On February 27, 2013, the Supreme Court held in a 6-3 opinion in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 568 U.S. ___ (2013), that securities fraud class action plaintiffs need not prove materiality at the class certification stage to invoke the fraud-on-the-market presumption of class-wide reliance. The Supreme Court also held that a district court need not consider a defendant’s rebuttal evidence submitted in an effort to prove the absence of materiality and therefore rebut the presumption of reliance. Although this decision forecloses materiality as a battleground at class certification, the Court did not address the broader legal questions of whether and how securities fraud defendants can rebut the fraud-on-the-market presumption at the class certification stage.

Background Facts and Procedural History

The plaintiffs alleged in their complaint that Amgen had made misstatements and omissions about the safety and use of Amgen’s products in the company’s disclosures, which inflated the price of the company’s stock. According to the complaint, subsequent corrective disclosures caused the stock price to fall, resulting in harm to those who had purchased the stock at the allegedly inflated price.

The putative plaintiffs sought to certify a class on behalf of all purchasers of Amgen stock between the date of the alleged misrepresentations and the date of the corrective disclosures. In its class certification analysis, the district court considered whether the shareholder plaintiffs could use the fraud-on-the-market theory to establish that reliance was common to the class. The district court identified three factors required for plaintiffs to invoke the fraud-on-the-market presumption: (1) showing that Amgen’s stock traded in an efficient market; (2) showing that the alleged misstatements were public; and (3) alleging that the supposed falsehoods were material.

Amgen contested the third element, arguing that the plaintiffs needed to prove the materiality of the alleged misrepresentations, but the district court rejected that position. Amgen then sought an opportunity to rebut the materiality allegation by introducing evidence that the truth behind the alleged misstatement had already entered the market. If the truth had entered the market, none of the alleged misstatements could have artificially inflated the company’s stock price, and thus the fraud-on-the-market presumption would be inapplicable. The district court declined to consider Amgen’s evidence at class certification, holding that the rebuttal of the presumption was a trial issue. Amgen filed an interlocutory appeal of the certification order.

On appeal, the Ninth Circuit affirmed the district court’s decision and held that securities fraud plaintiffs do not need to prove materiality to invoke the fraud-on-the-market presumption. Instead, securities fraud plaintiffs must only allege materiality with sufficient plausibility to withstand a motion to dismiss. Further, the Ninth Circuit found that the district court acted properly in refusing Amgen’s request to rebut the fraud-on-the-market presumption at the class certification stage. Because Amgen’s truth-on-the-market defense pertained to the alleged misstatement’s materiality, the Ninth Circuit stated that it did not bear on the certification decision. Rather, the company could raise the defense either at trial or through a summary judgment motion. Amgen appealed the Ninth Circuit’s decision to the Supreme Court.

Supreme Court: No Proof of Materiality at Class Certification

The Supreme Court granted certiorari on two questions: (1) whether district courts must require proof of materiality before certifying a class of plaintiffs in a misrepresentation case under SEC Rule 10b-5; and (2) whether courts must allow defendants to present evidence that would rebut the fraud-on-the-market presumption at the class certification stage. Justice Ginsburg, writing for the majority, answered “no” to both questions.

With respect to the first issue, the Court recognized that materiality is indisputably an essential predicate of the fraud-on-the-market theory. The Court nonetheless held that proof of materiality is not required to show that common questions predominate over individual issues (an essential requirement for class certification) for two reasons. First, materiality can be established by common proof. The Court observed that the materiality analysis – whether omitted or misrepresented information would have been significant to a reasonable investor – is an objective standard that applies equally to all members of the class. Second, the Court reasoned that the failure to prove materiality would not leave individual issues predominating because materiality is an essential element of a Rule 10b-5 claim. Plaintiffs who cannot establish the materiality of an alleged misstatement or omission cannot prevail in a securities fraud suit as a matter of law. A failure to prove materiality at the class certification stage would, the Court reasoned, extinguish the claim on the merits. There would be no remaining claim and therefore no risk that individual issues would predominate. Consequently, the Court held that proof of the statement’s materiality does not bear on the district court’s class certification predominance analysis under Rule 23(b)(3).

For the same reasons, the Supreme Court further upheld the district court’s decision not to allow Amgen to rebut the plaintiffs’ allegations that the misstatements were material. “[J]ust as a plaintiff class’s inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class.”

In a concurring opinion, Justice Alito joined the majority opinion with the understanding that Amgen had not asked the Court to revisit the fraud-on-the-market presumption adopted by the Court in its Basic decision in 1988. Noting questions that have been raised regarding the underlying economic premise of the theory, Justice Alito wrote that “reconsideration of the Basic presumption may be appropriate.”

Justices Thomas, Scalia and Kennedy dissented and would have required that plaintiffs prove materiality – as a predicate of the fraud-on-the-market presumption – to show that individual issues of reliance do not preclude class certification.

Takeaway

The Amgen decision limits the ability of securities fraud defendants to challenge materiality at the class certification stage, potentially giving plaintiffs additional settlement leverage even where claims are weak. Following on the heels of the Supreme Court’s decision in Halliburton and other recent pro-plaintiff securities decisions, Amgen suggests that the conservative majority is not as hostile to securities class actions as some commentators may have thought. Notably, the Court did not address the broader legal question of whether defendants can rebut the fraud-on-the-market presumption at the class certification stage through evidence that does not overlap with the merits of the claims. Going forward, however, defendants in Rule 10b-5 cases are left to contest materiality and loss causation at the dismissal and summary judgment stages rather than at class certification.