Contributing Author: Taylor Jackson

The Supreme Court agreed last month to hear an appeal from a Ninth Circuit case, Conn. Retirement Plans & Trust Funds v. Amgen, Inc., 660 F.3d 1170 (9th Cir. 2011), that affirmed an order certifying a securities fraud class based on the fraud-on-the-market theory. Plaintiffs alleged Amgen misrepresented the safety of a few of its drugs and thereby artificially increased its stock price. The Ninth Circuit held plaintiffs were entitled to class certification despite not showing that Amgen’s alleged misrepresentation was material, widening a Circuit split on the question of whether “materiality” is a class certification issue or a merits issue.

Fraud-on-the-market class actions deal with allegations of public misrepresentations that affect the market price of a stock. The fraud-on-the-market theory creates a rebuttable presumption of the reliance element of a 10(b)-5 claim. To certify a class using this theory, plaintiffs must prove that the market for the stock is efficient, the defendant’s misrepresentation was public, and that plaintiffs traded shares between the time the misrepresentations were made and the truth was revealed. At issue in Amgen is the question of whether plaintiffs must also prove that the defendant’s misrepresentation was material to their claims—and whether defendants may offer evidence to rebut the fraud-on-the-market theory’s application at the certification stage.

The Ninth Circuit’s decision in Amgen would not require plaintiffs to prove materiality in order to utilize the fraud-on-the-market theory’s presumption of reliance at the class certification stage. 660 F.3d at 1172. The Amgen court held that a plaintiff must plausibly allege – but need not prove – that the misrepresentations at issue are material to his claims. Id. The court adopted the Seventh Circuit’s standard in Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010), holding that issues of materiality are not relevant at the class certification stage and instead are appropriately addressed at trial. This position has also been adopted in the Third Circuit. Meanwhile, the First, Second, and Fifth Circuits require plaintiffs to demonstrate materiality at the class certification stage. In particular, the Second Circuit case of In re Salomon, 544 F.3d 474 (2d Cir. 2008), held that in order to have a presumption of reliance at the class certification stage, the plaintiffs must prove the materiality of the misrepresentations to their claims and the defendants must have a chance to rebut these claims. The cases adopting that standard base their holding on the Supreme Court’s opinion in Basic, Inc. v. Levinson, 485 U.S. 224 (1988).

The Supreme Court granted certiorari review of the Amgen case to address the split between the Circuits. In their petition for a writ of certiorari, Amgen argued that barring certification is the best remedy if a plaintiff class fails to prove that the defendant’s alleged misrepresentations are material to the claims—and that, if the Ninth Circuit’s opinion is upheld, defendants will be deprived of a chance to challenge class wide reliance given the immense and immediate settlement pressure created by a class certification order in securities litigation. Pet. for Cert. at 5.

The Supreme Court’s decision thus could have a significant impact on the standards for class certification at the class certification stage. And, just as in the Comcast case now before the Supreme Court (see our blog from June 28, 2012), the Supreme Court will decide the line between class certification and merits evidence – an as yet undecided area in the law.