Last week the Supreme Court decided Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085. As previously discussed on this blog, Amgen is an extremely important case dealing with the divide between what is appropriately decided at class certification versus on the merits. The Supreme Court, in a 6-3 decision authored by Justice Ginsburg, held that in a Rule 10(b) securities fraud class action, materiality is a merits question and that plaintiffs need not show at the class ceritifcation stage that the misprepresentation or omission on which they allegedly relied was material to their decision to purchase or sell the security at issue. The import of the decision is that classes that could never meet the materiality standard can nevertheless proceed. In some ways, the decision is consistent with the Court’s decision last year in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), in which the Court held that a plaintiff need not prove loss causation at the certification stage. But, the decision in Amgen is different from Halliburton because of the way in which the Court discusses the Rule 23 predominance requirement generally, and plaintiffs’ counsel will no doubt argue that Amgen’s meaning goes beyond the securities context.
Amgen is best viewed as a continuation of the “Eisen” debate as to whether merits issues can be reviewed at the class certification stage. In Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), the Court noted that Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), had been misread to mean that courts could not consider the merits when determining whether to certify a class. Instead, the Court held, in conducting a rigorous class certification anlysis, courts could and should, when necessary, consider the merits of the underlying claim: a rigourous anlaysis will “[f]requently . . . entail some overlap with the merits of the plaintiff’s underlying claim.” Dukes, 131 S. Ct. at 2551. In Amgen, Justice Ginsburg added the following gloss: “… the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the ‘metho[d]’ best suited to adjudicate the controversy ‘fairly and efficiently.'” Further, she reasoned: “Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage. Merits questions may be considered to the extent — but only to the extent — that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied.”
Echoing the views that she and Justice Kagan expressed at oral agument, Justice Ginsburg reasoned that materiality was a merits question, and that the only issue for class certification was whether the question of materiality was a predominant one, or an individualized one: “Because materiality is judged according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a question common to all members of the class…. The alleged misrepresentations and omissions, whether material or immaterial, would be equally so for all investors composing the class.” Justice Ginsburg emphasized that predominance is to viewed in terms of whether common questions predominate. She then reasoned that materiality is an objective question that can be proved through evidence common to the class, and that individual questions can never predominate as to materiality because even if down the road that common proof fails, the case simply would end.
In dissent, Justices Scalia and Thomas go back to the “basics,” discussing the meaning of the decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which invented the presumption of reliance in fraud-on-the-market securities cases. Under Basic, plaintiffs in securities class actions are entitled to a presumption of reliance (which is virtually always an individualized inquiry otherwise) if they could meet certain factors, including showing that the alleged misrepresentation or omission was material. In dissent, Justice Scalia reasoned that Basic itself applies not only to the merits, but to the certification decision. Moreover, he reasoned, that reading is consistent with the notion, expressed most recently in Wal-Mart, that “‘Rule 23 does not set forth a mere pleading standard.'” Similarly, Justice Thomas reasoned that the plaintiff should not get the benefit of the presumption of reliance at the certification stage unless it can show that it meets the criteria for the presumption. And without the presumption, questions of reliance remain individualized: “Without materiality, there is no fraud-on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible.”
The Court admittedly has come out differently on different aspects of the Basic factors, e.g., whether a named plaintiff must establish that he or she executed trades at the relevant time. Justice Ginsburg argues that that aspect of the Basic presumption goes to the Rule 23(a)(3) and (4) criteria of typicality and adequacy of representation, making them preliminary inquiries appropriate for the certification decision. The dissent sees this as a meaningless distinction. Meanwhile, Justice Alito, in a concurring opinion, asks whether the Basic presumption needs to be re-examined, an issue which was not raised to the Court.
While Amgen is a securities case, it likely will have a broader impact. Fraud class actions generally fail because of the question of the individualized nature of reliance, and plaintiffs’ counsel will now argue that reliance need not be shown until the merits phase of a case. Defendants will argue that Amgen should be confined to the securities context given that it involves a presumption of reliance that itself is confined to that context. The Eisen debate thus will continue to be played out in the courts.