On November 5, 2012, the Supreme Court heard oral argument in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (No. 11-1085). At issue is “[w]hether, in a misrepresentation case under SEC Rule 10b-5, [a] district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory” set forth in Basic, Inc. v. Levinson, 485 U.S. 224 (1988) (Blackmun, J.).1 Questions Presented. The Court is also considering whether courts “must allow [a] defendant to present evidence rebutting the applicability of the fraud-onthe- market theory before certifying a plaintiff class based on that theory.” Id.


In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir. 2011) (Silverman, J.), the Ninth Circuit upheld an order granting class certification in a securities fraud suit concerning alleged misstatements regarding two Amgen pharmaceuticals. The Ninth Circuit ruled that “plaintiffs need not prove materiality to avail themselves of the fraud-on-the-market presumption of reliance at the class certification stage.” Amgen, 660 F.3d at 1177.

Amgen petitioned the Supreme Court for certiorari, arguing that the Ninth Circuit’s decision had widened a circuit split on the question of whether proof of materiality is required for class certification. Amgen stated that the Second and Fifth Circuits require plaintiffs to prove materiality at the class certification stage, while the Seventh Circuit prohibits courts from considering materiality for class certification purposes.2 Amgen also noted that the Third Circuit has adopted an intermediate approach, holding that plaintiffs need not establish materiality as part of an initial showing for class certification purposes, but permitting defendants to rebut the applicability of the fraud-on-the-market theory by disproving the materiality of the alleged misrepresentation.3 Amgen emphasized the “immense settlement pressure generated by class certification orders in securities fraud litigation” and contended that “[a] rule that postpones consideration of materiality until summary judgment or trial effectively means that, in most cases, there will be no examination of materiality—at any stage of litigation.” Petition for a Writ of Certiorari at 15.

On June 12, 2012, the Supreme Court granted certiorari to review the Ninth Circuit’s decision. (Please click here to read our discussion of the certiorari-level briefings in the June 2012 edition of the Alert.)

Amgen Argues That Courts Must Consider Materiality First at the Class Certification Stage and Then Again at the Merits Stage

During oral argument, counsel for Amgen stated that “[t]he real question in this case is what is the purpose of Rule 23.”4 Transcript at 12. What must a class representative “show to get through the certification gate to transform an ordinary bilateral dispute” into “something entirely different, a class of tens or hundreds of thousands of people, all of whom are proceeding together?” Id. at 20. “If you think that the purpose of Rule 23 is to postpone to the merits everything that can be postponed without a risk of foreclosing valid individual claims, we lose.” Id. at 12. But Amgen posited that this is “not the purpose” of Rule 23. Id. “The purpose is for a court to determine whether all of the preconditions for forcing everyone into a class action are present before you certify.” Id.

Amgen argued that plaintiffs must prove materiality to benefit from the fraud-on-the-market theory of reliance at the class certification stage, but suggested that the trial court’s determination of materiality at the certification stage would not necessarily be “binding on the trier-of-fact” at a later stage of the litigation. Id. at 6. Amgen stated that “the inability to prove to a certifying judge that … classwide reliance exists because the statement was material doesn’t preclude a plaintiff” from later bringing a securities fraud suit based on that plaintiff’s direct reliance on the statement at issue. Id. at 5.

Justice Kagan took issue with Amgen’s claim that “a plaintiff can always relitigate the question of materiality.” Id. at 6. She stated that “at the class certification stage, isn’t it correct that if the [c]ourt holds that a statement is immaterial, it’s immaterial for all members of the class, and the suit has to be dismissed?” Id. Justice Ginsburg later echoed this same sentiment, stating that “I am really nonplussed by [Amgen’s] answer that if the judge says it’s immaterial, that doesn’t end it for everybody. … [I]f it’s immaterial, the case ends. And if it is material, then it is material to everybody in the class.” Id. at 10.

Justice Breyer observed that Amgen was essentially claiming that a statement “could still be material for some individual, even though there is no market reliance.” Id. at 13. He questioned the premise underlying this line of reasoning: “we could always think of a few examples where, despite the fact that, you know, that it’s only a common issue 99 percent of the time, we can dream up a situation where it’s not a common issue.” Id.

Justice Kagan emphasized that the question of class certification “is a question of coherence; it’s a question of whether the class wins or loses together.” Id. at 14. She noted that under the test set forth in Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011) (Scalia, J.),5 materiality is a question for which the court can “rule on each of the claims in one stroke.” Id. at 15. Justice Ginsburg agreed: “I just don’t understand why this isn’t just a clear case of a question common to the class; that is, the question of materiality.” Id. at 16.

Counsel for Amgen responded that “there is class cohesion” only if “the alleged misinformation was significant enough to affect the price, thus enabling the common claim of relying on the misinformation in the same way.” Id. at 15-16. “The statement has to be material because immaterial statements don’t move markets.” Id. at 20. “Letting a putative representative through the certification gate without showing that key is like … no harm, no foul, because [the plaintiffs] will all lose together.” Id. at 16.

Justice Ginsburg noted that Amgen “seem[ed] to be setting out two determinations of materiality.” Id. at 21. She stated:

You say in order to certify the class you have to show that the misrepresentation was material. And in order to win on the merits, you certainly have to show that the misrepresentation was material. … How does the finding that you say must be made at the certification stage differ from the finding that must be made at the trial?

Id. Amgen stated that “[t]hey differ temporally, they differ functionally, and they differ in terms of who decides it and with what level of finality.” Id. Justice Ginsburg followed up by observing that “it’s the same question” and asked: “[I]f it’s established at the certification stage, it has to be established again at trial?” Id. at 22. Amgen answered: “That’s correct. Just like the market efficiency and the public statement and the market timing. Every one of those predicates has to be proven to the jury’s satisfaction at trial.” Id.

Connecticut Retirement Plans and Trust Funds Contends That Materiality Is a “Quintessential” Common Question That Should Be Considered Only at the Merits Stage

Justice Ginsburg questioned why defendants should not be permitted to rebut materiality and thus challenge the applicability of the fraud-on-the-market theory at the class certification stage. Counsel for the plaintiff-respondent Connecticut Retirement Plans and Trust Funds (“Connecticut Retirement”) answered that “Basic needs to be read against the backdrop of Rule 23, and especially this Court’s recent decision in Wal-Mart v. Dukes.” Id. at 24. “Because materiality always generates a common answer for all class members, it is the quintessential common issue that does not splinter the class or cause it to be noncohesive for purposes of understanding predominance.” Id. “If the market is efficient and it is absorbing information into the price, all investors will have the same question with respect to materiality.” Id. at 26. “They all lose on the merits if there is no materiality.” Id. Connecticut Retirement argued that “[w]ith materiality, it is a common element of the tort always … so there is no special reason to or desirability in or need for litigating at the outset.” Id. at 33-34.

Justice Scalia rejoined that “there is a reason for deciding it earlier, and the reason is the … enormous pressure to settle once the class is certified.” Id. at 34. “In most cases, that’s the end of the lawsuit … there’s automatically a settlement.” Id. Justice Scalia noted that “one of way of … certifying the class is to show … it’s an efficient market and you can presume that everybody in the class relied on the market.” Id. But this presumption is “only true” if “the statement was material to the market.” Id. “If it was immaterial to the market, that isn’t true. And you should not proceed any further, and you should not begin [a] … class action which, in most cases, is simply the preliminary to a settlement.” Id.

Connecticut Retirement answered that this approach “would consign district court judges to having many trials on the merits because … materiality is such a highly contextual inquiry.” Id. at 35. In response, Justice Kennedy pointed out courts “have the burden of justifying class certification.” Id.

The United States, as Amicus Curiae, Argues That Materiality Should Only Be Litigated Once and Emphasizes That Class Certification Is Not a Merits Determination

Counsel for the United States, advocating in support of the respondents’ position, stated that “the confusion here is that materiality in a fraud-on-themarket case serves two purposes: It is a predicate to the fraud-on-the-market theory, but it is also an independent, separate element.” Id. at 40. “[W]hat [Amgen] would have this Court do is isolate the two inquiries when they’re really the same question.” Id. “It is asking the same question that leads to the same answer, and it’s one that unites the class.” Id.

Justice Scalia stated that “[i]f you have the same question, then maybe we shouldn’t have this fraud on-the-market theory.” Id. at 41. “[M]aybe we should overrule Basic because it was certainly based upon a theory that … simply collapses once you remove the materiality element.” Id. Justice Kennedy observed that “24 years of economic scholarship” since Basic was decided “has shown that the efficient market theory is … really an overgeneralization.” Id. at 42.

Counsel for the United States emphasized that “the problem with [Amgen’s] position is that it would require relitigation of the materiality question at the merits stage to the extent the class is certified.” Id. at 46. Moreover, counsel for the United States explained that “class certification is not about only certifying meritorious cases.” Id. at 47. “In the current rule of Rule 23(b)(3), you want to certify class actions that are both meritorious and those that are not, so it reaches a binding judgment.” Id.

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The Supreme Court is expected to issue a decision in Amgen later this term. We will report on the Court’s ruling in a future edition of the Alert.