What you need to know:
The Supreme Court is currently hearing a case regarding class action securities fraud lawsuits, which is of particular significance to publicly traded life sciences companies, who are often targets for these lawsuits given the complexities of disclosures in their industry. The ruling may have significant disclosure practice implications with respect to regulatory developments, drug safety and efficacy, and market opportunities for life sciences products. If the Court finds that materiality must be demonstrated at the class certification stage in securities fraud class actions, companies might be better positioned to defeat class certification, but they might also run the risk of a loss of leverage in settlement discussions where there is an early materiality finding against them.
What you need to do:
Life sciences public companies must vigilantly ensure that their public disclosures are accurate and presented in a manner that is understandable to investors. Moreover, they should take into account that public availability of third-party information that provides a full picture often will not insulate them from lawsuits.
Implications for Life Sciences Companies
On November 5th, the US Supreme Court heard arguments in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds. The case is especially important for life sciences companies, because it addresses the murky and complex issues surrounding the Food & Drug Administration’s drug approval process, and the disclosures (or lack thereof) made by drug companies about that process. These issues historically have made life sciences companies prime targets for class action securities fraud lawsuits.
For life sciences companies, Amgen is an important reminder about their vulnerability to securities fraud lawsuits. Regardless of the outcome of this case, companies must vigilantly ensure that their public statements are accurate; relying on the public availability of information from third parties such as market analysts and regulators to present a full picture, while sometimes forming the basis of a successful defense, often does not prevent even unmeritorious lawsuits. In particular, disclosure of information relating to regulatory developments, drug safety and efficacy and market opportunities can involve complex and nuanced judgments that may be difficult to articulate to the investing public. Even if Amgen prevails on materiality by demonstrating that the allegedly omitted information was otherwise available to the market, doing so will have been time-consuming and costly.
Possible Outcomes of Amgen
In Amgen, the Supreme Court will decide whether plaintiffs in securities fraud cases are required to demonstrate the materiality of a company’s alleged misrepresentations in order to win class certification.
An affirmative answer will make it more difficult for plaintiffs to proceed as a class, rather than individually. If the Supreme Court establishes that materiality must be demonstrated at class certification, the case likely would be remanded to the district court in order to permit Amgen to offer evidence that the alleged misrepresentations were immaterial. If Amgen does so successfully, the case would proceed only as an individual action with damages limited to the loss, if any, suffered by the named plaintiff.
Alternatively, the Supreme Court could hold that materiality should not be considered at the class certification stage. Such a ruling likely would result in a remand to the district court for further post-certification proceedings, potentially to include summary judgment and/or trial that could result in a judgment against Amgen and a damages award for all members of the class.
Life sciences public companies likely would prefer that the Supreme Court direct lower courts to take up potentially dispositive issues like materiality at class certification, rather than deferring them until summary judgment or trial. But such a result is not without risk. Simply because a court must examine materiality at class certification does not mean that the issue will be resolved routinely in favor of public company defendants. If it is determined early-on that the alleged misrepresentations were material, this makes it more difficult for defendants argue immateriality as part of their defense—which could cost them leverage in settlement discussions. In addition, defeating class certification on the basis of materiality does not have the broad preclusive effect provided by resolution (by settlement or otherwise) of a certified class action. While it is unlikely that many investors would line up to sue individually after a court had found the alleged misrepresentations immaterial in the course of its class certification analysis, corporate defendants face at least the theoretical problem of a multiplicity of lawsuits after defeating class certification.
Case Details and Background
The Amgen Case
This case is the Court’s latest foray into the class certification requirements of Rule 23 of the Federal Rules of Civil Procedure. Specifically, the Court will decide whether or not plaintiffs in securities fraud cases must show that alleged misrepresentations were “material” (i.e., whether they would have significantly altered the total mix of information available to investors) in order to win class certification.
On behalf of investors who purchased Amgen stock during a particular period in time, the Plaintiff filed suit against Amgen and certain individuals alleging that they had committed securities fraud by making misrepresentations about the safety of two anemia treatment products. According to the Plaintiff, Amgen downplayed the FDA’s safety concerns about its products in advance of an FDA meeting with a group of oncologists, concealed details about a clinical trial that was canceled over concerns that Amgen’s product exacerbated tumor growth in a small number of patients, exaggerated the on-label safety of the products, and claimed that Amgen promoted its products only for on-label uses when, in fact, it promoted significant off-label usage.
Securities fraud claim cases under section 10(b) of the Securities Exchange Act and Rule 10b-5 are commonly filed against public companies after stock price declines and are often referred to as “strike suits” because the aim of the plaintiff and/or its lawyer in filing them is sometimes to pressure defendants into making a large settlement in lieu of facing the risks of an adverse result at trial.
After Amgen unsuccessfully moved to dismiss the case at the outset, the Plaintiff sought class certification pursuant to Rule 23, which permits class actions in which one or more plaintiffs sue on behalf of themselves and other, unnamed parties who are alleged to have been injured by similar conduct. To obtain class certification, the plaintiff is required to show that “questions of law or fact common to class members predominate over any questions affecting only individual members.”
The Lower Courts’ Views
The Plaintiff in Amgen submitted expert evidence to show that the market for Amgen stock was efficient (a point Amgen conceded), but put forward no evidence as to the materiality of the alleged misrepresentations.
Amgen opposed certification, arguing principally that because the Plaintiff did not (and could not) establish materiality, he could not rely on the presumption established by the Supreme Court’s 1988 decision in Basic, Inc. v. Levinson that where an efficient market exists that reflects the available information about the company, members of the class relied on the stock price in making their purchase or sale decision, and thus need not prove that they specifically relied upon the allegedly false statements by the defendants.
The district court certified the class, holding that the Plaintiff was entitled to the presumption of reliance because it had established the efficiency of the market for Amgen stock (i.e., that the price of Amgen stock reflected the publicly available information about the company). The district court concluded that a finding of materiality was not necessary to the class certification decision because materiality “do[es] not concern the requirements of Rule 23, but instead concern[s] the merits of the case.” The district court declined to consider Amgen’s rebuttal evidence, holding that its “truth-on-the-market” defense was a method of defeating the claim itself by negating the element of materiality, which the district court considered outside the bounds of the Rule 23 inquiry.
On appeal, the Ninth Circuit affirmed the lower court’s ruling.
Key Arguments Before the Supreme Court in Amgen
Immaterial statements do not affect price. Amgen argued that the materiality of the alleged misrepresentations must be shown before plaintiffs can take advantage of the fraud-on-themarket theory and, thus, the presumption of reliance under Basic that makes class action securities fraud suits possible. By definition, Amgen asserted, immaterial misstatements do not affect a stock’s price and, therefore, there is no basis to presume reliance if the alleged misrepresentations were immaterial.
Materiality is inherently a common question. The Plaintiff countered by arguing that materiality is inherently a common question (one that can be resolved in the same way on the same evidence for all members of the class), which is all that Rule 23 requires before a class may be certified. The fact that the answer to the question could end the case on the merits by negating an essential element of the claims is irrelevant.
The Plaintiff noted that in Basic itself, the Supreme Court described materiality as a common question. The Plaintiff also pointed out that in Basic, the Court simultaneously affirmed the lower court’s decision certifying the class, but sent the case back to the district court to reconsider its ruling on summary judgment that plaintiff had not demonstrated materiality so that the district court could apply the correct standard for materiality.
Amgen countered that when Basic was decided, Rule 23 contemplated conditional orders of class certification that could be reversed during the life of the case and, therefore, the current Court should not read too much into the fact that Basic itself affirmed certification at a stage when materiality was unproven.
In Halliburton, the Supreme Court did not include materiality among the elements of the presumption. The Plaintiff noted that in the Supreme Court’s decision in Erica P. John Fund, Inc. v. Halliburton the Court did not mention materiality when it identified the elements a plaintiff needs to show to invoke the Basic presumption of reliance. In Halliburton, the Court said it was “undisputed” that plaintiffs must prove, “for example,” that the alleged misrepresentations were publicly known, that the stock traded in an efficient market, and that the relevant transaction took place between the time the alleged misrepresentation was made and the time the truth was revealed.
In Wal-Mart, the Supreme Court held that a “merits” question can be examined at class certification. Amgen turned to another of the Supreme Court’s recent well-publicized opinions on class certification, Wal-Mart Stores, Inc. v. Dukes, to argue that just because reliance is an element of a securities fraud claim does not mean that it cannot be examined in the context of class certification, where it serves a different purpose (as a predicate for the fraud-on-the-market theory). In Wal-Mart, the Court held that all matters relevant to class certification must be evaluated at the class certification stage, even when they are also relevant to the merits of the claims that would be decided on summary judgment or at trial.
Delayed consideration of materiality gives plaintiffs “enormous” settlement leverage. Both sides in Amgen also squared off over which side is supported by public policy concerns. Amgen highlighted the harmful practical consequences of class certification in securities fraud cases without testing all of the predicates of the fraud-on-the-market theory, principally the “enormous” settlement pressure that certification permits plaintiffs to bring to bear on defendants. According to Amgen, permitting certification without proof of materiality will mean that materiality likely will never be tested because the risks and costs to defendants of continuing to litigate will prompt them to settle, regardless of whether the element of materiality could ever be proven. Amgen also noted that testing materiality at class certification does not put an unfair evidentiary burden on plaintiffs because if proof of materiality exists, it can be offered as easily at certification as it can at any later stage.
Early consideration of materiality potentially creates numerous individual cases and doesn’t prevent future plaintiffs from bringing the same claim. The Plaintiff countered that forcing courts to rule on materiality at class certification would “merely splinter a single class action into countless individual cases.” That would harm plaintiffs, who would face increased costs associated with multiple lawsuits, and defendants, who rely on class certification to ensure that they need not re-litigate such issues multiple times.