In an important vindication of shareholder rights, the U.S. Supreme Court in February’s Amgen v. Connecticut Retirement Plans and Trust Funds, 568 U. S. ____ (2013), on a 6-3 vote, held that securities fraud plaintiffs have no obligation to prove that defendant’s misrepresentations and omissions were material at the class certification stage. Months later, Amgen is still the topic of conversation, although some question whether plaintiffs won a total victory.
Amgen involved fraud-on-the-market allegations. That doctrine (introduced by the Supreme Court in 1988 through Basic v. Levinson, 485 U.S. 224 (1988)) states that if a security trades in an efficient market, all public information is considered to be reflected in the price of the security. Securities fraud plaintiffs would never be able to proceed with a class action if they had to prove individual reliance, and thus under Basic, classwide reliance may be presumed, although this is a rebuttable presumption. Amgen, when sued for making misrepresentations about the safety of two of its flagship drugs to artificially inflate the price of its stock, sought to rebut the applicability of the Basic doctrine and defeat class certification by presenting evidence that market analysts were already aware that the Food and Drug Administration advisory committee would discuss possible safety concerns at its meeting in May 2004.
The Supreme Court stopped Amgen from raising this rebuttal argument at the class certification stage. The court ruled strictly on Rule 23(b)(3) predominance, rather than deciding the case on pro-defense policy arguments, as Amgen urged. Specifically, the court found that even if a defendant has definitive evidentiary rebuttals on materiality, whether the misrepresentations are material is still a predominating common question to the class. Thus, post-Amgen, the defense tactic of rebutting the Basic presumption of reliance — showing that the misrepresentations were immaterial and thus could not have been fraud on the market — can only be raised at trial or at summary judgment. Interestingly, the Amgen court reached this result despite having recently welcomed some overlap in consideration of merits issues in determining whether Rule 23 prerequisites were met, in Wal-Mart Stores v. Dukes, a 2011 decision.
Amgen draws a line between the showing of materiality and the showing of publicity and market efficiency in a securities fraud case. The latter two “predicates” of fraud-on-the-market theory must be shown at the class certification stage. The court rejected Amgen’s arguments that materiality should be shown at class certification, like these other predicates. Importantly, failure of proof as to publicity or market efficiency gives rise to the need for individualized proof of reliance, and thus the prospect of individual questions overwhelming common ones. Failure of proof as to materiality, on the other hand, dooms even the named plaintiff’s claims on the merits.
Should plaintiffs be celebrating? Or should the dissents and Justice Samuel Alito’s brief concurrence in Amgen give plaintiffs cause for worry? Alito suggested his willingness to reconsider the Basic doctrine if the implications of recent economic evidence were to undermine its rationale. But on this subject, Alito’s concurrence cites only the commentary of law professor Donald Langevoort, in Basic at Twenty: Rethinking Fraud on the Market. And the concerns of the Langevoort commentary — specifically that judicial insistence on market efficiency may be misguided — were expressly raised by Amgen’s briefing to the Supreme Court, and were discussed and rejected in the majority opinion. In its briefs, Amgen argued that modern economic research tends to show that differences in market efficiency can exist within a single market, given that some forms of information are easily digestible and other forms of information are difficult to understand. The majority opinion rejected Amgen’s arguments, although it did not help Amgen that it had conceded an efficient market for its securities in its answer to Connecticut Retirement’s complaint.
Amgen tells us that a current majority of the court certainly has no trouble with the Basic doctrine. Further, it can be remembered that the Amgen dissenters, as well as Alito, were all in the majority just two years ago in another 2011 decision, Erica P. John Fund v. Halliburton, 131 S.Ct. 2179 (2011), where a unanimous court applied Basic to conclude that plaintiffs did not have to establish loss causation at the class certification stage to trigger the presumption of reliance. Halliburton recognized Basic’s useful purpose in alleviating concerns about an unrealistic evidentiary burden on 10b-5 plaintiffs trading in an impersonal market. To actually overturn Basic — perish the thought — would require significant backtracking by these same justices.
The plaintiff-friendly momentum of Amgen was demonstrated as the U.S. Court of Appeals for the Fifth Circuit dealt with another appeal in the Halliburton case, in an opinion issued April 30. This most recent opinion of the Fifth Circuit concluded that defendants were not entitled to use evidence of “no market price impact” to rebut the fraud-on-the-market presumption of reliance at the class certification stage. Price-impact evidence — which actually is simply probative evidence of, among other things, materiality — did not bear on the Rule 23(b)(3) inquiry, after Amgen. The Fifth Circuit picked up on the Supreme Court’s important reminder: the class certification stage is for the inquiry “not whether the plaintiffs will fail or succeed, but whether they will fail or succeed together.”
If Basic is a judicially created rule, it is one that Congress has left untouched for 25 years, passing up opportunities to do so including the sweeping reforms of the Private Securities Litigation Reform Act in 1995. Even Justice Clarence Thomas’ dissent in Amgen recognized that Basic is “highly significant because it makes securities-fraud class actions possible.” If Thomas is correct, the fact that Basic was reaffirmed in Amgen (and the unanimous Halliburton) is a good result for everyone. Plaintiffs failing or succeeding together, through use of the class action device in securities fraud cases, provide a benefit to both sides — not just investors seeking to recover losses and with no other means for doing so, but also defendants who can assert successful defenses against an entire class of plaintiffs, winning global peace.
T. Brent Jordan is an associate with Bonnett, Fairbourn, Friedman & Balint. He lives in Philadelphia and has more than 15 years of experience representing plaintiffs in class action litigation.