In a much anticipated ruling in the Amgen securities
class action litigation, the U.S. Supreme Court, in a 6-3 majority opinion
written by Justice Ginsburg, held that a securities plaintiff is not required
to prove that the allegedly misleading statements are material as a
prerequisite to class certification. Justice Thomas, Scalia and Kennedy
dissented. A copy of the court's February 27, 2013 opinion can be found here.
As detailed here, the plaintiffs
alleged that Amgen and certain of its directors and officers has issued
misrepresentations and omissions regarding the safety, efficacy and marketing
of two of its flagship drugs. The plaintiffs moved for class certification. The
District Court granted the motion to certify a class, rejecting the defendants
arguments that the before certifying the class, the plaintiff should be
required first to prove that the alleged misrepresentations were material, or
in the alternative that the defendants should be permitted to present
information rebutting the contention that the class certification was material.
The defendants pursued an interlocutory appeal to the Ninth Circuit, which
affirmed the district court. The Supreme Court granted the defendants' petition
for a writ of certiorari.
The questions before the Supreme Court had to do with the
"predominance" requirement under Rule 23(b)(3) of the Federal Rules of Civil
Procedure. This Rule provides that as a prerequisite to certifying a class, the
court must determine that "questions of law of fact common to class members
predominate." Because it would be difficult for securities claimants to
show that a class of shareholders had all relied on misrepresentations,
the Court has recognized the "fraud on the market" presumption, which holds
that investors rely on an efficient market to include into a company's share
price the public information about the company.
The defendants argued that because "materiality" is a
requirement for the applicability of the "fraud on the market" theory,
plaintiffs should be required to prove that the allegedly misleading statements
were material in order to use the "fraud on the market" presumption (and thereby
allow a Court to determine that common issues of reliance predominate for class
In raising these arguments, the defendants relied on a
split within the Circuits on these questions. The Second Circuit, for example,
had held that plaintiffs must prove and defendants may rebut materiality before
class certification. The Third Circuit had held that plaintiffs need not prove
materiality before class certification, but that the defendant may present
rebuttal evidence. The Ninth Circuit had held that the plaintiff need not prove
materiality before class certification.
Justice Ginsberg, writing for the majority, held that
"proof of materiality is not required to establish that a proposed class is
sufficiently cohesive to warrant adjudication by representation." The plaintiff
is "not required to prove materiality of Amgen's alleged misrepresentations and
omissions at the class-certification stage." While the plaintiff "certainly
must prove materiality to prevail on the merits," such proof "is not a
perquisite to class certification."
Because materiality is judged "according to an objective
standard, the materiality of Amgen's alleged misrepresentations and omissions
is a common questions to al members of the class." The plaintiffs' failure to
proved materiality "would not result in individual questions predominating.
Instead, a failure of proof on the issue of materiality would end the case,
given that materiality is an essential element of the class members' securities
Justice Ginsberg's added that the dissent view that the
plaintiffs must first establish materiality to gain certification "would have
us put the cart before the horse."
The majority opinion also specifically rejected Amgen's
public policy argument that because of the enormous economic pressure that the
mere existence of a securities class action lawsuit creates, plaintiffs should
be required to prove materiality at the class certification state. Justice
Scalia endorsed this view in his dissenting opinion. The majority rejected this
argument, noting that this argument could be made for any element of a
securities class action claim, yet the Court has previously held that other
common elements - such as loss causation and the falsity or misleading nature
of the defendant's alleged misrepresentations -- "need not be adjudicated
before a class is certified."
Justice Ginsburg also noted that Congress had amended the
federal securities laws in the PSLRA, based on a recognition that securities
suits were subject to abuse, yet Congress had "rejected calls to undo the fraud
on the market presumption" and "did not decree that securities-fraud
plaintiffs" must "prove each element of their claim before obtaining class
certification." Justice Ginsberg added that "we have no warrant to encumber
securities-fraud litigation by adopting an atextual requirement of
precertification proof of materiality that Congress, despite extensive
involvement in the securities field, has not sanctioned."
While commentators will be digesting the Court's opinion
in coming days, and while it appears that there might be much fruitful inquiry
in analyzing the interplay between the majority, concurring and dissenting
opinions, the bottom line is that plaintiffs seeking class certification in a
securities suit will not be required to prove materiality. This outcome not
only spares plaintiffs the burden of a pre-certification contest on one of the
merits issues, but is relieves the plaintiffs of that burden in the judicial
circuits that up until now had imposed that requirement. Securities class
action defendants, on the other hand, will now be deprived of one of their
tools in trying to block class certification - a blow that will be felt
particularly in those circuits (like the Second Circuit) that had held that
proof of materiality is a prerequisite to class certification in a securities
If nothing else, this case proves that even with the
Court's current line-up, the Court's grant of certiorari in a securities suit
is not invariably bad news for securities plaintiffs. Though plaintiffs have
taken a number of defeats before the Court in recent years, the outcome have
not been uniform. The outcome here may not have been entirely unexpected - summaries
of oral argument (refer for example here)
suggested that some of the justices were skeptical of the defendants'
arguments. Nevertheless, it is noteworthy that a Court that is perceived as
favoring the defendants in securities cases has entered a majority opinion
favorable to plaintiffs.
One final note is that the Court did not (at least on
first reading) appear to do anything to alter the existence of the fraud on the
market theory. As always, a close reading of Supreme Court cases is
required and a closer reading of this case might reveal subtle signals. There
had been some speculation that the Court might use this case as an occasion to
reconsider or alter the fraud on the market theory. But at least based on the
initial reading it does not appear that the Court did so.
Special thanks to a loyal reader for alerting me to the
Supreme Court's opinon
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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