The U.S. Supreme Court has issued a decision in the Amgen case holding that proof of materiality is not a prerequisite to certification of a securities fraud class action. It is a 6-3 decision authored by Justice Ginsburg, with dissents from Justice Thomas (main) and Justice Scalia.
Under the fraud-on-the-market presumption, reliance by investors on a misrepresentation is presumed if the misrepresentation is material and the company’s shares were traded on an efficient market that would have incorporated the information into the stock price. At issue in Amgen was whether a class action plaintiff, to take advantage of this presumption for purposes of class certification, is required to prove that the misrepresentation was material. As foreshadowed by the oral argument, the key issue for the Court was whether the fact that materiality is both a predicate for the use of the fraud-on-the-market presumption and a substantive element of the securities fraud claim means that it should be treated differently than the other fraud-on-the-market predicates (market efficiency, misrepresentation was public, transaction took place between time when misrepresentation was made and truth was revealed).
The majority opinion held that proof of materiality is not needed to ensure, as required by FRCP 23(b), that the questions of law or fact common to the class will predominate over any questions affecting only individual members. First, materiality is determined using an objective test and is therefore a common question as to every class member. Second, if the plaintiff were unable to establish materiality at summary judgment or trial, that failure would end the case for every class member leaving no individual reliance questions. This result is in contrast to the other fraud-on-the-market predicates – e.g., market efficiency – where a failure to prove that the market was efficient would still leave an individual plaintiff capable of establishing reliance by other means and proceeding with his case. The Court also rejected the notion that policy considerations militated in favor of requiring precertification proof of materiality. Notably, the Court found that Congress had previously “rejected calls to undo the fraud-on-the-market presumption of classwide reliance” and had not decreed “that securities-fraud plaintiffs prove each element of their claim before obtaining class certification.”
The main dissent presented a starkly different view of the importance of addressing materiality at the class certification stage. According to the dissent, “nothing in logic or precedent justifies ignoring at certification whether reliance is susceptible to Rule 23(b)(3) classwide proof simply because one predicate of reliance – materiality – will be resolved, if at all, much later in the litigation on an independent merits element.” Indeed, a recent Court decision (Wal-Mart) “expressly held that a court at certification may inquire into questions that also have later relevance on the merits.” The judicial history of the fraud-on-the-market presumption also shows that materiality “has been the driving force behind the theory from the outset” and “further supports the need to prove materiality at the time the fraud-on-the-market theory is invoked.”
Holding: Judgment of Ninth Circuit upholding grant of class certification affirmed.
Notes on the Decision:
(1) The decision does not “revisit” the fraud-on-the-market presumption. That said, it would appear that at least four justices have some concerns about its continuing validity. The dissent notes that the Court is not well-equipped to apply economic concepts and there is some disagreement about how market efficiency works. In a separate concurrence, Justice Alito references that part of the dissent and suggests reconsideration could be appropriate because the presumption “may rest on a faulty economic premise.”
(2) The majority’s eagerness to establish there can be no individual questions of reliance if a class action plaintiff fails to prove materiality leads to some interesting language. Notably, the Court states that “there can be no actionable reliance, individually or collectively, on immaterial information.” The Court also concludes that an individual’s reliance on immaterial information would be “objectively unreasonable.” In the context of the entire opinion, it is not clear whether the Court is suggesting that (a) any class member’s claim will fail in the absence of materiality (therefore rendering the question of reliance moot), or (b) materiality is a necessary predicate for a finding of reliance under any circumstances. There is no doubt that there is close relationship between the concepts of materiality and reliance, but for an individual investor the reliance question is typically whether he actually saw the misrepresentation and acted upon it (i.e., transaction causation), with materiality as a separate inquiry.