At oral argument on Monday in Amgen v. Connecticut Retirement Plans and Trust Funds, the Court addressed (1) whether plaintiffs must establish materiality to invoke the “fraud-on-the-market” theory when seeking certification of a securities class action; and (2) whether defendants must have the opportunity to rebut materiality when opposing class certification.
Arguing for Amgen, Seth Waxman emphasized that materiality has consistently been recognized – along with an efficient market, public disclosure of alleged misstatements, and purchase and sale of stock during the period of market distortion – as one of four predicates to the application of the fraud-on-the-market theory. Waxman observed that without materiality, “the market price cannot be presumed to reflect the statement in question”; thus, plaintiffs should not be entitled to rely on the theory.
Waxman acknowledged that “[i]f you think that the purpose of Rule 23 is to postpone to the merits everything that could be postponed without a risk of foreclosing valid individual claims, we lose.” But, he continued, “that’s not the purpose. The purpose is for a court to determine whether all of the preconditions for forcing everyone into a class action are present before you certify.”
Justice Kagan pressed Waxman on what practical result would occur if a district court found that a plaintiff seeking to rely on the “fraud-on-the-market” theory was unable to establish materiality; she asked, for example, “isn’t it correct that if the Court holds that a statement is immaterial, it’s immaterial for all members of the class, and the suit has to be dismissed?” Waxman responded that although class certification would then be denied, “all that the class certification decision says is that the putative class representative can sue on his own behalf, but he can’t drag everybody else into [the action].” He also noted that a district court addressing certification would necessarily need to make factual determinations regarding materiality; however, even if it found an absence of materiality at the certification stage, that finding would not necessarily entitle a defendant to summary judgment based on absence of materiality due to limitations on the court’s role when deciding summary judgment motions. Waxman continued, “The judge at the class certification stage is required to weigh competing evidence and . . . render his or her best judgment. At the summary judgment stage, a judge is precluded from doing that.”
Neither this line of argument, nor hypothetical examples of how there could be a lack of materiality for class certification but a viable case on the merits for trial, appeared to satisfy some of the Justices. Justice Breyer, for example, observed that if the Justices were “professorial enough, we could dream up a hypothetical for anything, where there is still a case.” And Justice Kagan summarized what appeared to be the view of some Justices that “it’s a question of whether the class wins or loses together. And here, for materiality, the class wins or loses together. If it’s material, it’s material as to everybody. If it’s not material it’s not material to everybody.”
Finally, in response to a question from Justice Ginsburg, Waxman explained that the materiality determination advocated by Amgen at the class certification differed from the later merits determination of materiality made at summary judgment or trial: “[t]hey differ temporally, they differ functionally, and they differ in terms of who decides it and with what level of finality.”
Arguing for Connecticut Retirement, David Frederick argued that the key determination for a court at the class certification stage is whether the putative class is “cohesive” and whether “all the investors are standing in the same position.” He continued, “[i]f the market is efficient and it is absorbing information into the price, all investors will have the same question with respect to materiality.” Frederick urged the Court to avoid a “mini-trial” on the merits by requiring materiality to be demonstrated at the class certification stage. In response to a question from Justice Kennedy, Frederick asserted that because materiality is a “common question, it is not one to be decided at class certification.”
Justice Scalia cited the enormous pressure on a class defendant to settle claims – regardless of their merit – as a reason for courts to resolve the materiality issue at the class certification stage. Frederick responded that when it enacted the Private Securities Litigation Reform Act of 1995 (“PSLRA”), Congress had declined to address the issues of market efficiency and materiality and instead had enacted higher pleading standards for other elements. In the wake of the PSRLA, he continued, the total number of securities class actions had fallen, and fifty percent of such cases had been dismissed. Frederick concluded by urging the Court not to impose “policy judgments about what additional requirements ought to be put on [Federal Rule of Civil Procedure] 23(b)(3).”
Arguing for the United States, Assistant to the Solicitor General Melissa Sherry supported Connecticut Retirement’s position that materiality need not be demonstrated at the certification stage by plaintiffs invoking the fraud-on-the-market theory. Sherry emphasized that materiality is an “objective inquiry,” and that the common answer to that question can only serve to unite the putative class. Justice Scalia observed that materiality is a common issue only if one accepts the fraud-on-the-market theory, that one can only rely on the theory “where there has been a material misrepresentation,” and he inquired whether it would be appropriate for the Court to overrule its decision in Basic Inc. v. Levinson case because the theory “simply collapses once you remove the materiality element.” In response, Sherry identified the theory as “substantive” rather than “procedural” and argued that the key issue before the Court was not whether a fraud-on-the-market can be proven on the merits but rather “whether common issues predominate over individual issues.” She continued, “[m]ateriality is a common issue. It will result in the same answer for all. The class rises or falls together.”
Sherry concluded with an argument implicit in Connecticut Retirement’s position but much more easily made by the United States: class certification is not about only certifying meritorious cases. Instead, courts should “certify class actions that are both meritorious and those that are not, so it reaches a binding judgment.”
On rebuttal, Waxman reiterated Amgen’s position that, absent materiality, there was no basis for application of the fraud-on-the-market theory at the class certification stage. When Justice Ginsburg asserted that it seemed Amgen was arguing that a plaintiff would have “to win on the merits of the materiality question in order to get the class certified,” Justice Scalia defended Amgen’s position stating, “you don’t have to prove it to get the class certified. You only have to prove it to get the class certified with the benefit of the fraud-on-the-market theory.”
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