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March 5, 2013

Supreme Court Holds Proof of Materiality Is Not Necessary to Win Class Certification

Arnold & Porter Advisory

In a February 27, 2013 ruling in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, the Supreme Court addressed the question of whether a plaintiff invoking the fraud-on-the-market presumption to satisfy the reliance element of a securities fraud claim must prove, as a prerequisite to class certification, the materiality of the alleged misrepresentations. In a six-to-three decision, the Court held that proof of materiality is not necessary at the class certification stage because the applicable provision of Federal Rule of Civil Procedure 23(b) (3) "requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class." The Court explained that materiality is an objective issue, the resolution of which necessarily applies in common to all members of a class. Because materiality is an issue for which the class "is entirely cohesive" and will "prevail or fail in unison," the Court concluded that proof of materiality is not a prerequisite to class certification.

The decision resolves a split among lower courts and effectively eliminates one theory that had been used to defeat class certification in securities fraud actions. To that extent, Amgen has been viewed as a victory for the plaintiffs' bar. However, the  decision also confirms that ample grounds remain on which to contest class certification. Moreover, four justices indicated that the fraud-on-the-market theory, which creates a rebuttable presumption of reliance at the class certification stage, may itself be prone to attack, which, if true, would have a far greater impact than Amgen. In our view, Amgen may affect securities litigation tactics but not the defense strategies for seeking the early and favorable resolution of securities fraud class actions.

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