February 27, 2013

DECISION ALERT
Today the Supreme Court issued one decision, described below, of interest to the business community.

• Securities Exchange Act—Certification of Class Actions

Securities Exchange Act—Certification of Class Actions

A private securities-fraud action under Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), requires proof that the plaintiff relied on the alleged misrepresentation. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court held that a plaintiff may obtain a rebuttable presumption of reliance by invoking the fraud-on-the-market theory if four predicates are established: (1) the security traded in an efficient market, (2) the plaintiff’s transaction postdated the misrepresentation and predated the revelation of the truth, (3) the misrepresentation was public, and (4) the misrepresentation was material. Without the benefit of presumed reliance, a plaintiff cannot assert its claims in a class action because reliance would have to be proved separately for each individual class member.

Today in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, the Supreme Court held that a plaintiff who relies on the fraud-on-the-market theory need not prove that the alleged misrepresentation was material in order to obtain class certification. The Court likewise ruled that a defendant may not prevent class certification by rebutting the presumption of reliance with proof that the alleged misrepresentation was immaterial.

In a 6-3 opinion authored by Justice Ginsburg, the Court held that proof of materiality is not “needed to ensure that questions of law or fact common to the class will ‘predominate over any questions affecting only individual members’ as the litigation progresses.” Slip op. at 10. The Court gave two reasons. First, materiality is an “objective” question, turning on what a “reasonable investor” would think, which “can be proved through evidence common to the class.” Id. at 11. Second, a failure to establish materiality would not make individual questions necessary, but rather “would end the case for one and for all.” Id. at 11. The Court dismissed the concern that freeing plaintiffs from materiality challenges at the class-certification stage would allow plaintiffs to use the in terrorem effect of massive potential Section 10(b) liability to force settlements even on weak claims. The Court took the position that allowing immateriality to defeat the presumption of reliance for class-certification purposes would impermissibly add to the restrictions that Congress has already enacted to restrain abusive securities class actions, such as those in the Private Securities Litigation Reform Act and the Securities Litigation Uniform Standards Act. Id. at 18-20.

Justice Alito filed a concurring opinion, noting that reconsideration of Basic may be appropriate in light of new evidence that “suggests that the [fraud-on-the-market] presumption may rest on a faulty economic premise.”

Justice Thomas filed a dissenting opinion, joined by Justice Kennedy and joined in part by Justice Scalia. He argued that because class certification in a Section 10(b) case depends on the presumption of reliance and that presumption in turn depends on the materiality of the alleged misrepresentation, a failure to prove materiality should prevent class certification. Justice Scalia filed a separate dissenting opinion, reflecting his belief that Basic “governs not only the question of substantive liability, but also the question whether certification is proper,” and would require a court to find all the predicates to presumed reliance, including materiality, before a class could be certified.

The Supreme Court’s decision in Amgen establishes that defendants in securities class litigation will not be able to defeat class certification by demonstrating that purported misrepresentations were not material. The ruling will thus be of interest to all public companies that may be the target of securities-fraud class actions. But the Court’s decision should not be read too broadly. It recognizes that a failure to prove other predicates to presumed reliance will prevent class certification. It thus does not prevent defendants from opposing class certification on other grounds. And it speaks only to the special securities-fraud doctrines of presumed reliance and objective materiality, without casting any doubt on the Court’s broader class-action rulings in cases such as Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011).

Any questions about this case should be directed to Joshua Yount (+1 312 701 8423) in our Chicago office.

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