opinon