Plausible Allegations – Not Proof – Of Materiality All That’s Required For Class Certification in Securities Fraud Suits, Says Supreme Court

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In its ruling on February 27, in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds (No. 11-1085), the first of several highly anticipated class action decisions that impact securities class action litigation going forward, the Supreme Court, in a 6-3 opinion written by Justice Ruth Bader Ginsburg, held that securities fraud plaintiffs need not prove that allegedly misleading statements are material in order to obtain class certification. Ruling in favor of plaintiff Connecticut Retirement Plans and Trust Funds, the Court affirmed the Ninth Circuit, which had held that materiality is a merits question that should not be considered when a court is deciding whether to certify a class. 660 F.3d 1170 (9th Cir. 2011).

In the underlying suit, Connecticut Retirement alleged that Amgen, a biotechnology company, violated federal securities laws when it misrepresented and omitted important safety information about Amgen products used to treat anemia. Before the district court, Amgen introduced evidence to support its contention that the alleged misrepresentations were not material and had not been relied upon. Without considering the proffered evidence, the district court rejected that position, granted the Connecticut Retirement’s motion for class certification, and concluded that the first instance in which such a “non-reliance” defense could be raised was in a summary judgment motion. The Ninth Circuit affirmed.

As framed by the Supreme Court, the key question in Amgen was whether proof of materiality is required to ensure that questions of law or fact common to the class will “predominate over any questions affecting only individual members” as the litigation progresses. The Court offered two reasons why such proof isn’t necessary. First, because materiality raises an objective question, it can be proved through evidence common to the class and therefore raises a common question for Rule 23(b)(3) purposes. Second, the Court saw no risk that a failure of proof on the common question of materiality would result in individual questions predominating because a plaintiff’s failure to present sufficient evidence of materiality—an essential element of a Rule 10b-5 claim—would end the case.

The Court’s ruling means that a securities fraud plaintiff is obligated to plausibly allege – but not to prove – materiality in order to certify a class under Federal Rule of Civil Procedure 23(b)(3). As the court put it, “Amgen…would have us put the cart before the horse.” The court went on to explain, “to gain certification under Rule 23(b)(3), [Amgen argues], Connecticut Retirement must first establish that it will win the fray. But the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the ‘metho[d]’ best suited to adjudication of the controversy ‘fairly and efficiently’.” 568 U.S. ____, _____ (2013) (slip op., at 3). The Court found that Amgen’s position would require mini-trials on the issue of materiality at the class certification stage, a preliminary form of adjudication unanticipated in the Federal Rules.

Amgen was one of several cases before the Court this term with the potential to reshape significantly the contours of Rule 23 certification. Other cases, including Comcast Corp. v. Behrend (No. 11-864), and Genesis HealthCare Corp. v. Symczyk (No. 11-1059), are yet to be decided. But after the Court’s recent decisions in Wal-Mart Corp. v. Dukes, 131 S.Ct. 2541 (2011) and AT&T Mobility v. Concepcion, 131 S.Ct. 1740 (2011) left legal commentators and news analysts wondering what, if any, future existed for the class action, the Amgen decision appears to predict a robust future for the class action. “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,’” Wal-Mart Stores, Inc. v. Dukes, 564 U.S. ___, ____ (2011) (slip op., at 10) (internal quotation marks omitted), Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage.” Amgen, 568 U.S. at ____ (slip op., at 9).