Issues
1. To establish a class of investors in a lawsuit alleging securities fraud, must a plaintiff show that the defendant’s allegedly untrue statements materially affected the security’s price?
2. Additionally, to prevent a class from being established, may a defendant present evidence to refute that the alleged fraud materially affected the security’s price?
In 2004, biotechnology company Amgen Inc. was selling securities of two drugs that stimulate the production of red blood cells. After the Food and Drug Administration held an advisory committee meeting in May 2004 about the safety of those drugs, the market prices of their corresponding securities dropped. On behalf of the shareowners who suffered, Connecticut Retirement Plans and Trust Funds sought to certify the class of investors who held stock in Amgen at that time to sue Amgen for fraud regarding any misrepresentations of the drugs. Amgen argues that this kind of class action requires a plaintiff to show material reliance of the class of investors as part of the question as to whether a class exists. In contrast, Connecticut Retirement argues that during this class certification stage a plaintiff need not go beyond demonstrating that investors share a common question of reliance as a class rather than as individuals. If Amgen wins, then plaintiffs of securities fraud may face an unwieldy burden of proof at an early stage in litigation. If Connecticut Retirement wins, then defendants of securities fraud may face unfair pressures to settle cases.
Questions as Framed for the Court by the Parties
1. Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory.
2. Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.
Facts
Respondent Connecticut Retirement Plans and Trust Funds’ (“Connecticut Retirement”) purchased securities offered by petitioner Amgen, Inc. (“Amgen”), a biotechnology company that manufactures pharmaceutical drugs. The Connecticut State Treasurer supervises the investments of Connecticut Retirement, which funds various academic programs and retirement plans for public employees. The securities in question here involve two of Amgen’s drugs, Aranesp and Epogen, which promote the production of red blood cells and so are prescribed patients with anemia as an alternative to blood transfusions. (Those with anemia do not have enough red blood cells, which are used to carry oxygen throughout the body.)
Connecticut Retirement filed a lawsuit against Amgen in the Central District of California, alleging violations of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Connecticut Retirement alleged that Amgen represented that these two drugs were safe despite knowing of evidence that these drugs could be very dangerous—possibly promoting tumor growth in some cancer patients—even when used in accordance with the drugs’ labels. Connecticut Retirement also alleged that Amgen made further misrepresentations with its marketing materials by encouraging use of the drugs beyond the uses described on their labels, while also overstating the safety of the product on the labels. Additionally, Connecticut Retirement claimed that because the drugs were held out to be safe when it invested in Amgen, Amgen’s stock was worth more at that time; however, when Amgen later disclosed the potentially dangerous effects of the drugs, the value of the stock plummeted. As a result of this, Connecticut Retirement alleged that investors suffered due to Amgen’s misrepresentations of the drugs.
Connecticut Retirement moved for certification as a class action, in which Connecticut Retirement would represent others similarly harmed by Amgen’s actions. The district court found that a class action would be appropriate here because the issues were common to all members of the class and also refused to allow Amgen the chance to rebut evidence of materiality at the class certification hearing. When Amgen appealed this decision, the U.S. Ninth Circuit Court of Appeals affirmed the class certification as well as the district court’s refusal, stating that Connecticut Retirement needed to allege only that a class of investors plausibly relied to meet the requirements of filing a class action lawsuit.
The Supreme Court granted Amgen’s petition for writ of certiorari on June 12, 2012.
Analysis
Petitioner Amgen argues that to sue in a class action under §10b-5 of the Securities Exchange Act of 1934 (1934 Act), which prohibits “untrue statements of material fact in connection with the purchase or sale of any security,” plaintiffs must show that the allegedly untrue statements are “material,” meaning that the statements actually affected the market price of the security. Additionally, Amgen argues that not only is evidence of materiality necessary to establish that the potential members of the class commonly relied on the allegedly untrue statements but also a defendant must have a chance to rebut that claim before a court recognizes the class of plaintiffs. Conversely, Respondent Connecticut Retirement Plans and Trust Funds (Connecticut Retirement) argues that materiality is unnecessary to show that every single potential class member relied on the allegedly untrue statements. Furthermore, Connecticut Retirement argues that evidence of materiality is not only unnecessary to certify a class but also inappropriately transforms the requirement of class certification from showing the existence of shared facts to proving those facts.
Proof of Materiality to Establish a Class of Plaintiffs
Amgen argues that proof of materiality is essential for meeting the requirements for suing as a class under the 1934 Act. According to Amgen, a single plaintiff suing under the 1934 Act has the burden of proving that the plaintiff knew of the defendant’s allegedly untrue statements and used that knowledge in deciding to buy a security from the defendant. Amgen notes that in a class action lawsuit, offering evidence of knowledge for every individual potential class member would depart from the requirements for bringing a class action lawsuit under Rule 23(b)(3) of the Federal Rules of Civil Procedure. According to Amgen, the U.S. Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988), resolved this tension between the 1934 Act and Rule 23 by allowing a presumption of reliance if the plaintiffs suing in a class action show that all the investors trading in that market for the security in question indirectly relied on the allegedly untrue statements. Amgen notes that successfully applying this fraud-on-the-market theory depends on showing the materiality of the allegedly untrue statements because immaterial information would not have affected the market at all. Thus, Amgen asserts that evidence of materiality at the class certification stage is essential for determining whether a class of plaintiffs relied on a distorted market price.
In contrast, respondent Connecticut Retirement argues that establishing a group or class of plaintiffs does not require proof of materiality. According to Connecticut Retirement, pursuing a class action under Rule 23 of the Federal Rules of Civil Procedure requires producing evidence that a proposed class of plaintiffs share common questions more than individual ones. Connecticut Retirement argues that although questions of materiality may affect the success of the claim at trial, requiring a class of plaintiffs to show material reliance on untrue statements would collapse the stages of litigation by considering the weight of evidence to decide the claim before considering whether common questions predominate over individual ones. Additionally, Connecticut Retirement asserts that any inquiry into materiality at the class certification stage must be in terms of how the class relied rather than whether each member relied at all. Moreover, Connecticut Retirement argues that the fraud-on-the-market theory does not transform materiality into a common question for a class of plaintiffs. Connecticut Retirement asserts that class certification stage examines the commonality of questions and not whether the entire class should lose the case.
Proof of Materiality to Establish the Market
Amgen argues that proof of materiality is necessary at the class certification stage because this evidence also provides essential information about the market itself. According to Amgen, recent economic research of markets shows that courts have been applying misleading tests for whether market efficiency exists to the extent sufficient for linking a statement about a security with the price for that security. Amgen notes that because market efficiency may exist for some pieces of information but not others, a court should consider proof of materiality for the purposes of defining and understanding the market within which a potential class of plaintiffs made transactions. Thus, Amgen argues that a court must decide on the effect of material information on efficiency as part of its determination of class certification.
Opposing the characterization of Amgen’s analysis of class certification, Connecticut Retirement argues that proof of market efficiency meets the requirements of Rule 23 without any showing of materiality. Connecticut Retirement claims that because the class certification stage requires plaintiffs to show a common question of reliance and not actual proof of reliance, showing that the market is efficient sufficiently answers whether a class of plaintiffs shares the issue of reliance on the defendant’s allegedly untrue statements. Additionally, Connecticut Retirement notes that proof of materiality would confuse the questions of whether a statement was true and whether a statement affected the information available to investors in that market. Furthermore, Connecticut Retirement argues that because Amgen conceded that market efficiency exists here, the Supreme Court should refuse to consider the issue as though it had been in dispute all along.
Rebutting Reliance at Class-Certification Stage of Litigation
Amgen argues that before any trial may begin, when a court is determining whether a class of plaintiffs exists, a defendant of securities fraud should have the opportunity to refute evidence of misstatements or omissions that may have affected the stock price. According to Amgen, if a defendant successfully shows that a statement did not affect the stock price, then there is no common reliance that a class of plaintiffs shared. Furthermore, preventing defendants from rebutting evidence of reliance at the class certification stage allows classes of plaintiffs to pursue lawsuits that are doomed to fail at trial. Amgen notes that the requirements for class certifications under Rule 23 of the Federal Rules of Civil Procedure are so rigorous that a court might meet them only after both sides of the litigation have a chance to put forth and challenge evidence pertaining to certification.
In contrast, Connecticut Retirement argues that the certification stage permits evidence that rebuts the plaintiffs’ claims only if the evidence demonstrates that individual issues prevail over questions that the whole class shares. According to Connecticut Retirement, deciding whether information is material does not also answer whether the questions of individual plaintiffs outweigh the questions of class concern. Instead of challenging the presence of a class, Connecticut Retirement argues, evidence that rebuts materiality would undermine the claim in its factual allegations. Furthermore, evidence pertaining to the truth of statements would not concern whether a class action should be certified because it focuses instead on the merits or facts of the claim itself and not whether the plaintiffs share a common question.
Discussion
As the U.S. Ninth Circuit Court of Appeals noted, in order to maintain a cause of action for securities fraud, a plaintiff must establish that the defendant made untrue statements on which the plaintiff relied; in a class action lawsuit, the plaintiff must show that the question of reliance is shared by an entire group or class of investors. Petitioner Amgen argues that to show a class of investors exists, a plaintiff must show that the entire group materially relied on the defendant’s allegedly untrue statements. In contrast, respondent Connecticut Retirement Plans and Trust Funds (Connecticut Retirement) argues that to show a class exists, a plaintiff need not go beyond showing that the question of reliance is common to the group. In this case, each party argues that a decision against them would cause a waste of judicial resources and a variety of other injustices.
Wasting Judicial Resources
Amgen notes that if the court waits to decide on the question as to whether a class of investors materially relied on the defendant’s statements then a court risks spending judicial resources on cases that will ultimately prove unsuccessful. In support of Amgen, the Securities Industry and Financial Markets Association (“SIFMA”) contends that a full examination of materiality to determine whether a class exists would facilitate the smooth management of justice by preventing meritless claims from proceeding. According to SIFMA, proving materiality would not be overly burdensome at this early stage of litigation, because the requisite information would be publicly available and the inquiry is objective—what would a reasonable investor, and not all the actual investors, have known?
In support of Connecticut Retirement, the National Association of Shareholder and Consumer Attorneys (“NASCAT”) argues that addressing materiality at class certification would only serve to drag out securities fraud litigation by piling another complex issue onto the already lengthy proceedings. According to NASCAT, materiality is a complicated and context-specific matter, often tangled with other issues and requiring intensive discovery, making it inappropriate to handle at the class certification stage. Similarly, Public Citizen, Inc. notes that requiring materiality for certifying a class would hinder the smooth management of justice by demanding the resolution of a question of fact before engaging in discovery for the other merits of the case.
Furtherance of Justice
Amgen cautions that allowing a class of investors to be certified without showing material reliance would loosen the requirements for class certification at the expense of businesses. Amgen claims that, because defendants of securities fraud potentially face substantial liabilities and costly litigation, they tend to favor settling cases even if they might win in litigation. Consequently, Amgen claims that evaluating materiality prior to class certification is necessary to protect defendants from abusive pressure to settle by plaintiffs without merit to their claims. In support of petitioner, the Chamber of Commerce of the United States of America (Chamber of Commerce) notes that the effect of coercive settlements may be felt hardest by smaller companies whose stock value tends to vary, making them vulnerable and less able to assume the costs of litigation than a more stable business. Moreover, the Washington Legal Foundation notes that the costs for businesses extend beyond the courtroom: because high-level executives generally must become involved in lawsuits, their absence may disrupt and so harm the day-to-day operations of their businesses.
Connecticut Retirement argues that adding hurdles to class certification will inhibit the enforcement of securities laws, as private lawsuits drive regulation of the securities industry. Connecticut Retirement claims that, because the damages caused for any one individual are generally too small to bother pursuing, a class action lawsuit is a necessary tool to ensure that legitimate claims are not surrendered. In support of respondent, AARP notes that small investors would be most hurt by the additional barriers to class certification, as individuals likely would not have the resources necessary to make a full showing of materiality and therefore would not pursue class actions. NASCAT adds that, beyond ensuring compliance with securities laws, securities class actions also encourage better corporate governance.
Conclusion
This case has significant implications regarding the requirements for suing as a class of plaintiffs against defendants of securities fraud. Amgen argues that establishing that a class of plaintiffs materially relied on the allegedly untrue statements is essential for deciding whether a class of plaintiffs exists at all. In contrast, Connecticut Retirement asserts that materiality is a factual investigation that demands extensive discovery beyond the needs for showing that common questions predominate over individual ones. A holding for Amgen might dramatically constrict the ability of people to sue sellers of securities, whereas a holding for Connecticut Retirement might allow abusive negotiation tactics by plaintiff attorneys.
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Additional Resources
- Richard Levick, Forbes: Amgen: A Supreme Court Case With Immense Business Impact (Oct. 4, 2012)
- Swati S. Desai, ABA Litigation News: Circuits Split on Materiality in Securities Class Actions (Feb. 6, 2012)
- Britt K. Latham and M. Jason Hale: The Supreme Court’s review of the Amgen decision may cause it to reconsider the 'Fraud-On-The-Market' presumption (Aug. 13, 2012)