On February 27, 2013, the United States Supreme Court issued its opinion in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, 2013 WL 691001 (Feb. 27, 2013).2 The Court affirmed the Ninth Circuit’s conclusion that a plaintiff need not prove the materiality of the alleged misstatements in a securities class action to certify a class of investors.3 The Court likewise ruled that rebuttal evidence from the defendants demonstrating a lack of materiality need not be considered at class certification.4 The plaintiffs’ bar was quick to hail this decision as a victory for their side, but a closer examination of the opinion reveals that the issue decided by the Court was a narrow one and reflects an argument that is seldom made by the defendants in opposition to class certification. Accordingly, it remains to be seen whether this decision will have a meaningful impact on how class certification issues are litigated in the vast majority of securities cases.
A critical issue frequently debated at class certification in securities class actions relates to the separate requirement under Section 10(b) of proof of reliance and, specifically, whether plaintiffs can invoke a presumption of reliance to satisfy the predominance requirement for certification under Fed. R. Civ. P. 23(b) (3). The Supreme Court has previously held that (1) to invoke that presumption at class certification, a plaintiff must show, inter alia, that the stock at issue traded in an efficient market and (2) once this presumption is established, it may be rebutted by the defendants.5 In opposition to class certification, defendants often challenge whether plaintiffs have offered sufficient evidence to carry their burden of establishing the existence of an efficient market and/or offer in rebuttal direct evidence of the market’s inefficiency.
In Amgen, however, the defendants conceded both that Amgen’s stock traded in an efficient market and that their rebuttal evidence related not to the question of market efficiency, but to the issue of materiality.6 Thus, the debate in Amgen focused exclusively on whether proof of materiality of the alleged misstatements was a further requirement for invoking the presumption of reliance in addition to market efficiency. The Supreme Court’s refusal to impose this additional requirement leaves untouched the Court’s prior decisions that specifically acknowledge that plaintiffs bear the burden of demonstrating market efficiency at class certification and certification must be denied where they fail to meet their burden.7 Nor does the decision in Amgen affect the right of a defendant also recognized in the Court’s prior decisions to attempt to rebut the presumption of reliance by showing, for example, that the market for the stock was not efficient.8 At best, Amgen can be said to have removed the possibility of imposing a further hurdle for plaintiffs at class certification. It did not and could not change the fact that other requirements previously recognized by the Supreme Court—like proof of market efficiency—still exist for certification of a shareholder class, and a defendant may successfully oppose class certification by raising plaintiffs’ failure to satisfy these long-standing requirements.
The Amgen ruling also reflects a clear difference of opinion among the Justices regarding the wisdom of allowing plaintiffs to prevail at class certification based on a “judicially invented” presumption of reliance.9 The separate opinions from Justices Scalia, Thomas and Alito in Amgen strongly suggest that some members of the Court in the future may be willing to reconsider what they view as “the regrettable consequences” of recognizing this presumption in the first place based on recent evidence that the presumption “may rest on a faulty economic principle.” 10
Overview of the Opinion. It has long been the rule that, in order to satisfy the predominance requirement of Fed. R. Civ. P. 23(b)(3) (i.e., to show that issues common to the class predominate over issues that pertain to individual class members), a plaintiff in a securities class action must show an entitlement to invoke a presumption that they relied on the alleged misstatements that is sometimes available to investors under the “fraud-on-the-market” theory.11 Without the ability to presume reliance on public statements by the class as a whole, individualized reliance issues would necessarily predominate, making class certification impossible.12 As noted above, prior to Amgen, the Supreme Court previously made clear that (1) proof of the issuer’s stock trading in an efficient market is a necessary prerequisite for invoking the fraud-on-the-market theory at class certification and (2) the presumption of reliance based on this theory is rebuttable by the defendants.13
The defendants in Amgen argued that, in addition to showing market efficiency, a plaintiff should be required to prove the materiality of the alleged misstatements to invoke the fraud-on-the-market theory.14 They reasoned that the fraud-on-the-market theory is premised on the notion that the defendants’ alleged misstatements must have an effect on the company’s trading price (i.e., artificially inflating the stock price). Thus, according to the Amgen Defendants, if the alleged misstatements were immaterial, it necessarily follows that they could have no impact on a company’s stock.15 The defendants in Amgen also argued that the district court wrongly refused to consider the rebuttal evidence they offered demonstrating that the truth behind the defendants’ alleged misstatements was already known to the market, rendering these alleged misstatements immaterial as a matter of law.16
The Supreme Court rejected the defendants’ views on both points. The Court first held that, while the plaintiffs must certainly prove materiality to prevail on their claims at summary judgment or trial, such proof was not a prerequisite to class certification.17 Following the logic employed by the Seventh and Ninth Circuits, the Court held that materiality is judged by an objective standard and “‘is a question common to all class members.’”18 Thus, “the plaintiff class’s inability to prove materiality would not result in individual questions predominating” but rather “a failure of proof on the issue of materiality would end the case . . . for one and for all.”19 Thus, “[a]s to materiality, . . . the class is cohesive: It will prevail or fail in unison.”20 Even though the Court explicitly stated that materiality is “indisputably” “an essential predicate of the fraud-onthe- market theory,” it nevertheless concluded that materiality, unlike reliance, “is a ‘common questio[n]’ for purposes of Rule 23(b)(3).”21
The Court also held that the Ninth Circuit did not err in refusing to consider the defendants’ rebuttal evidence.22 Again, the Court’s decision on this point turned on the atypical nature of the arguments presented by the defendants. The Supreme Court noted that “[t]he Court of Appeals concluded, and Amgen does not contest, that Amgen’s rebuttal evidence aimed to prove that the misrepresentations and omissions alleged in [the] complaint were immaterial.”23 Having classified the rebuttal evidence as going to the question of materiality, the Court’s prior ruling that the immateriality of Amgen’s alleged misstatements presented no barrier to predominance controlled the outcome.24 Accordingly, the Court ruled that “just 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.” 25
Key Factors That Distinguish Amgen and Limit Its Potential Impact on Future Cases. As noted above, the Supreme Court specifically acknowledged that “Amgen . . . conceded the efficiency of the market for the securities at issue . . . .”26 It was, therefore, undisputed on appeal that the market for Amgen’s stock “‘promptly digested current information regarding Amgen from all publicly available sources and reflected such information in Amgen’s stock price.’”27 Defendants seldom challenge materiality at class certification, but they do often challenge whether the market for a particular stock is efficient. Amgen should have no impact on a defendants’ ability to continue to challenge whether plaintiffs have met their burden of demonstrating market efficiency at class certification because no disputed issues on market efficiency were properly before the Court.
To be sure, the Court in Amgen refused to consider certain “rebuttal” evidence offered by the defendants at class certification. Again, however, that evidence was presented solely for the purpose of showing the immateriality of the alleged misstatements and not for the purpose of attacking market efficiency (because market efficiency was conceded). At the most, Amgen stands for the proposition that, at class certification, a court need not consider defendants’ evidence that the alleged misstatements were immaterial (i.e., that no reasonable investor would have viewed the statements as important given “the total mix of information” available about the company). 28 But that is not the approach typically taken by defendants.
Defendants more often submit rebuttal evidence directed at challenging market efficiency, which, as the Court’s opinion in Basic makes clear, is a separate inquiry from materiality and relates to the independent requirement of reliance.29 Amgen cannot be read to suggest that rebutting the presumption of reliance on other grounds is no longer possible at class certification. Indeed, such a reading would be contrary to the Supreme Court’s decision in Basic, where the Court specifically acknowledged in its review of a class certification decision that the fraud-on-the-market theory was a prerequisite for certification and could be rebutted by the defendants. 30 Amgen states nothing to the contrary. Indeed, the Amgen Court specifically acknowledged the long-standing rule that “‘the presumption,’ . . . is ‘just that, and [can] be rebutted by appropriate evidence.’”31
The Concurring and Dissenting Opinions. Each of these opinions voiced a common theme—a desire by certain members of the Court to revisit the fraud-on-the-market presumption, in general. Justice Alito makes this point directly in his concurring opinion. He explained that he joined the majority’s opinion only because “the petitioners did not ask us to revisit Basic’s fraud-on-the-market presumption.”32 He nevertheless filed a separate opinion to make clear that he believes “reconsideration of the Basic presumption may be appropriate.”33 Justice Scalia similarly observed in his separate opinion that the failure to require proof of materiality at class certification not only does an injustice to Basic, which clearly “envision[ed] a demonstration of materiality” for class certification, but also expands the “consequences [of recognizing the fraud-on-the-market theory] from the arguably regrettable to the unquestionably disastrous.”34
Justice Thomas’ dissenting opinion echoed these concerns. His opinion references the fact that, in Basic, “four Justices of a six-Justice Court created the fraud-on-the-market presumption from a combination of newly minted economic theories.”35 He questioned the wisdom of imposing lower burdens on plaintiffs at class certification based on “a judicially invented doctrine . . . adopted to ease the burden on plaintiffs bringing claims under an implied cause of action.”36 He reasoned that “[t]here is nothing untoward about requiring plaintiffs to take the steps that the Basic Court created in an effort to save otherwise inadequate claims.”37 Like the dissent in Basic, Justice Thomas emphasized that “the Court is ‘not well equipped to embrace novel constructions of a statute based on contemporary microeconomic theory.’”38