- The Supreme Court’s Amgen Decision: Proof of Materiality Is Not A Prerequisite to Certification of a Securities Fraud Class Action
- March 7, 2013
- Law Firm: Blank Rome LLP - Philadelphia Office
On February 27, 2013, six justices of the U.S. Supreme Court joined to hold that, in order for a class to be certified, plaintiffs in a securities fraud class action need only plausibly allege—not prove—that allegedly misleading statements are material.1 (Information is material if a reasonable investor would believe it significantly alters the total mix of available information.) This is a significant decision insofar as it eliminates one of the tools that defense counsel had used to achieve early termination of certain securities class actions. It also rejects, without expressly overruling, the standard adopted by the United States Court of Appeals for the Second Circuit, which had required proof of materiality in order to certify a class.2
I. The Decision
The majority opinion rests primarily on two pillars. First, the Court determined that materiality “is a question common to all members” of a putative class because materiality is judged on an objective, reasonable investor standard—that is, materiality is not tied to the subjective mindset of putative class members.3 Second, the Court explained that the putative class’ inability to prove materiality following discovery (or at trial) would not result in a down-the-road predominance of individual questions because the ultimate “failure of proof on the issue of materiality would end the case, given that materiality is an element of the class members’ securities-fraud claims.”4 The majority noted that the question of materiality was a common one: “In no event will the individual circumstances of particular class members bear on the inquiry.”5
The Court rejected Amgen’s policy arguments in favor of a standard for certification that would require proof of materiality at the class-certification stage. Amgen argued that a relaxed standard would not only result in frivolous lawsuits and “in terrorem” (i.e., extortionate) settlements, but also that a stricter standard would conserve judicial resources and promote efficiency.6 The Court took the position that such policy matters are better decided by Congress, not by the courts. The Court expressly rejected Amgen’s contention that a stricter pre-certification standard would promote efficiency. To the contrary, the Court wrote, such a standard would “necessitate a mini-trial on the issue of materiality at the class-certification stage,” which “would entail considerable expenditures of judicial time and resources.”7
Interestingly, both the majority and dissenting opinions reveal skepticism among the Justices regarding the Supreme Court’s reasoning in Basic, Inc. v. Levinson8 and the premise of the “fraud-on-the-market” presumption. Although joining with the majority, Justice Alito authored a concurring opinion succinctly welcoming future “reconsideration of the Basic presumption” in light of “more recent evidence suggest[ing] that the presumption may rest on a faulty economic premise.”9 The dissenting justices were less restrained, with Justice Scalia commenting that the majority’s “holding does not merely accept what some consider the regrettable consequences of the four-Justice opinion in Basic; it expands those consequences from the arguably regrettable to the unquestionably disastrous,”10 and with Justice Thomas, joined by Justice Kennedy, noting that “[t]he Basic decision itself is questionable” and that the dissent’s views in Basic “remain valid today, but the Court has not been asked to revisit Basic’s fraud-on-the-market presumption.”11
II. The Potential Impact of Amgen Beyond Securities Class Actions
Amgen may extend beyond securities-fraud class actions, potentially impacting class certification more generally. Perhaps recognizing what some might view as the incongruity of its holding with the Supreme Court’s holding in 2011 in Wal-Mart Stores, Inc. v. Dukes,12 the majority opened its discussion by acknowledging Wal-Mart:
Although we have cautioned that a court’s class certification analysis must be “rigorous” and may “entail some overlap with the merits of the plaintiff’s underlying claim,” Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage. Merits questions may be considered to the extent—but only to the extent—that they are relevant to determining whether Rule 23 prerequisites for class certification are satisfied.13
As the dissenting justices noted, the majority’s holding in Amgen may signify a partial retreat from Wal-Mart.14 According to the dissent, the majority’s relaxation of the requirements for certification “transforms the predicate certification inquiry into a novel either-or inquiry occurring much later on the merits” such that “either (1) plaintiffs will prove materiality on the merits, thus demonstrating ex post that common questions predominated at certification, or (2) they will fail to prove materiality, at which point we learn ex post that certification was inappropriate because reliance was not, in fact, a common question.”15
1. Amgen Inc. v. Conn. Retirement Plans and Trust Funds, 568 U.S. ---, --- (2013).
2. In re Salomon Analyst Metromedia Litig., 544 F. 3d 474, 484-85, 486, n.9 (2d Cir. 2008) (holding that plaintiffs must prove materiality at the class-certification stage and that defendants may present rebuttal evidence).
3. Amgen, slip op. at 10.
4. Id., slip op. at 2-3, 10-12.
5. Id., slip op. at 10.
6. Id., slip op. at 20-22.
7. Id., slip op. at 21.
8. 485 U.S. 224 (1988).
9. Amgen, 568 U.S. at -- (Alito, J., concurring at p.1).
10. Id. (Scalia, J., dissenting at p.4).
11. Id. (Thomas, J., dissenting at pp. 9-10 & n.8).
12. 131 S.Ct. 2541
13. Amgen, slip op. at 9.
14. Id. (Scalia, J. dissenting at p.3).
15. Id. (Thomas, J., dissenting at pp. 9-10 & n.8).