On November 5, 2012, the U.S. Supreme Court heard argument in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 1085, a securities class action, that concerned the ongoing question of what evidence is required at the class certification stage of a case as opposed to the merits phase of a case. (See our blog post from July 12, 2012.) The Court appeared divided on the issue.
The fraud-on-the-market theory allows a rebuttable presumption of class-wide reliance in a securities case dealing with stocks traded on an efficient market. The presumption comes from the Supreme Court’s seminal decision in Basic v. Levinson, 485 U.S. 224 (1988). Last year, in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court held that a plaintiff does not need to prove “loss causation” (i.e., that the defendant’s allegedly deceptive conduct caused plaintiff’s loss) at the class certification stage, to get the benefit of the fraud-on-the-marlet presumption of reliance.
In Amgen, the Ninth Circuit had held that proof of materiality of an alleged misrepresentation was not required for establishing the fraud-on-the-market presumption of reliance. Several of the Supreme Court justices appeared to agree at oral argument, seeing materiality as a merits issue. Justices Ginsberg, Kagan and Sotomayor, for example, reasoned that the only question on materiality at the class certification stage was whether it was an issue common to the class. As Justice Kagan put it: “… for materiality, the class wins or loses together. If it’s material, it’s material as to everybody. If it’s not material, it’s not material as to everybody… it seems to me that the Wal-Mart test, which is… when you rule on the issue, do you rule on each of the claims in one stroke? The answer to that is yes.”
Meanwhile, Justice Scalia tried to place the issue of materiality in perspective, pointing out that the fraud-on-the-market theory is a “shortcut” to getting a class certified: “You don’t have to prove it to get the class certified. You only have to prove it to get the benefit of the fraud-on-the-market theory.” And why should a plaintiff not have to show materiality at the class certification stage, then, particularly given the importance of class certification in pressuring a defendant to settle.
While Amgen is in the securities context, the case demonstrates the ongoing debate in the class context at large as to what is a merits versus a class certification issue. The Supreme Court made clear in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2552 n.6, that Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) does not preclude courts from considering the merits at the class certification stage of a case as necessary to determine if class treatment is appropriate. However, courts continue to struggle with the specifics of the divide between class certification and merits issues. The Amgen decision may provide some insight into this divide in the securities context, but defendants should anticipate argument on this issue in nearly all class certification battles to come.