In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, 568 U.S. ___ (2013), decided on February 27, 2013, the Supreme Court of the United States affirmed the Ninth Circuit’s ruling that, in a case alleging violations of Section 10(b) of the Securities Exchange Act of 1934, (1) the plaintiff need not prove materiality in order to obtain class certification under a fraud-on-the-market theory, and (2) the defendant cannot avoid class certification by adducing evidence rebutting materiality.
In so holding, the Court resolved a three-way circuit split. In Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010), the Seventh Circuit held that a plaintiff need not prove materiality on class certification, and that a defendant may not defeat certification by rebutting materiality. In contrast, the Second Circuit in In re Salomon Analyst Metromedia Litigation, 544 F.3d 474 (2d Cir. 2010), the Second Circuit reached the opposite conclusion, holding that a plaintiff must prove materiality on class certification, and that a defendant may defeat class certification by rebutting the fraud-on-the-market presumption. Finally, in In re DVI, Inc. Securities Litigation, 639 F.3d 623 (3d Cir. 2011), the Third Circuit struck a middle ground, holding that a plaintiff need not prove materiality on class certification, but that a defendant may defeat class certification by rebutting materiality.
In an opinion authored by Justice Ginsburg, the Court rejected Amgen’s argument that plaintiffs should be required to prove materiality before a class may be certified. Because materiality is objective, the Court reasoned, the question of materiality is necessarily common to all class members and therefore does not give rise to individual questions precluding class certification. This is true, the Court held, regardless of how the question of materiality is ultimately resolved; Rule 23(b)(3) only requires that common questions of fact or law predominate—it does not require that those common questions actually be answered.
The Court also rejected Amgen’s plea that defendants be able to rebut the fraud-on-the-market presumption at the class certification stage with evidence showing a lack of materiality. The Court held that, although the fraud-on-the-market presumption will collapse in the face of evidence rebutting materiality, such evidence must be adduced on summary judgment or at trial.
The Amgen ruling will have wide-ranging implications for class action securities cases. By allowing plaintiffs to obtain class certification without proof of materiality, Amgen may encourage plaintiffs to bring specious, artfully pleaded lawsuits based on statements of dubious or negligible materiality. And by preventing defendants from adducing evidence to rebut materiality at the class certification stage, Amgen will expose defendants to greater defense costs and litigation risks in cases that otherwise could have been disposed of at the class certification stage.