In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., No. 09–56965, 2011 WL 5341285 (9th Cir. Nov. 8, 2011), the U.S. Court of Appeals for the Ninth Circuit held that plaintiffs do not have to prove that an alleged misstatement is material in order to obtain the benefit of the fraud-on-the-market presumption at the class certification stage of a proceeding. The Ninth Circuit also held that defendants cannot defeat class certification by attempting to rebut the fraud-on-the-market presumption through the so-called “truth-on-the-market” defense. These holdings are in alignment with similar rulings by the Third and Seventh Circuits, but are in direct conflict with rulings on these issues in the First, Second and Fifth Circuits. As a result, sooner rather than later, the U.S. Supreme Court is likely to accept review to resolve the issues.
Factual and Procedural Background
The plaintiffs brought a securities fraud action against Amgen Inc., a biotechnology company, and several of its officers, alleging that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose safety information about two Amgen products used to treat anemia. Id. at *1. The plaintiffs alleged that the misrepresentations and omissions inflated Amgen’s stock price at the time the plaintiffs purchased it and that later corrective disclosures caused the stock price to fall, injuring the plaintiffs. Id. at *2.
The plaintiffs moved to certify a class of plaintiffs that purchased Amgen stock between the date of the alleged omissions and misrepresentations and the date of the corrective disclosures. Id. The district court certified the plaintiffs’ proposed class and held that the Federal Rule 23(a) prerequisites were satisfied and that common questions predominated. The district court further held that the element of reliance was common to the class because the class could avail itself of the fraud-on-the-market presumption under Basic Inc. v. Levinson, 485 U.S. 224 (1988). Id. at *2. The district court concluded that the plaintiffs were entitled to invoke that presumption by showing that Amgen’s stock traded in an efficient market and that the alleged misstatements were public. The district court also denied Amgen’s attempt to rebut the fraud-on-the-market presumption at the class certification stage holding that rebuttal of the presumption was an issue for trial. Id. at *3.
The Ninth Circuit granted Amgen’s Rule 23(f) request for permission to appeal the class certification order and affirmed the district court’s order certifying the plaintiffs’ proposed class. Id. at *1.
Proof of Materiality Is Not Required at the Class Certification Stage to Invoke the Fraud-on-the-Market Presumption
In affirming the district court’s class certification order, the Ninth Circuit rejected Amgen’s argument that the district court erred by certifying the class and, in so doing, rejected Amgen’s argument that the plaintiffs could only invoke the fraud-on-the-market presumption if they could prove that Amgen’s allegedly false statements were material. Id. at *4. As the Ninth Circuit explained: “The problem with that argument is that, because materiality is an element of the merits of their securities fraud claim, the plaintiffs cannot both fail to prove materiality yet still have a viable claim for which they would need to prove reliance individually.” Id. It went on to reason that: “If the misrepresentations turn out to be material, then the fraud-on-the-market presumption makes the reliance issue common to the class, and class treatment is appropriate. But if the misrepresentations turn out to be immaterial, then every plaintiff's claim fails on the merits (materiality being a standalone merits element), and there would be no need for a trial on each plaintiff's individual reliance. Either way, the plaintiffs’ claims stand or fall together — the critical question in the Rule 23 inquiry.” Id.
By affirming the district court ruling, the Ninth Circuit agreed that to invoke the fraud-on-the-market presumption: “[T]he plaintiff must (1) show that the security in question was traded in an efficient market. . . , and (2) show that the alleged misrepresentations were public . . . .” Id. at *1. The plaintiffs are not required to prove the element of materiality at class certification because “[p]roof of materiality, like all other elements of a 10b–5 claim, is a merits issue that abides the trial or motion for summary judgment.” Id.
Defendants Cannot Rebut the Fraud-on-the-Market Presumption Through the Truth-on-the-Market Defense at the Class Certification Stage
The Ninth Circuit also rejected Amgen’s attempt to rebut the fraud-on-the-market presumption at the class certification stage by submitting evidence in support of its “truth-on-the-market” defense. Id. at *6. The Ninth Circuit explained: “[T]he truth-on-the-market defense is a method of refuting an alleged misrepresentation's materiality. . . . [A] plaintiff need not prove materiality at the class certification stage to invoke the presumption; materiality is a merits issue to be reached at trial or by summary judgment motion if the facts are uncontested.” Id. at *6. Thus, “rebuttal of the fraud-on-the-market presumption, at least by showing that the alleged misrepresentations were not material, is a matter for trial or summary judgment, not a matter to be taken up in a class certification motion.” Id. at *1.
The Ninth Circuit’s Decision Creates Further Conflict Among the Circuit Courts
The Ninth Circuit’s conclusion that materiality need not be proved at the class certification stage places it in line with the Third and Seventh Circuits, but in conflict with the First, Second and Fifth Circuits. As the Ninth Circuit noted, the First, Second and Fifth Circuits’ determination that materiality must be proven at the class certification stage is based on an interpretation of footnote 27 in the U.S. Supreme Court’s opinion in Basic. Id. at *5 (citing Basic, 485 U.S. at 248 n.27 (“The Court of Appeals held that in order to invoke the presumption, a plaintiff must allege and prove . . . that the misrepresentations were material. . . .”)).
Following the Seventh Circuit, the Ninth Circuit held that the other circuits “misread the Basic footnote: ‘All footnote 27 [in Basic] does . . . is state that the court of appeals deemed materiality essential; the Justices did not adopt it as a precondition to class certification.’” Id. (quoting Schleicher v. Wendt, 618 F.3d 679, 687 (7th Cir. 2010)). The Ninth Circuit also held that this interpretation of the Basic footnote is supported by the U.S. Supreme Court’s recent formulations of the presumption in Erica P. John Fund and Dukes, “which require the plaintiff to show that the stock was traded in an efficient market but do not mention materiality as a requirement.” Id. at *5 (citing Erica P. John Fund v. Halliburton, ––– U.S. ––––, 131 S.Ct. 2179, 2185 (2011); Dukes v. Wal–Mart Stores, Inc., ––– U.S. ––––, 131 S.Ct. 2541, 2552 n.6 (2011)).
The Ninth Circuit’s decision makes it easier for plaintiffs to obtain the benefit of the fraud-on-the-market presumption at the class certification stage because they are not required to prove, and defendants are prohibited from rebutting, the materiality of the alleged misstatements. The Ninth Circuit’s holding, while aligned with the Third and Seventh Circuits, creates a split among the circuit courts that the U.S. Supreme Court will almost certainly choose to resolve when presented with a case for it to hear, and it might well be this one.
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This article was originally published by Bingham McCutchen LLP.