On February 27, 2013, in Amgen Inc. et al. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, the Supreme Court held that proof of materiality is not a prerequisite to certification of a securities-fraud class action seeking money damages for alleged violations of section 10(b) the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.
Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 require that a plaintiff seeking monetary damages prove, among other things, a "material misrepresentation or omission by the defendant." In Basic Inc. v. Levison, 485 U.S. 224 (1988), the Court endorsed a "fraud-on-the-market" theory, which permits plaintiffs to "invoke a rebuttable presumption of reliance on material misrepresentations aired to the general public." In class actions, Rule 10b-5's reliance requirement would ordinarily preclude class certification because individual reliance issues would overwhelm questions common to the class. "The fraud-on-the-market theory, however, facilitates class certification by recognizing a rebuttable presumption of classwide reliance on public, material misrepresentations when shares are traded in an efficient market."
Relying on the fraud-on-the-market theory, plaintiff Connecticut Retirement Plans and Trust Funds alleged that Amgen violated §10(b) and Rule 10b-5 through certain misrepresentations and misleading omissions regarding the safety, efficacy and marketing of two of its drugs. The District Court certified a class of all investors who purchased Amgen stock during the claimed period of misrepresentation. On interlocutory appeal to the Ninth Circuit, Amgen argued it was error (1) to certify the class without first requiring the plaintiff to prove that the alleged misrepresentations and omissions were material and (2) to refuse to consider certain rebuttal evidence. The Ninth Circuit affirmed. The Supreme Court granted certiorari to resolve a split among the circuits.
The Supreme Court affirmed, explaining that the "pivotal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members'" under Federal Rule of Civil Procedure 23(b)(3). The Court held that the answer is "clearly no" for two reasons. First, the question of materiality is an objective one, and thus can be proved through evidence common to the class. Second, there is "no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating." Because materiality is an essential element of the claim, failure of that element will end the case for all class members, and no claim would remain for which questions of individual reliance might predominate.
The Court found the policy considerations Amgen advanced unpersuasive. Congress had taken steps to curb abusive securities-fraud suits, but had "rejected calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic." The Court did not think it appropriate "for the judiciary to make its own further adjustments."
With respect to the district court's refusal to consider Amgen's rebuttal evidence, the Court noted the proffered evidence aimed to prove that the alleged misrepresentations and omissions were immaterial, and held that the district court was "not required to consider the evidence in determining whether common questions predominated under Rule 23(b)(3)" and "correctly reserved consideration" of the rebuttal evidence for trial.
Justice Ginsburg delivered the opinion of the Court, joined by Chief Justice Roberts, and Justices Breyer, Alito, Sotomayor, and Kagan. Justice Alito filed a concurring opinion. Justice Scalia filed a dissenting opinion. Justice Thomas also filed a dissent, in which Justice Kennedy joined and Justice Scalia joined in part.