During the 2010-11 term, the U.S. Supreme Court decided four important class action appeals including the Court’s landmark Wal-Mart decision, which garnered the lion’s share of academic and media attention. See Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011). This fall the court returns to its interest in class litigation, hearing two appeals on November 5.
See Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, and Comcast Corp. v. Caroline Behrend, No. 11-864.
Both Amgen and Comcast present the court with unanswered questions concerning class certification procedure and present the court with fresh opportunities to tighten class certification requirements. Hence, class action practitioners will closely attend to these oral arguments and the court’s decisions.
THE AMGEN APPEAL
The Connecticut Retirement Plans and Trust Funds sued Amgen Inc. in a securities fraud class action for losses stemming from alleged misleading statements about the safety of two drugs, Aranesp and Epogen, in violation of the Securities Exchange Act of 1934 and Rule 10b-5 of the securities laws.
Amgen focuses on whether a plaintiff seeking class certification who invokes a rebuttable fraud-on-the-market presumption must provide evidence that alleged misstatements were material to the impact on a company’s stock price. The court also will consider whether a defendant must be afforded the opportunity to present rebuttal evidence to alleged misstatements during certification proceedings.
The plaintiff filed a securities fraud class action against Amgen in California federal court, alleging that the company artificially inflated the Amgen stock price through misrepresentations about the safety of two Amgen drugs. In seeking certification under Fed. R. Civ. P. 23(b)(3), the plaintiff invoked the “fraud-on-the-market” presumption endorsed in Basic v. Levinson, 485 U.S. 224 (1988). This presumption permits a court to presume reliance by all stock purchasers in an efficient market. The plaintiff presented expert testimony that Amgen stock was traded in an efficient market, but made no showing about the materiality of Amgen’s alleged misstatements.
Amgen opposed class certification, arguing that the plaintiff did not establish the materiality of the alleged misstatements and therefore were not entitled to the fraud-on-the-market presumption. Consequently, the court could not certify the class action under Rule 23(b)(3), which requires that common questions of law or fact predominate over individual questions. Amgen further contended that it ought to be entitled to rebut the presumption by showing that the market was privy to the truth and therefore no alleged misrepresentation had impact on its stock price.
The district court certified the class. In re Amgen Inc. Sec. Litig., 544 F. Supp. 2d 1009 (C.D. Calif. 2008). The court held that requiring proof of materiality did not concern Rule 23 requirements, but instead pertained to the merits of the securities fraud claims. The court indicated that class certification was not the appropriate time to consider whether a defendant’s statements were material to affect market price. The court indicated that inquiries into materiality and loss causation — elements of a Rule 10b-5 claim — are properly taken up in later proceedings.
The Ninth Circuit affirmed, holding that the plaintiffs did not need to prove materiality to use the fraud-on-the-market presumption. In re Amgen Inc. Sec. Litig., 660 F.3d 1170 (9th Cir. 2012). The court held that a plaintiff did not need to prove materiality because, whether any alleged misstatements were material or immaterial, the class claims stood or fell together and therefore materiality was a common class question affecting all investors alike.
Further, the Ninth Circuit held that in adopting the Basic presumption, the Supreme Court did not require proof of materiality as a precondition for class certification. The Ninth Circuit agreed that materiality was an element of a security fraud claim that courts should address at summary judgment or trial. Finally, the court upheld the district court’s refusal to consider Amgen’s rebuttal evidence, reasoning that this defense was just a method of refuting the materiality of the alleged misrepresentations.
The Amgen appeal follows one year after the Supreme Court’s decision in Erica P. John Fund Inc. v. Halliburton, 131 S. Ct. 2179 (2011), in which a defendant similarly asked the court to tighten the fraud-on-the-market presumption. Halliburton had contended that a plaintiff must prove “loss causation” as a predicate to application of the Basic fraud-on-the-market presumption.
In a unanimous opinion, the court rejected Halliburton’s suggestion to tighten a plaintiff’s pleading burden at class certification. The court answered the simple question whether a plaintiff in a Rule 10b-5 securities class action must prove loss causation to obtain class certification with an unqualified “No.”
The Supreme Court rejected appellate decisions requiring a plaintiff to prove loss causation to apply the presumption. The court noted that loss causation addressed something different than whether an investor relied on a misrepresentation when buying or selling a stock. The court indicated that a rule requiring proof of loss causation as a precondition to class certification contravened Basic‘s fundamental premise: that an investor presumptively relies on a misrepresentation so long as it is reflected in the market price. In addition, the term “loss causation” did not appear in the Basic decision.
However, the court limited its opinion by not addressing any other question about the Basic decision, its presumption or how or when the Basic presumption might be rebutted.
THE COMCAST APPEAL
Philadelphia cable subscribers sued Comcast Corp. in an antitrust class action alleging that Comcast violated §§ 1 and 2 of the Sherman Act by monopolizing and attempting to monopolize the Philadelphia cable market, which artificially inflated prices. See Sherman Act, 15 U.S.C. 1-2. The class sought certification under Fed. R. Civ. P. 23(b)(3).
The Comcast appeal potentially raises an important question left open by the Court’s Wal-Mart decision: the appropriate judicial role in evaluating expert-witness testimony at class certification. However, review is muddied by the appeal’s unusual posture. The plaintiffs contend that Comcast did not properly raise or preserve the issue, and the parties have settled. Thus, the plaintiffs urge the court to dismiss the case as “improvidently granted.”
In 2007, the district court certified the class. Shortly afterwards the Third Circuit delineated comprehensive standards to govern rigorous analysis of class certification proceedings, including disputed expert-witness testimony. In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2008). On reconsideration, the court conducted a four-day evidentiary hearing in which the parties presented economic experts testifying on classwide damages.
During the hearing and subsequent appellate proceedings, Comcast did not object to the experts’ admissibility under federal evidence rules or Daubert standards for expert-witness testimony. See Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 469 (1993). Instead, Comcast argued that the plaintiffs had not proved by a preponderance of the evidence that the Rule 23(b)(3) predominance requirement was satisfied with regard to antitrust impact or the methodology for classwide damages.
The court recertified the class. See 264 F.R.D. 150 (E.D. Pa. 2010). A divided Third Circuit panel held that the trial court properly applied Hydrogen Peroxide and found that plaintiffs could prove antitrust impact using common evidence. The panel disagreed as to whether the plaintiffs carried their burden to show that their alleged damages were capable of classwide measurement using common proof. However, the majority suggested that Comcast’s attacks on the merits of the expert’s methodology had no place in the class certification inquiry.
Instead, the court examined only whether the proposed model “could evolve to become admissible evidence,” and accepted the plaintiffs’ assurances that it could. The court noted that Wal-Mart “require[d] a court to evaluate whether an expert is presenting a model which could evolve to become admissible evidence, and not requiring a district court to determine if a model is perfect at the certification stage.”
While Comcast’s petition for certiorari was pending, the parties settled. Two weeks later the Supreme Court granted review, and Comcast informed the plaintiffs that Comcast would not finalize the settlement.
The Comcast appeal raises several issues: (1) whether the court should resolve a contested issue when the parties settled their underlying dispute; (2) whether Comcast properly preserved the issue of the court’s role in resolving the admissibility of expert-witness testimony; and (3) whether, if the court agrees to hear the appeal, the trial court appropriately resolved the admissibility of expert-witness testimony on classwide damages at class certification.
If the Supreme Court determines either that the settlement moots the appeal or that Comcast failed to properly preserve the evidentiary issue, then it will dismiss the writ as improvidently granted and will not reach the unresolved Wal-Mart issue.
Linda S. Mullenix holds the Morris and Rita Atlas Chair in Advocacy at the University of Texas School of Law. She is the author of Leading Cases in Civil Procedure (2d ed. 2012) and Mass Tort Litigation (2d ed. 2008).