On February 27, 2013, the Supreme Court issued its much-anticipated decision in Amgen, Inc. v. Connecticut Retirement Plans & Funds, 568 U.S. __ (2013), addressing central questions concerning class certification in federal securities fraud actions that the Court last examined two terms ago in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. ___ (2011). Like Halliburton before it, Amgen further clarifies the burdens that a plaintiff seeking class certification must carry. Because certification of a plaintiff class magnifies stakes of a securities fraud action -- and thus can create enormous pressure on defendants to settle -- the Amgen ruling is of critical importance to public companies and their directors and officers, insurance carriers and outside professionals.
Both Amgen and Halliburton presented questions concerning the interplay between class certification and the rebuttable presumption of classwide reliance under the "fraud on the market" doctrine that theCourt endorsed in Basic, Inc. v. Levinson, 485 U.S. 224 (1988). In Halliburton, the Court held that plaintiffs need not prove loss causation in order to invoke the "fraud on the market" doctrine at the class certification phase, but explicitly noted that it was not addressing "any other question about Basic, its presumption, or how and when it may be rebutted." In Amgen, the Court considered two questions that Halliburton left open and that had split the federal courts of appeals. First, the Court considered whether, at the class certification stage, plaintiffs must prove the materiality of purported misstatements or omissions in order to invoke the "fraud on the market" doctrine. The Court also considered whether defendants in such cases can defeat class certification by demonstrating lack of materiality. By a 6-3 vote, the Court held that the answer to both questions is "no," and rejected the contrary views of the Second, Third and Fifth Circuits, as well as dicta in First and Fourth Circuit opinions. While Amgen does not relieve plaintiffs in federal securities fraud actions of their burden to plead materiality, or offer sufficient evidence as to that element at the summary judgment stage, the Court's decision makes it easier for plaintiffs to obtain class certification in such cases by clarifying that proof of materiality is not necessary at the class certification stage. Balanced against that ruling, however, the concurring and dissenting opinions in Amgen suggest that at least four Justices question the economic underpinnings of the "fraud on the market" doctrine, and are prepared to re-examine Basic to the extent the Court had previously endorsed that doctrine.
Defendants in Amgen had conceded the efficiency of the market for the securities at issue, as well as the public character of the alleged misstatements and the various prerequisites for class certification under Rule 23(a) of the Federal Rules of Civil Procedure. The only question was whether, without proof that the alleged misstatements were material, plaintiffs could satisfy their burden to show that certification of a plaintiff class was appropriate under Rule 23(b)(3). Accordingly, the Court focused on how the fraud on the market theory, and the materiality element of the implied private cause of action under Section 10(b) and Rule 10b-5, interact with the class certification requirements of Rule 23(b)(3).
Justice Ginsburg, writing for the majority, explained that "Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class." She reasoned that because courts determine materiality according to an objective standard, that element is capable of being proved through evidence common to the class, and is a "common" question for Rule 23(b)(3) purposes. Justice Ginsburg went on to reason that a failure of proof on the common question of materiality would not result in individual questions predominating, but rather would result in the case ending because materiality is an essential element of a securities fraud claim. Thus, Justice Ginsburg pointed out: "As to materiality, therefore, the class is entirely cohesive: It will prevail or fail in unison. In no event will the individual circumstances of particular class members bear on this inquiry." The majority therefore concluded that proof of materiality was not necessary to class certification, and that a defendant's evidence of lack of materiality was likewise irrelevant to the question whether a class should be certified.
In addition to overturning the law in five Circuit Courts, the practical consequence of the Supreme Court's Amgen decision is significant because it makes it easier for plaintiffs to certify class actions.Plaintiffs will not be required to prove materiality and defendants will not even be afforded the opportunity to rebut the allegation of materiality with evidence at the class certification stage. One upshot of this, as Amgen argued before the Supreme Court, is that plaintiffs will more readily obtain the settlement leverage afforded by class certification.
However, the concurring and dissenting opinions in Amgen suggest that litigation concerning the "fraud on the market" doctrine is far from concluded. Justice Thomas' dissenting opinion, joined in relevant part by Justices Kennedy and Scalia, openly questions the wisdom of the Court's decision in Basic, in which only four Justices endorsed the fraud on the market theory. Justice Thomas noted that the "Basic decision itself is questionable," and observed that the fundamental assumption underlying the fraud on the market theory -- i.e., that prices in an efficient market swiftly integrate all publicly-available, material information -- is also subject to attack because the market may operate "differently depending on the information at issue." And while Justice Alito joined in the majority opinion, his concurring opinion cited Justice Thomas' observation about Basic and stated that "reconsideration of the Basic presumption may be appropriate." Thus, it appears that at least four current Justices might entertain a challenge to the fraud on the market theory in an appropriate case. Notably, the Amgen majority did not foreclose such a challenge. Rather, faced with empirical evidence suggesting that the fraud on the market theory ought not apply to the alleged misstatements in Amgen, the majority sidestepped the issue by noting the defendants' concession that the market for its securities was "efficient" and quickly integrated the statements at issue. The Supreme Court now may be positioned to revisit, and perhaps substantially alter, its long-standing fraud on the market doctrine.