The Securities Class Action, Not So Special?

In a 6-3 decision authored by Justice Ginsburg (who taught and wrote about civil procedure as a professor at Columbia Law School), the Supreme Court held last week that plaintiffs in securities fraud class actions do not have to prove materiality at the class certification stage.  A class of plaintiff shareholders (Connecticut Retirement Funds) alleged that Amgen and its executives misled investors about the safety and efficacy of two drugs in violation of Section 10(b) and Rule 10b-5. One of the alleged material misstatements involved the company’s public statement that the FDA would not be addressing one of its drug’s safety at a particular meeting when in fact it was.  Plaintiff’s class action asserted the fraud-on-the-market theory, which creates a rebuttable presumption that securities purchasers relied on publicly available information in purchasing stock in an efficient market.  During class certification, Amgen argued that Rule 23(b)(3) required that plaintiffs needed to do more than plausibly plead that a misrepresentation materially affected the stock price.  Amgen insisted that plaintiff needed to prove materiality to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members.”  Both the district court and the Ninth Circuit Court of Appeals rejected Amgen’s argument.

The Supreme Court affirmed the Court of Appeal’s judgment, holding that proof of materiality is not a prerequisite to class certification in securities fraud cases.  The majority noted that Rule 23(b)(3) “requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor the class.”  The Court held that plaintiffs need not prove materiality to ensure that questions of law or fact common to the class will predominate for two reasons. The first related to the objective nature of the materiality question.  As Justice Ginsburg explained, because materiality is judged according to an objective standard, it can be proved through evidence common to the class.  Thus, materiality is a “common question for purposes of Rule 23(b)(3).”  For the second, the Court reasoned that failure of proof on the common question of materiality posed no risk that individual questions will predominate. Quite the contrary, explained Justice Ginsburg.  Because materiality is an essential element of a 10b-5 claim, a failure of proof on this claim will “end the case for one and all.”  The Court determined that to make the plaintiffs prove materiality at the certification stage would effectively be “putting the cart before the horse.”  The Court noted,

Although we have cautioned that a court’s class-certification analysis must be “rigorous” and may “entail some overlap with the merits of the plaintiff’s underlying claim,” Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___ (2011) (slip op., at 10) (internal quotation marks omitted), 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. See id., at ___, n. 6 (slip op., at 10, n. 6) (a district court has no “‘authority to conduct a preliminary inquiry into the merits of a suit’” at class certification unless it is necessary “to determine the propriety of certi­ fication”); Advisory Committee’s 2003 Note on subd. (c)(1) of Fed. Rule Civ. Proc. 23, 28 U. S. C. App., p. 144 (“[A]n evaluation of the probable outcome on the merits is not properly part of the certification decision.”).

Amgen suggests that securities fraud class actions are not special vis-a-vis other kinds of classes.  It does not appear that they have additional prerequisites than what is already required in certifying other types of class actions.  To be sure, securities fraud class action are special but in the way that Congress required in the Private Securities Litigation Reform Act with its heightened pleading requirements, limits on damages, mandatory sanctions for frivolous litigation, etc.  In citing Professor Richard Nagreda’s NYU Law Review piece on aggregate litigation (which Justice Scalia relied on in Walmart to flesh out commonality of 23(a)(2)), Justice Ginsburg seemed to reminding us, as she did in the dissent in Walmart, that Professor Nagreda’s point about common injuries and common reasons for them pertained to Rule 23(b)(3), as in Amgen, not the commonality question of 23(a) (as the Walmart majority invoked it for its finding).  I’m not sure if Amgen signals a ratcheting back of the common question/common answer inquiry in 23(a)(2), but it may be worth watching and waiting.

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1 Response

  1. Lawrence Cunningham says:

    Interesting. Also interesting was how all three opinions in the case (majority, concurring and dissent) cited heavily Don Langevoort’s thoughtful article questioning the soundness of the fraud on the market theory. As Don quipped when I asked him about that, “apparently the piece means whatever a reader wants it to mean.”