March 2013 – The U.S. Supreme Court’s decision this week in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, http://www.supremecourt.gov/opinions/12pdf/11-1085_9o6b.pdf, may have a major impact on public companies and their directors and officers seeking early settlement of “fraud-on-the-market” securities fraud cases. The decision has been described as a set-back for the defense bar, which had been hoping the Court would support another hurdle for plaintiffs in these cases by agreeing that the element of materiality must be decided on the record at the class certification stage. Instead, the Court held in a 6-3 decision that plaintiffs should not be required to produce proof of the materiality of alleged misstatements at the class certification stage, since materiality is a “’common questio[n]’ for purposes of Rule 23(b)(3)” under the fraud-on-the-market theory of reliance, and there is “no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating” so as to defeat class certification.
The Court relied in part on the fact that Congress in enacting the Private Securities Litigation Reform Act (Reform Act) did not require proof of materiality at the class certification stage, and further, “rejected calls to undo the fraud-on-the-market presumption.” However, the majority also recognized and confirmed that the Reform Act does provide heightened pleading standards for the elements of a securities fraud claim. This requirement often results in courts analyzing the materiality element in some detail at the pleadings stage.
The dissenting opinions by Justices Scalia and Thomas argue that the majority improperly relieves plaintiffs of their duty to show that reliance is a common question by proving the materiality of the alleged misstatements to the market as a whole at the class certification stage.
Early comments on the Amgen decision have suggest that the Court may be poised to review the entire fraud on the market hypothesis in the near future, since four Justices (including dissenting Justices Thomas, Kennedy, and Scalia, and Justice Alioto in a concurring opinion) expressed skepticism about its viability. The defense bar would welcome the chance to re-argue this theory, which allows plaintiffs to avoid having to plead or prove individual reliance by class members in federal securities fraud cases.
In the meantime, Amgen may create the anomaly that a court may have to take a harder look at materiality at the pleading stage than it would be allowed to do at the class certification stage. Thus, it is unclear how lower courts will harmonize the Amgen decision with the Reform Act’s pleading requirements. What is clear is that the opinion is likely to have a detrimental effect on the ability of target directors and officers to settle cases without significant discovery.
If you have any questions or would like additional information, please contact Ulmer & Berne LLP.