On Wednesday, the Supreme Court issued its decision in Amgen, Inc. v. Connecticut Retirement Plans. In a 6-3 decision authored by Justice Ginsburg, the Supreme Court handed a win to plaintiffs in securities fraud class actions, holding that plaintiffs do not have to prove materiality at the class certification stage. The decision marks a departure from some of the Court’s more recent class action rulings, which seemed to narrow class action litigation. Justices Scalia, Thomas and Kennedy dissented.
In their complaint, plaintiff shareholders alleged that Amgen and its executives misled investors about the safety and efficacy of two anemia drugs, thereby violating Section 10(b) and Rule 10b-5. During class certification, Amgen argued that Rule 23(b)(3) required that plaintiffs needed to prove materiality in order to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members.” Both the district court and the Ninth Circuit Court of Appeals rejected Amgen’s argument. The Supreme Court followed suit, affirming the Court of Appeal’s judgment and holding that proof of materiality is not a prerequisite to class certification in securities fraud cases.
The Court noted that Rule 23(b)(3) “requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor the class.” For two reasons, the Court held, plaintiffs need not prove materiality in order to ensure that questions of law or fact common to the class will predominate. First, because materiality is judged according to an objective standard, it can be proved through evidence common to the class. Thus, materiality is a “common question for purposes of Rule 23(b)(3).” Second, a failure of proof on the common question of materiality poses no risk that individual questions will predominate. To the contrary, the Court reasoned, because materiality is an essential element of a 10b-5 claim, a failure of proof on this claim will “end the case for one and all.” Ultimately, the Court determined that to make the plaintiffs prove materiality at the certification stage would effectively be “putting the cart before the horse.”
In arriving at its decision, the Court rejected Amgen’s argument that just as plaintiffs must prove that Amgen’s stock traded in an efficient market and that the stock trades at issue “took place between the time the misrepresentation was made and the time the truth was revealed” in order to take advantage of the fraud-on-the-market theory and win class certification, so too must plaintiffs prove materiality at the class certification stage. The Court did not dispute that both the efficient market and trade timing elements must be proved before a plaintiff can win certification, but held that those elements go to Rule 23’s requirements of typicality and adequacy of representation, not to the Rule 23(b)(3) predominance inquiry.
The Court also rejected Amgen’s public policy argument that an order granting class certification without requiring proof of materiality pressures a defendant “to settle rather than incur the costs of defending a class action and run[ning] the risk of potential ruinous liability.” Instead, the Court stated that Congress has already addressed this precise concern, primarily through the passage of the Private Securities Litigation Reform Act of 1995, and it was not the judiciary’s place “to make further adjustments.”