Originally Published in Daily Business Review - April 26, 2013.
The U.S. Supreme Court's most recent opinion opinion in the arena of class action certification not only alters the landscape of class certification in securities fraud class actions, it also raises major questions about the future of class certification for claims of any nature. Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds has the potential to dramatically lower the bar the putative class plaintiff must reach to obtain class certification.
Securities fraud class actions are brought under SEC Rule 10b-5, which prohibits fraud and deceit in connection with the purchase or sale of securities.
Amgen revisits the fraud-on-the-market theory adopted by the Supreme Court in Basic, Inc. v. Levinson. In Basic, the court adopted a rebuttable presumption that for class certification common questions exist regarding the reliance element — reliance on a material representation or omission— of a 10b-5 claim, where the plaintiff can prove that there was a public, material misrepresentation regarding a stock trading on an efficient market. The theory behind the fraud-on-the-market theory is that without allowing an assumption that a plaintiff relied on the price of such a stock, individual questions of reliance would preclude class certification in almost every case.
Over the years, the federal circuit courts have split on the question of whether a plaintiff must prove at the class-certification stage that the misstatement or omission at issue was material. If a statement or omission is not material, then it does not affect the stock's price. And at this stage, if a statement is not being material, it would not matter whether plaintiffs relied on the stock price, because the price would not be affected by the statement. The fraud-on-the-market theory would not apply, and plaintiffs would have to prove individual reliance.
But, more significantly, if a statement or omission is not material, it cannot be the causation of any losses. The case would then fail on the merits of the 10b-5 claim, for which loss causation is an element of such a claim. In effect, the circuit courts that require materiality must be proven at the class-certification stage — the U.S. Courts of Appeal for the First, Second, and Fifth Circuits — require that plaintiffs prove the merits of one element of their cause of action. This is more akin to a summary judgment issue than a class certification question.
Amgen settled the split by holding that the plaintiff does not need to prove materiality at the class-certification stage. The basic premise behind the ruling is that materiality must be a common question: The same statement that applies to the class either did or didn't affect the stock price. So, the holding goes, questions of reliance must also be a common question.
The Eleventh Circuit has not ruled one way or the other regarding whether materiality must be proven at the class-certification stage. Therefore, the Amgen opinion provides clarity for cases in this jurisdiction.
Under Amgen, class certification has become more easily obtainable for putative securities fraud classes. As Amgen reminded, the elements of a 10b-5 claim are a material omission or misrepresentation, scienter, a connection to a purchase or sale of security, reliance on that material omission or misrepresentation, damages and loss causation. So, putative class plaintiffs will argue that, so long as the class is defined as any person who purchased or sold the security at issue within the relevant time frame — generally the time between the misrepresentation or omission and the correction causing a price decline — every element is a common question. Of course, it is not that simple in every case and defendants still have all the same defenses to certification they previously had — except materiality.
Generally, materiality was one of the major hurdles a securities fraud class faced at the class-certification stage, at least in jurisdictions requiring that materiality be proved at that stage. Proving materiality requires discovery and economic experts, an expensive albeit inevitable burden for a plaintiff. With materiality out of the picture, class certification of securities fraud cases likely will become less burdensome for plaintiffs. This may lead to more frequent securities fraud class actions being filed, although plaintiffs still have the stringent standards of the Private Securities Litigation Reform Act to contend with.
Amgen's effect on securities fraud class actions is undeniable. But, its effect on class actions generally is less certain. On the one hand, Amgen deals specifically with the judicially created fraud-on-the-market theory espoused in Basic. And, that theory exists specifically to ease the burden on putative securities fraud classes, by allowing them to avoid the inevitable individual issues of the reliance element of a 10b-5 claim. Because the decision defines the showing a class must make to meet the fraud-on-the-market rule, Amgen most likely is limited in application to that theory.
But Amgen might signal a sea change for class certification in general. Class action practitioners should be prepared to argue the effects of Amgen in all class certification motions until its effects are clarified by the courts. For the time being, this is an issue that should be on the radar of all class action practitioners.