To best understand this decision, we need to look at the rules concerning both class actions and securities:
According to Rule 23(b)(3), a class action may be maintained if the court finds that questions of law or fact common to class members “predominate” over questions affecting individual members. This is known as the “predominance requirement.”
§10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 require plaintiffs in securities-fraud actions to prove reliance on a material misrepresentation or omission made by a defendant.
Amgen argued that in order to satisfy the predominance requirement, plaintiffs are required to prove (1) defendant made misrepresentations or omissions; and (2) plaintiffs actually relied on the alleged material misrepresentations, before class certification. Connecticut Retirement argued that during the class certification stage, plaintiffs are only required to demonstrate that investors share a common question of reliance as a class. In a 6-3 decision authored by Justice Ginsberg, the Supreme Court sided with plaintiffs, holding that plaintiffs in securities fraud cases need not prove materiality at the class certification stage.
The majority reasoned that under a fraud-on-the-market theory, reliance can be proven on a class-wide basis. Because material reliance can be resolved simultaneously for the entire class, it need not be proven at the class certification stage. Requiring plaintiffs to establish material misrepresentation at this early stage would be akin to requiring plaintiffs to establish that they will win on the merits. Such a requirement at a certification ruling would be to “put the cart before the horse.” Materiality will be resolved later on the merits.
In his dissent, Justice Thomas identifies the flaw in the majority’s ruling: “The Court’s opinion depends on the following assumption: Plaintiffs will either (1) establish materiality at the merits stage, in which case class certification was proper because reliance turned out to be a common question, or (2) fail to establish materiality, in which case the claim would fail on the merits”. This second scenario would mean reliance was never a common question and the class should not have been certified in the first place. Plaintiffs should not be excused of their Rule 23 burden to show at certification that questions of reliance are common merely because they might lose later on the merits element of materiality. Justice Thomas claims that the Court “put the cart before the horse” by deferring class certification issues until trial on the merits.
While it is clear that Amgen is an important decision for securities fraud cases, we expect it to impact future class actions in general. This decision is sure to be cited by plaintiffs arguing for the reduction of elements required to be resolved at the class certification phase. As Amgen appears to blur the line between class certification and merits elements, could other class certification issues be pushed off until trial?