New England Biz Law Update
In the second of two cases considering what class action plaintiffs must prove to make it past the certification stage, the justices of the U.S. Supreme Court tackled the issue of whether plaintiffs asserting a fraud-on-the-market claim must prove that allegedly misleading statements were material to get class status, and whether defendants can present rebuttal evidence in response.
In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, putative class members alleged that biotechnology company Amgen violated Rule 10b-5 of the Securities Exchange Act by misleading investors about safety concerns the Food and Drug Administration had expressed about two of the company’s anemia drugs to artificially inflate the market price of the company’s stock.
The company opposed class action certification under Rule 23, arguing that the plaintiffs failed to show that they relied on the FDA’s response in making their investment decisions, a necessary element in a fraud-on-the-market case.
But the 9th Circuit disagreed, holding that plaintiffs must plausibly allege — but need not prove at the class certification stage — that the claimed misrepresentations were material. The Supreme Court granted certiorari.
Individual claims
At oral arguments, Seth P. Waxman, a partner and chair of the appellate and Supreme Court litigation practice group at WilmerHale in Washington, argued for Amgen that for a class action to move forward, the class members must be able to show materiality for the class as a whole. If the class cannot do so at the certification stage, members would be limited to individual claims, Waxman said.
A ruling for Amgen would not preclude any “member of the class from coming to court and saying, ‘I directly relied on this statement and here’s my proof,’” he asserted.
Justice Elena Kagan questioned that logic.
“Do you mean to say that a judge who has just ruled that a statement is immaterial is going to keep the case in his court litigated by an individual plaintiff?” she asked.
Waxman said that determining materiality as to an individual — whether that individual relied on a statement — was entirely different from determining materiality on a class-wide basis.
“Materiality, as this court has said, is fact-sensitive,” he said.
A presumption
When David C. Frederick, a partner in the Washington office of Kellogg, Huber, Hansen, Todd, Evans & Figel, began his argument on behalf of the class, Justice Sonia M. Sotomayor immediately asked him whether the court’s ruling in Basic Inc. v. Levinson, 485 U. S. 224 (1988), which established a presumption of reliance in fraud-on-the-market cases as well as a defendant’s ability to rebut that presumption, applies at the certification stage.
Sotomayor asked if a defendant’s rebuttal right exists before certification.
“Are you disputing that at the class certification stage a defendant can prove that the market is inefficient?” she asked.
Frederick said the ruling in Basic was not aimed at class certification standards.
“Basic did not try to distinguish between the requisites of Rule 23 and the substantive component of the fraud-on-the-market theory,” Frederick said.
Justice Anthony M. Kennedy asked if a determination of materiality at the certification stage — whether the judge rules for or against the plaintiffs — would be deemed common to all the class members, meaning “everybody wins or everybody loses.”
“That is not our position,” Frederick said, calling the materiality question a “gate-keeping” issue that “functions to determine whether or not [there] is a common question.”
A decision from the court is expected later this term.
