The United States Supreme Court’s opinion in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, 2013 WL 691001 (U.S., Feb. 27, 2013), presents a fascinating theoretical dilemma, but one with limited application beyond securities law.  Justice Scalia’s assertion in his dissent that Justice Ginsberg’s majority opinion expands the consequences of the Basic decision from “regrettable” to “arguably disastrous” may be an overstatement beyond the context of securities law.  The issue in this case was whether the proponent of certifying a securities class action under § 10(b) of the SEC Act of 1934 and SEC Rule 10b-5 is required to prove the element of materiality at the class certification stage.  The majority held that it did not, because materiality, while an element of the fraud on the market theory applicable to securities claims, was a merits issue.  This is of course not surprising, as courts have long been warned away from considering the merits of the claims since Eisen was first misconstrued.

The interesting angle in this case, however, is the interplay between predominance and the merits of the claims.  The fraud on the market theory, in effect, gives the security plaintiff a free pass on proving reliance via an objective common test, provided the plaintiff can establish its elements, including materiality of the misrepresentation.  In function, the question of whether reliance can be proven using common evidence turns on the answer to whether the plaintiff can prove the merits of the materiality element – in other words, the merits and the predominance issues are one and the same.  The majority says that decision can wait for the merits stage.  The dissent wants that merits issue to be determined before the class is certified.

Justice Ginsberg justifies the majority’s position with the practical assertion that if materiality is not proven, then the case will fail as a matter of law at the merits stage, and the premature certification will have mattered little.  No harm, no foul.  The dissent argues that this approach is unrealistic; due to the pressure of settlement, odds are that the merits will never be reached once a class has been certified.  Statistics indicate that the dissent has the better of this argument.

The Thomas  dissent also takes issue with the manner in which the majority recognizes that certain aspects of the fraud on the market theory – market efficiency and the public nature of the misrepresentations – must be proven at the class certification stage, while materiality need not be.  Justice Ginsberg dismisses this apparent inconsistency by pointing out that failure to prove these elements, unlike that of materiality, would not necessarily end the case, thus requiring that they be proven upfront lest a case be certified in which reliance is proven individually.   While this distinction makes sense, it still fails to intellectually satisfy the question of why  these merits issues can be addressed at the class certification stage, while materiality cannot.  The answer seems to be that materiality can be deferred because it can be, whereas the other elements cannot.  But should it?

Justice Thomas’ most salient point is that the majority’s unwillingness to grapple with a merits issue that is also relevant to class certification runs afoul of the Court’s statement in Dukes that it would not hesitate to address issues at the certification stage merely because those issues also had relevance to the merits of the claims.  Dukes Slip Op. at 10-11.  While certain audiences may brandish this inconsistency as a retreat from the principle enunciated in Dukes, its factual application seems extremely narrow at best, limited at most to a context where a factual inquiry bearing on class certification must also be proven at the merits stage as a required element of the claim.  The potential for abuse is palpable, however.  Does this principle now allow any class plaintiff to bypass factual issues bearing on class certification if those issue must also be resolved at the merits stage?  Or does this bypass apply only where a particular legal presumption such as the fraud on the market theory potentially applies to relieve a plaintiff of having to prove an element of its claim through individualized evidence?   The latter theory makes the most sense.

In short, this case is good news for those pursuing securities fraud class actions, but of dubious intellectual underpinnings and limited application beyond materiality and reliance in a securities fraud case.

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