March 1, 2013
This post is written by Mark Chalos.
In a 6-3 ruling, the Supreme Court re-affirmed the long-standing principle that a court deciding class certification is not required to adjudicate the case, but rather must select the method best suited to adjudicate the controversy fairly and efficiently.
Amgen arose out of claims by investors in a publically traded bio-tech company that the company violated federal securities laws by making misrepresentations and misleading omissions regarding two key products. Plaintiffs alleged that the statements and omissions were material and therefore constituted a “fraud-on-the-market,” a theory traceable to the Court’s decision Basic Inc. v. Levinson.
At issue in the Court in Amgen was whether plaintiffs are required to establish the materiality of statements and omissions prior to class certification. The Court held: no.
While this narrow holding will be impactful for securities cases, the majority opinion and the interplay among the majority and dissenting opinions are potentially significant for a wide swath of other class cases.
Majority Opinion Rejects New Hurdle
The Court’s opinion was written by Justice Ginsburg and joined by, among others, Chief Justice Roberts and Justice Alito.
The majority rejected Amgen’s argument that a district court should determine at the class certification stage whether plaintiffs can prove all elements of their substantive causes of action. The Court characterized Amgen’s argument as putting the “cart before the horse.”
The majority, citing Wal-Mart v. Dukes, stated that although a court’s class certification analysis must be rigorous and might entail some overlap with the merits of the underlying claim, “Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage.” Merits questions may be considered at class certification only to the extent they are relevant to whether the Rule 23’s requirements are met.
Assuming the other Rule 23 requirements are met, in the majority’s analysis a plaintiff seeking class certification must establish only that common questions predominate over individual issues and not that the predominating questions will be answered in their favor.
In Amgen, plaintiffs established that materiality was a common question for the proposed class. Whether the class could ultimately establish materiality, according to the majority, is a question for summary judgment or trial.
Dissenters Cry Foul
Justice Thomas dissented, joined by Justice Kennedy and, in part, Justice Scalia. Justice Scalia also filed a separate dissent. Through slightly different, but overlapping, reasoning, the dissents arrive at the same conclusion: materiality in securities fraud cases must be established prior to class certification.
Justice Thomas asserted that to warrant class certification, a plaintiff must establish that all elements of the claim are susceptible to classwide proof . Materiality is an element of the substantive claim in Amgen; therefore, plaintiffs must establish materiality as a predicate to class certification. Moreover, Justice Thomas argued, if a class is certified and it fails to prove a common element such as materiaility, that failure establishes that the class should never have been certified.
In addressing Justice Thomas’s dissent, the majority characterized his central argument as “totally misapprehending our essential point.” The majority stated that Rule 23 does not require a plaintiff to prove that each element of the claim is susceptible to classwide proof, but only that common questions predominate over individual issues. Additionally, after class certification, according to the majority, failure to prove a common question would end the litigation for the entire class and there would be no remaining individual issues to adjudicate. That is, according to the majority, the proper function of Rule 23. Justice Thomas’s argument to the contrary is, in the majority’s view, “wrong.”
Justice Scalia also argued that Basic makes clear that materiality must be established as a predicate to class certification. Justice Scalia also lamented that class certification is often a prelude to a substantial settlement by defendants because of the high costs and risks of litigating. In sum, Justice Scalia calls the majority’s holding “unquestionably disasterous.”
The majority’s treatment of Justice Scalia’s dissent is pointed. The majority referred to the notion that Basic required all elements of the “fraud-on-the-market” claim to be established prior to class certification as “Justice Scalia’s invention.” The majority also accused Justice Scalia of unsuccessfully “scouring” Basic for “some semblance of support for his position.”
Impact of Amgen
Some early commentators are decrying Amgen as a “watershed” in class action law that will inevitably lead to non-meritorious class actions being filed, resulting in unwarranted, rich settlements. More likely, Amgen will be regarded as a restatement of bedrock Rule 23 standards that have guided courts for decades. Regardless of how courts ultimately apply Amgen, it re-affirmed the principle that class actions serve an important function in getting redress for harm and in adjudicating complex disputes.