Resolving a split among several circuits, the U.S. Supreme Court in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 133 S.Ct. 1184 (2013), held that plaintiffs are not required to demonstrate that misrepresentations are material in order to obtain class certification.
Information has been defined as material if it would alter the total mix of information in the marketplace (Id. at 1203) or be significant to a reasonable investor. Id. at 1209, n.3 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). The Supreme Court affirmed that materiality is an element of a claim under Section 10(b) and of the Securities Exchange Act of 1934 and Rule 10b-5. Id. at 1191-92. The Court also confirmed that materiality is incorporated in the fraud on the market theory—that in efficient markets, security prices reflect all material, publically available information—the theory under which Amgen had been brought. Id. at 1192-93. But because materiality was an issue common to all members of the class, the Court held it need only be plausibly alleged—not proved—to establish class certification. Id. at 1191.
Amgen arose out of a putative class action brought by plaintiff Connecticut Retirement Plans against Amgen and its officers under section 10(b) of the Exchange Act. Plaintiff claimed Amgen misled investors about the safety, efficacy, and marketing of two of its flagship drugs, causing investors’ losses when the truth about these drugs came to light. Plaintiff moved for class certification. Amgen asserted in its opposition that because plaintiff was invoking the fraud on the market theory, plaintiff must prove the materiality of the alleged misrepresentations to qualify for class-wide presumption of reliance and to avoid the predominance of individual issues. Amgen submitted evidence to the district court purporting to establish that the alleged misstatements could not have altered the total mix of publicly available information. The district court rejected this effort and the Ninth Circuit affirmed, contrary to some decisions in other circuits. Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 660 F.3d 1170 (9th Cir. 2011); see also Quinn Emanuel Business Litigation Report, Securities Litigation Update (Sept. 2012) at 8-10.
The Supreme Court agreed with the Ninth Circuit. Writing for the majority, Justice Ginsburg distilled the issue in the case into one basic question: “whether proof of materiality is needed to ensure that the questions of law or fact common to the class ‘predominate over any questions affecting only individual members,’” a requirement for class certification under Federal Rule of Civil Procedure 23(b)(3). Amgen, 133 S.Ct. at 1191. The Court answered no for two reasons. First, because materiality is judged according to an objective standard, it can be provided through evidence common to the class. Id. (citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 445). Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Amgen, 133 S.Ct. at 1191. Instead, such a failure would end the case entirely because materiality is an essential element of a securities fraud claim. Id. Therefore, according to the Court, securities fraud classes are entirely cohesive on the issue of materiality: they will prevail or fall in unison. Id. To require proof of materiality precertification, the Court reasoned, would put the “cart before the horse” by requiring class plaintiffs to first establish that they “will win the fray.” Id. Such a requirement would defeat the whole purpose of a Rule 23(b)(3) certification ruling, which is not to adjudicate the case—it is to select the “method” best suited to adjudication of the controversy “fairly and efficiently.” Id. The Court also rejected Amgen’s policy argument that a failure to require proof of materiality precertification would increase settlement costs for defendants, making it difficult to defend even cases with little merit. The Court noted that Congress can pass laws to address these policy considerations, and indeed has done so by enacting the PSLRA. Id. at 1200.
In declining to impose a barrier to class certification in securities fraud litigation, the Court in Amgen adopted a pragmatic approach. Subjecting putative class plaintiffs to preliminary evidentiary hearings at the pleading stage would impose an unconventional burden on plaintiffs and courts alike, and confining such hearings solely to materiality would be difficult. But the Court in Amgen also sidestepped several thorny questions vexing securities fraud litigants. In a concurring opinion, for example, Justice Alito suggested that it might be time for the Court to reconsider the validity of the fraud on the market theory, based on new research tending to show certain inefficiencies in the market. Id. at 1204. The majority in Amgen, however, declined to address this issue. Id. at 1197. Nor did the Court attempt to clarify and distinguish the concepts of materiality, reliance, and causation—concepts which are difficult to define and which tend to overlap in fraud on the market cases. While certainly an important decision in the area of securities fraud class action litigation, Amgen left unresolved fundamental issues likely to resurface in other fraud on the market cases.