The Supreme Court on Wednesday continued its extensive exploration of class action litigation, handing a rare victory to plaintiffs in one case while hearing arguments in another that could come down on the side of defendants.
In Amgen Inc. v. Connecticut Retirement Plans and Trust, the court, by a 6-3 vote, declined to adopt a rule that would have made it harder for plaintiffs to mount a class action in securities fraud cases. Amgen and business groups hoped the court would require plaintiffs to prove, before a class could be certified, that company misrepresentations materially affected the price of its stock. Investors sued Amgen, claiming its misrepresentations about two drugs it marketed to combat anemia had artificially inflated Amgen’s stock price.
Justice Ruth Bader Ginsburg, writing for the majority, said that proof of materiality is necessary for plaintiffs to prevail—but it did not have to be made before the class is certified. Amgen, Ginsburg said, "would have us put the cart before the horse."
She dismissed the "policy considerations" advanced by Amgen that not requiring proof before a class is certified would force defendants to settle with plaintiffs filing flimsy lawsuits—rather than incur the costs of litigation and "potentially ruinous" damages. Congress had considered that concern, she added, but had not disturbed the "fraud on the market" presumption that a stock’s price reflects all publicly available information about a company. The court endorsed that presumption in the 1988 ruling Basic Inc. v. Levinson.
In dissent, Justice Antonin Scalia said the majority had expanded the scope of Basic "from the arguably regrettable to the unquestionably disastrous." Justice Clarence Thomas wrote a separate dissent that was joined in part by Scalia and in full by Justice Anthony Kennedy.
The court’s ruling is "disappointing in the way that it treats materiality as solely a merits issue, rather than as a critical component of the presumption of reliance that is a prerequisite for class certification," said Mayer Brown partner Joshua Yount. "Taking materiality out of the class certification equation eases the path for plaintiffs to bring massive class actions that force defendants to settle weak claims of securities fraud." But Yount said the ruling did not preclude other avenues for defeating class certification.
Boris Feldman of Wilson Sonsini Goodrich & Rosati said the ruling was unsurprising, even though it was a rare affirmance of a ruling by the U.S. Court of Appeals for the NInth Circuit. But Feldman pointed to a concurrence by Justice Samuel Alito Jr. as well as the dissents to suggest that at least four justices—though not a majority—are looking for a case in which the court could overturn the "fraud-on-the-market" presumption under Basic.
The decision was a win for David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who argued for the plaintiffs against Seth Waxman of Wilmer Cutler Pickering Hale and Dorr, who represented Amgen.
Class actions—this time in the arbitration context—were also the focus of the court’s attention during an oral argument Wednesday. American Express v. Italian Colors Restaurant is a sequel to the 2011 case AT&T Mobility v. Concepcion in which the court said the Federal Arbitration Act pre-empted a California law that would have nullified arbitration agreements in consumer contracts that barred class actions. In the case before the court Wednesday, merchants sued AmEx, claiming that the arbitration agreements they sign with the company should not prevent a class action antitrust suit from going forward, when case-by-case arbitration would be so costly as to effectively prevent plaintiffs from being able to vindicate their rights.
The argument came immediately after the high-profile Voting Rights Act case of Shelby County v. Holder. Most spectators and reporters filed out of the court as that argument ended, and Chief Justice John Roberts Jr. told the advocates in the American Express case, "We’re still here." That was not exactly accurate, since Justice Sonia Sotomayor, who is recused in the case, had left the courtroom. She was on the U.S. Court of Appeals for the Second Circuit at earlier stages of the case.
Justices expressed concern that that by shunting complaints against American Express into arbitration, plaintiffs would abandon their claims, because the cost of market analyses and other economic evidence would far exceed the small damages they could recover. "The expense to win one of these cases is enormous," Ginsburg told AmEx lawyer Michael Kellogg of Kellogg, Huber, Hansen, Todd, Evans & Figel. "No one in his right mind will bring such a lawsuit to pay $300,000 [for an expert witness] to get $5,000."
Kellogg replied that it would be up to the arbitrator to devise "cost-effective" procedures, and plaintiffs could share costs of expert testimony, without class action status. Even if the costs are not shared, Kellogg added, "there is no guarantee in the law that every claim has a procedural path to its effective vindication."
Justice Elena Kagan also worried that if the sharing of economic evidence is not allowed, and class actions are barred, "once again we have a problem about completely frustrating the effect of the Sherman Act."
But few other justices appeared concerned about the consequences of discouraging class actions in antitrust cases. More than once, Justice Scalia reminded his colleagues that the Sherman Act was in effect for decades before class actions were permitted. During that period, he shrugged, "If your claim was so small that you can’t pay an expert, you as a practical matter don’t bring the suit."
Paul Clement of the Bancroft firm represented Italian Colors, an Oakland, Calif., restaurant that was one of the merchants suing American Express. He urged the court not to abandon its "vindication of rights" principle that arbitration should not be permitted if it leaves plaintiffs unable to pursue their claims.
But Justice Stephen Breyer appeared more concerned that plaintiffs might abuse that principle by intentionally advancing theories and claims that would be expensive to prove, to the point that would force their case into court, not arbitration. Scalia and Roberts also tried to poke holes in Clement’s arguments. "The more the court thought about expanding the ‘vindication of rights’ doctrine, the more nervous they seemed about the impact," said Mayer Brown partner Andrew Pincus after the argument. Pincus wrote a brief for the Chamber of Commerce on the side of American Express.
Clement’s appearance on behalf of plaintiffs was a rare role reversal for the former solicitor general, who usually advocates for business defendants. The switch may have accounted for a moment of confusion when Clement ended his time at the lectern, which had been punctuated by numerous questions. Roberts told Clement, "we’ll afford you some rebuttal time," something he had also done in the first argument of the day.
Clement looked perplexed at the offer, for good reason; under court rules, only the appellant gets rebuttal time, while appellees—like Clement, in this instance—get none. Soon, Roberts realized his error and said, "Oh, no we won’t." Amid laughter, Scalia told Clement, a former law clerk of his, "You should have said, ‘I accept,’ very quickly.’"
Tony Mauro can be contacted at firstname.lastname@example.org.