Litigation Alert: Amgen: A Pyrrhic Victory For Plaintiffs In Securities Class Actions?

In a 6-3 decision issued last week, the Supreme Court ruled in Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, 568 U.S. ___, 2013 WL 691001 (Feb. 27, 2013), that shareholders bringing class actions under Section 10(b) of the Securities Exchange Act of 1934 need not prove that alleged misstatements are material in order to invoke the fraud-on-the-market presumption. Several lower courts had held that the fraud-on-the-market theory - long used by plaintiffs to justify class certification - was not applicable absent a threshold showing of materiality. In rejecting that approach, the Amgen decision removes one potential weapon from companies defending shareholder class actions. However, after reading the various opinions by the members of the Court, plaintiffs may conclude that modest victory is outweighed by a far more significant threat: the possibility of a challenge to the fraud-on-the market presumption itself.

The Issues Raised In Amgen

The Amgen decision pivots on the interplay between the requirements for class certification and the substantive elements of a Section 10(b) claim - and, in particular, the element of reliance.1 To certify a class action, a plaintiff must not only satisfy the requirements of numerosity, commonality, typicality, and adequacy of representation, but must also establish that "the questions of law or fact common to class members predominate over any questions affecting only individual members." Fed. R. Civ. P. 23(b)(3).

Securities fraud traditionally required a showing of direct reliance - i.e., that a plaintiff was aware of a defendant's statement and relied on that statement in his or her purchase or sale of a security. Applied strictly, however, the reliance element would present enormous challenges to shareholders seeking to show that common issues predominate over individual ones: after all, direct reliance is almost always an inherently individualized inquiry (i.e., one requiring an analysis of the circumstances of particular shareholders and what they may or may not have relied upon in buying or selling securities). Consequently, courts have held that reliance in Section 10(b) cases may be presumed in certain circumstances - a judicial gloss on the statute that has permitted hundreds of shareholder class actions to be filed every year. In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court endorsed the "fraud-on-the-market" presumption of reliance. The fraud-on-the-market presumption allows courts to "presume that investors trading in efficient markets indirectly rely on public, material misrepresentations through their 'reliance on the integrity of the price set by the market.'" Amgen, 2013 WL 691001, at *5 (citing Basic, 485 U.S. at 245). The fraud-on-the-market presumption is based on...