In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, 2013 WL 691001 (U.S. Feb. 27, 2013), the United States Supreme Court affirmed the decision of the United States Court of Appeals for the Ninth Circuit holding that a securities fraud plaintiff need not prove that the alleged false statements made by defendants were material in order to invoke the fraud-on-the-market presumption of reliance established by Basic, Inc. v. Levinson, 485 U.S. 224 (1988), at the class certification stage of the proceedings. The 6-3 majority opinion, written by Justice Ginsburg, resolved a split in the Circuits, which had pitted the First, Second, Fifth and, to a certain extent, Third Circuits against the Seventh and Ninth Circuits on this point. The Supreme Court’s decision deprives securities fraud defendants a means of limiting or effectively defeating a securities class action lawsuit at an early stage in the case before the bulk of fact discovery has begun.
Lead plaintiff Connecticut Retirement Plans and Trust Funds alleged that defendant Amgen Inc. (“Amgen”) artificially inflated the market price for Amgen stock by making misrepresentations and misleading omissions regarding the safety of two Amgen products. More specifically, plaintiff alleged that Amgen made misrepresentations and omissions about (1) the subject matter of a May 2004 advisory committee meeting of the Food & Drug Administration (“FDA”), (2) clinical trials involving one of the products, (3) the safety of on-label uses of both products and (4) its marketing of the products. Plaintiff alleged that these purported misrepresentations and omissions constituted securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities & Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
Plaintiff sought to represent a class of purchasers of Amgen stock from April 22, 2004, through May 10, 2007. The start of this period corresponded to a public statement by Amgen regarding the May 2004 FDA advisory committee meeting. Plaintiff alleged that Amgen misrepresented that the meeting would not focus on the safety of one of the products at issue. The end of the class period corresponded with a later meeting of the same FDA committee. Plaintiff alleged that this meeting constituted a corrective disclosure, revealing information about the safety of the products.
Plaintiff moved for class certification pursuant to Federal Rule of Civil Procedure 23(b)(3). That rule conditions certification on, among other things, a finding by the district court that “questions of law or fact common to class members predominate over any questions affecting only individual members.” As with most securities fraud claims, the predominance inquiry turned on the element of plaintiff’s reliance.
In Basic, the Supreme Court recognized that securities fraud plaintiffs could not proceed with a class action if they were required to prove direct individual reliance on the misrepresentation by each class member, because individual questions would overwhelm common ones, thereby precluding certification under Rule 23(b)(3). The Court, however, endorsed a rebuttable presumption of reliance by every class member in cases in which the “fraud-on-the-market” theory applies. That theory states that if a security trades in an efficient market, all public material information is reflected in the price of the security. Purchasers or sellers who rely on the integrity of the market price therefore also rely, indirectly, on any material misrepresentations which would be reflected in that price. The Court in Basic also held that the presumption of reliance can be rebutted by “[a]ny showing that severs the link between the alleged misrepresentation” and “the price received (or paid) by the plaintiff.”
In support of its motion for class certification, plaintiff argued that the putative class members were entitled to Basic’s fraud-on-the-market-based presumption of class-wide reliance. Plaintiff submitted expert evidence to establish the efficiency of the market for Amgen stock. It made no evidentiary showing, however, about the materiality of Amgen’s alleged misstatements.
Amgen opposed class certification principally on the ground that plaintiff did not and could not establish that the alleged misrepresentations were material. Amgen showed through analyst reports and public documents that the market was aware of all the information that plaintiff claimed was omitted during the class period. Proof of market efficiency alone, Amgen argued, without any corresponding proof of the materiality of the alleged misrepresentations, was not sufficient to invoke a presumption of class-wide reliance based on the fraud-on-the-market theory. Amgen also sought to affirmatively rebut any such presumption, again by showing that the market already was “privy to the truth,” and accordingly that no alleged misrepresentation had any impact on the price of Amgen stock.
The United States District Court for the Central District of California granted plaintiff’s motion for class certification, holding that proof of materiality was not necessary to invoke the fraud-on-the-market presumption of reliance and, accordingly, that it would not consider Amgen’s rebuttal evidence. The United States Court of Appeals for the Ninth Circuit affirmed the district court’s decision. See Connecticut Retirement Plans & Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. 2011). In doing so, the Ninth Circuit acknowledged the Circuit split regarding both of these issues. See In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011); Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010); In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007); In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005).
The United States Supreme Court affirmed the Ninth Circuit. The Court held that while plaintiff certainly must prove the materiality of the alleged misstatements or omissions to prevail on the merits of its Rule 10b-5 claim, such proof is not required for class certification. As the Court explained, “[b]ecause materiality is judged according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a question common to all members of the [putative] class . . . .” Plaintiff was not required to answer that common question at the class certification stage; the existence of the common question itself supported class certification. The Court went on to hold that its earlier decision in Basic could not be read to require proof of materiality at the class certification stage to trigger the fraud-on-the-market presumption, a point contested by Justices Scalia and Thomas in their dissenting opinions.
As noted above, this decision deprives securities fraud defendants of the ability to raise at the class certification stage, before the bulk of fact discovery, an issue that could be dispositive of the case. This effectively gives plaintiffs more leverage in settlement negotiations in the event the district court denies a motion to dismiss. One intriguing issue going forward stems from references throughout the majority and dissenting opinions to questions regarding the continued efficacy of the fraud-on-the-market theory and the strengths and weaknesses of the decision in Basic. It is fair to say that at least three (and perhaps more) of the Justices seem willing to reconsider the four-justice majority opinion in Basic. Were the Court to do so, it would have a profound impact on the entire securities class action litigation industry.