Amgen Inc. v. CT Ret. Plans & Trust Funds,
Annotate this Case
568 U.S. ___ (2013)
- Syllabus |
- Opinion (Ruth Bader Ginsburg) |
- Concurrence (Samuel A. Alito, Jr.) |
- Dissent (Clarence Thomas) |
- Dissent (Antonin Scalia)
SUPREME COURT OF THE UNITED STATES
AMGEN INC., et al., PETITIONERS v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
on writ of certiorari to the united states court of appeals for the ninth circuit
[February 27, 2013]
Justice Thomas, with whom Justice Kennedy joins, and with whom Justice Scalia joins except for Part I–B, dissenting.
The Court today allows plaintiffs to obtain certification of securities-fraud class actions without proof that common questions predominate over individualized questions of reliance, in contravention of Federal Rule of Civil Procedure 23(b)(3). The Court does so by all but eliminating materiality as one of the predicates of the fraud-on-the-market theory, which serves as an alternative mode of es-tablishing reliance. See Basic Inc. v. Levinson, 485 U. S. 224 –250 (1988). Without demonstrating materiality at certification, plaintiffs cannot establish Basic’s fraud-on-the-market presumption. Without proof of fraud on the market, plaintiffs cannot show that otherwise individualized questions of reliance will predominate, as required by Rule 23(b)(3). And without satisfying Rule 23(b)(3), class certification is improper. Fraud on the market is thus a condition precedent to class certification, without which individualized questions of reliance will defeat certification.
The Court’s opinion depends on the following assumption: Plaintiffs will either (1) establish materiality at the merits stage, in which case class certification was proper because reliance turned out to be a common question, or (2) fail to establish materiality, in which case the claim would fail on the merits, notwithstanding the fact that the class should not have been certified in the first place, because reliance was never a common question. The failure to establish materiality retrospectively confirms that fraud on the market was never established, that questions regarding the element of reliance were not common under Rule 23(b)(3), and, by extension, that certification was never proper. Plaintiffs cannot be excused of their Rule 23 burden to show at certification that questions of reliance are common merely because they might lose later on the merits element of materiality. Because a securities-fraud plaintiff invoking Basic’s fraud-on-the-market presumption to satisfy Rule 23(b)(3) should be required to prove each of the predicates of that theory at certification in order to demonstrate that questions of reliance are common to the class, I respectfully dissent.
We begin with §10 of the Securities Exchange Act of 1934, 15 U. S. C. §78j (2006 ed. and Supp. V). [ 1 ] We “have implied a private cause of action from the text and purposes of §10(b)” and Securities and Exchange Commission Rule 10b–5, 17 CFR §240.10b–5 (2011). [ 2 ] Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___ (2011) (slip op., at 9). See also Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6, 13, n. 9 (1971) (“It is now established that a private right of action is implied under §10(b)”). The elements of an implied §10(b) cause of action for securities fraud are “ ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrep-resentation or omission; (5) economic loss; and (6) loss causation.’ ” Matrixx, supra, at ___ (slip op., at 9) (quoting Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008) ). This case concerns the reliance element of the §10(b) claim and its interaction with Rule 23(b)(3).
To prove reliance, a plaintiff, whether proceeding individually or as a class member, must show that his stock transaction was caused by the specific alleged misstatement. “[P]roof of reliance ensures that there is a proper ‘connection between a defendant’s misrepresentation and a plaintiff’s injury.’ ” Erica P. John Fund, Inc. v. Hal-liburton Co., 563 U. S. ___, ___ (2011) (slip op., at 4) (quoting Basic, supra, at 243). [ 3 ] To satisfy this element, a plaintiff traditionally was required to “sho[w] that he was aware of a company’s statement and engaged in a relevant transaction . . . based on that specific misrepresentation.” Erica P. John Fund, supra, at ___ (slip op., at 4) (emphasis added). In the face-to-face fraud cases from which securities claims historically arose, see, e.g., Dura Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336 –344 (2005) (discussing common-law roots of securities-fraud actions), this requirement was easily met by showing that the seller made statements directly to the purchaser and that the purchaser bought stock in reliance on those statements. However, in a modern securities market many, if not most, individuals who purchase stock from third parties on an impersonal exchange will be unaware of statements made by the issuer of those securities. As a result, such purchaser-plaintiffs are unable to meet the traditional reliance requirement because they cannot establish that they “engaged in a relevant transaction . . . based on [a] specific misrepresentation.” Erica P. John Fund, supra, at ___ (slip op., at 4).
This concern was the driving force behind the development of the fraud-on-the-market theory adopted in Basic. Because individuals trading stock on an impersonal market often cannot show reliance even for purposes of an individual securities-fraud action, Basic permitted “plaintiffs to invoke a rebuttable presumption of reliance.” Erica P. John Fund, supra, at ___ (slip op., at 5). [ 4 ] Basic presumes that “ ‘in an open and developed securities market, the price of a company’s stock is determined by the avail-able material information regarding the company and its business.’ ” 485 U. S., at 241 (quoting Peil v. Speiser, 806 F. 2d 1154, 1160–1161 (CA3 1986); emphasis added). [ 5 ] “ ‘Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.’ ” 485 U. S., at 241–242. As a result, “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price,” and “an investor’s reliance on any public material misrepresentations” may therefore “be presumed for purposes of a Rule 10b–5 action.” Id., at 247 (emphasis added).
If a plaintiff opts to show reliance through fraud on the market, Basic is clear that the plaintiff must show the following predicates in order to prevail: (1) an efficient market, (2) a public statement, (3) that the stock was traded after the statement was made but before the truth was revealed, and (4) the materiality of the statement. Id., at 248, n. 27. [ 6 ] Both the Court and respondent agree that materiality is a necessary component of fraud on the market. See, e.g., ante, at 9 (materiality is “indisputably” “an essential predicate of the fraud-on-the-market the-ory”); Brief for Respondent 29 (“If the statement is not materially false, then no one in the class can establish reliance via the integrity of the market”). The materiality of a specific statement is, therefore, essential to the fraud-on-the-market presumption, which in turn enables a plaintiff to prove reliance.
Basic’s fraud-on-the-market presumption is highly sig-nificant because it makes securities-fraud class actions possible by converting the inherently individual reliance inquiry into a question common to the class, which is necessary to satisfy the dictates of Rule 23(b)(3). [ 7 ] Rule 23(b)(3) requires the party seeking certification to prove that “questions of law or fact common to class members predominate over any questions affecting only individual members.” A plaintiff seeking class certification is not required to prove the elements of his claim at the certifi-cation stage, but he must show that the elements of the claim are susceptible to classwide proof. See, e.g., Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___, n. 6 (2011) (slip op., at 11, n. 6) (“[P]laintiffs seeking 23(b)(3) certifi-cation must prove that their shares were traded on an ef-ficient market,” an element of the fraud-on-the-market theory (emphasis added)). Without that proof, there is no justification for certifying a class because there is no “ ‘capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.’ ” Id., at ___ (slip op., at 9–10) (quoting Nagareda, Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 132 (2009)).
If plaintiffs fail to show that reliance is a common question at the time of certification, certification is improper. For if reliance is not a common question, each plaintiff would be required to prove that he in fact relied on a misstatement, a showing which is simply not susceptible to classwide proof. Individuals make stock transactions for divergent, even idiosyncratic, reasons. As the leading pre-Basic fraud-on-the-market case recognized, “[a] purchaser on the stock exchanges may be either unaware of a specific false representation, or may not directly rely on it; he may purchase because of a favorable price trend, price earnings ratio, or some other factor.” Blackie v. Barrack, 524 F. 2d 891, 907 (CA9 1975). The inquiry’s inherently individualized nature renders it impossible to generate the common answers necessary for certification under Rule 23(b)(3). See Basic, 485 U. S., at 242 (“Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones”).
The Court’s solution in Basic was to allow putative class members to prove reliance through the fraud-on-the-market presumption. Id., at 241–250. As the Court today recognizes, failure to establish fraud on the market “leaves open the prospect of individualized proof of reliance.” Ante, at 17. Notably, the Court and the Ninth Circuit both acknowledge that in order to obtain the benefit of the presumption, plaintiffs must establish two of the fraud-on-the-market predicates at class certification: (1) that the market was generally efficient, and (2) that the alleged misstatement was public. See ante, at 16 (acknowledging “that market efficiency and the public nature of the alleged misrepresentations must be proved before a securities-fraud class action can be certified”); 660 F. 3d 1170, 1175 (CA9 2011) (same). See also Erica P. John Fund, 563 U. S., at ___ (slip op., at 5) (“It is undisputed that securities fraud plaintiffs must prove,” at certification inter alia, “that the alleged misrepresentations were publicly known . . . [and] that the stock traded in an efficient market”). The Court is correct insofar as its statements recognize that fraud on the market is a condition precedent to showing that there are common questions of reliance at the time of class certification.
Nevertheless, the Court asserts that materiality—by its own admission an essential predicate to invoking fraud on the market—need not be established at certification because it will ultimately be proved at the merits stage. Ante, at 16–18. This assertion is an express admission that parties will not know at certification whether reliance is an individual or common question.
To support its position, the Court transforms the predicate certification inquiry into a novel either-or inquiry occurring much later on the merits. According to the Court, either (1) plaintiffs will prove materiality on the merits, thus demonstrating ex post that common questions predominated at certification, or (2) they will fail to prove materiality, at which point we learn ex post that certification was inappropriate because reliance was not, in fact, a common question. In the Court’s second scenario, fraud on the market was never established, reliance for each class member was inherently individualized, and Rule 23(b)(3) in fact should have barred certification long ago. [ 8 ] The Court suggests that the problem created by the second scenario is excusable because the plaintiffs will lose anyway on alternative merits grounds, and the case will be over. See ante, at 17 (“[F]ailure of proof on the issue of materiality [at the merits stage] . . . not only precludes a plaintiff from invoking the fraud-on-the-market presumption of classwide reliance; it also establishes as a matter of law that the plaintiff cannot prevail on the merits of her Rule 10b–5 claim”). But nothing in logic or precedent justifies ignoring at certification whether reliance is susceptible to Rule 23(b)(3) classwide proof simply because one predicate of reliance—materiality—will be resolved, if at all, much later in the litigation on an independent merits element.
It is the Court, not Amgen, that “would have us put the cart before the horse,” ante, at 3, by jumping chronologically to the §10(b) merits element of materiality. But Rule 23, as well as common sense, requires class certification issues to be addressed first. See Rule 23(c)(1)(A) (“At an early practicable time after a person sues or is sued . . . the court must determine by order whether to certify the action as a class action”). A plaintiff who cannot prove materiality does not simply have a claim that is “ ‘dead on arrival’ ” at the merits, ante, at 17 (quoting 660 F. 3d, at 1175); he has a class that should never have arrived at the merits at all because it failed Rule 23(b)(3) certification from the outset. Without materiality, there is no fraud- on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible. And the fact that evidence of materiality goes to both fraud on the market at certification and an independent merits element is no issue; Wal-Mart expressly held that a court at certification may inquire into questions that also have later relevance on the merits. See 564 U. S., at ___ (slip op., at 10–11). The Court reverses that inquiry, effectively saying that certification may be put off until later because an adverse merits determination will retroactively wipe out the entire class. However, a plaintiff who cannot prove materiality cannot prove fraud on the market and, thus, cannot demonstrate that the question of reliance is susceptible of a classwide answer.
The fact that a statement may prove to be material at the merits stage does not justify conflating the doctrinally independent (and distinct) elements of materiality and reliance. [ 9 ] The Court’s error occurs when, instead of asking whether the element of reliance is susceptible to classwide proof, the Court focuses on whether materiality is susceptible to classwide proof. Ante, at 10 (“[T]he piv-otal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will ‘predominate’ ”). The result is that the Court effectively equates §10(b) materiality with fraud-on-the-market materiality and elides reliance as a §10(b) element. But a plaintiff seeking certification under Rule 23 bears the burden of proof with regard to all the elements of a §10(b) claim, which includes materiality and reliance. As Wal-Mart explained, “[a] party seeking class certification must affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.” 564 U. S., at ___ (slip op., at 10). If the elements of fraud on the market are not proved at certification, a plaintiff has failed to carry his burden of establishing that questions of individualized reliance will not predominate, without which the plaintiff class cannot obtain certification. Cf. id., at ___ (slip op., at 12) (holding in Rule 23(a)(2) context that “[w]ithout some glue hold- ing the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer”). It is only by establishing all of the elements of the fraud-on-the-market presumption that reliance can be proved on a classwide basis. Therefore, if a plaintiff wishes to use Basic’s presumption to prove that reliance is a common question, he must establish the entire presumption, including materiality, at the class certification stage.
Nor is it relevant, as respondent argues, that requiring plaintiffs to establish all predicates of fraud on the market at certification will make it more difficult to obtain certification. See Brief for Respondent 35–38. In Basic, four Justices of a six-Justice Court created the fraud-on-the-market presumption from a combination of newly minted economic theories, 485 U. S., at 250–251, n. 1 (White, J., concurring in part and dissenting in part), and “considerations of fairness, public policy, and probability,” id., at 245 (majority opinion), to allow claims that otherwise would have been barred due to the plaintiffs’ inability to show reliance, id., at 242. Basic is a judicially invented doctrine based on an economic theory adopted to ease the burden on plaintiffs bringing claims under an implied cause of action. There is nothing untoward about requiring plaintiffs to take the steps that the Basic Court created in an effort to save otherwise inadequate claims.
The majority’s approach is, thus, doctrinally incorrect under Basic. Its shortcomings are further highlighted by the role that materiality played in the pre-Basic development of the fraud-on-the-market theory as a condition precedent to showing that there are common questions of reliance in the class-action context. Materiality, at the time of certification, has been a driving force behind the theory from the outset. This fact further supports the need to prove materiality at the time the fraud-on-the-market theory is invoked to show that questions of reliance can be answered on a classwide basis.
Before Basic, two signposts marked the way for courts applying the fraud-on-the-market theory. Both demonstrate that the materiality of an alleged falsehood was not a mere afterthought but rather one of the primary reasons for allowing traditional proof of reliance to be brushed aside at certification. This fact weighs strongly in favor of the conclusion that materiality must be resolved at certi-fication when the fraud-on-the-market presumption is invoked to show that reliance can be proved on a classwide basis.
The first signpost was the Ninth Circuit’s 1975 opinion in Blackie, termed by one pre-Basic court the “seminal fraud on the market case.” Peil, 806 F. 2d, at 1163, n. 16. See also Basic, supra, at 251, n. 1 (White, J., dissenting) (“The earliest Court of Appeals case adopting this theory cited by the Court is Blackie v. Barrack, 524 F. 2d 891 (CA9 1975), cert. denied, 429 U. S. 816 (1976) ”).
Blackie arose from a $90 million loss reported by audio equipment manufacturer Ampex Corp. in its 1972 annual report. 524 F. 2d, at 894. [ 10 ] Ampex’s independent auditors not only refused to certify the 1972 annual report but also withdrew certification of all 1971 financial statements “because of doubts that the loss reported for 1972 was in fact suffered in that year.” Ibid. In resultant class actions, the defendants argued that reliance stood in the way of class certification under Rule 23(b)(3) because it was not a common question.
The Ninth Circuit disagreed. Instead, it relieved plaintiffs from providing traditional proof of reliance, ex-plaining that “causation is adequately established in the impersonal stock exchange context by proof of purchase and of the materiality of misrepresentations, without direct proof of reliance.” Id., at 906 (emphasis added). The court left no doubt that the materiality of the $90 million shortfall in Ampex’s financial statements was central to its determination that reliance could be presumed. It asserted that “[m]ateriality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price—when the purchase is made[,] the causational chain between defendant’s conduct and plaintiff’s loss is sufficiently established to make out a prima facie case.” Ibid. Materiality was not merely an important factor that allowed reliance to be presumed at certification; materiality was the factor. It demonstrated that the defendants had committed a fraud on the market, that all putative class plaintiffs had relied on it in purchasing stock, and, therefore, that questions of reliance would be susceptible to common answers. [ 11 ]
The second fraud-on-the-market signpost prior to Basic was a note in the Harvard Law Review, which described the nascent theory. See Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev. 1143 (1982) (hereinafter Harv. L. Rev. Note). The Sixth Circuit opinion reviewed in Basic termed the Note “[t]he clearest statement of the theory of presumption of reliance.” Levinson v. Basic Inc., 786 F. 2d 741, 750 (1986). Indeed, in the briefing for Basic itself, the plaintiffs, the United States, and plaintiffs’ amicus cited the article repeatedly as an authoritative statement on the subject. See Brief for Respondent 43, n. 18, 46, n. 20 (cited in Peil, supra, at 1160), Brief for Securities and Exchange Commission as Amicus Curiae 22, n. 25, 24, n. 30, 26, n. 32, and Brief for Joseph Harris et al. as Amicus Curiae 4, n. 2, in Basic Inc. v. Levinson, O. T. 1987, No. 86–279.
Like Blackie, the Note also hinged the fraud-on-the-market presumption of reliance on proof of materiality. Harv. L. Rev. Note 1161 (“In developed markets, which are apparently efficient, reliance should be presumed from the materiality of the deception” (emphasis added)). Ultimately, in language that will be familiar to anyone who has read Basic, the Note formulated a “pivotal assumption” underlying the fraud-on-the-market theory as the belief that:
“market prices respond to information disseminated (or not disseminated) concerning the companies whose securities are traded. In such a setting—often described as an ‘efficient market’—the reliance of some traders upon a material deception influences market prices and thereby affects even traders who never read or hear of the deception.” Harv. L. Rev. Note 1154 (footnote omitted).
Again, the materiality of the alleged misstatement was a key component, without which the market could not be presumed to move. As a result, without materiality it is impossible to say that there has been a fraud on the market at all, and if that is not the case there is no reason to believe that the market price at which stock transactions occurred was affected by an alleged misstatement or, by extension, that any market participants relied on it. Materiality should thus be proved when the fraud-on-the-market presumption is invoked, or there is no common-ality with respect to questions of reliance.
Nor did the importance of materiality diminish in the Sixth Circuit opinion reviewed in Basic. Rather, the court followed the path marked by the signposts discussed above. It excused plaintiffs from offering traditional evidence of reliance, so long as “a defendant is shown to have made a material public misrepresentation that, if relied on directly, would fraudulently induce an individual to mis-judge the value of the stock.” Levinson, 786 F. 2d, at 750 (emphasis added). The court’s analysis made clear that materiality should be demonstrated at the time the presumption was invoked: “In order to invoke the presumption of reliance based upon the fraud on the market theory, a plaintiff must allege and prove . . . that the mis-representations were material . . . .” Ibid. (citing Blackie, 524 F. 2d, at 906).
Finally, the briefing before this Court in Basic itself built upon this framework and the foundational principle that materiality is an integral part of the theory. Criti-cally, the Basic defendants argued that the plaintiffs could not establish fraud on the market at certification even if the theory were valid because the alleged misstatement was immaterial. They “contrast[ed] the likely market impact of disclosure of the [$90 million Blackie loss] . . . with the disclosure of the information which respondents contend[ed] rendered Basic’s statements materially misleading.” See Brief for Petitioners in O. T. 1987, No. 86–279, p. 42. The Basic defendants concluded that “the differences between a company’s $90 million loss and a company’s sporadic contacts with a friendly suitor are sub-stantial. . . . [T]he fraud on the market theory, if it has vitality, should not be applied in a case such as this.” Id., at 43.
In response, the plaintiffs in Basic did not argue that the defendants misunderstood the role of materiality in the fraud-on-the-market theory. They instead advanced a now-foreclosed interpretation of dicta from Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 177 (1974) :
“Petitioners’ final argument—that respondents will be unable to establish that Basic’s repeated false and misleading statements impacted the price of Basic stock over a fourteen month period—represents an effort to litigate the merits of this case on the motion for class certification. . . . As this Court held in Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 177 (1974) : ‘We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.’ ” Brief for Respondents in O. T. 1987, No. 86–279, p. 54.
The Court rejected this reading of Eisen two Terms ago, explaining that the very language the Basic plaintiffs quoted was “sometimes mistakenly cited” as prohibiting inquiry into “the propriety of certification under Rules 23(a) and (b).” Wal-Mart Stores, Inc., 564 U. S., at ___, n. 6 (slip op., at 10, n. 6). That reading, the Court explained, “is the purest dictum and is contradicted by our other cases.” Ibid. The Basic defendants’ reply is consistent with Wal-Mart:
“Putative class representatives, such as respondents, should not be permitted to invoke the fraud on the market theory while, at the same time, arguing that courts may not make any preliminary inquiry into the claimed impact on the market. See, e.g., Resp. Br., p. 54. By seeking the benefit of the presumption, respondents necessarily invite judicial scrutiny of the circumstances in which it is invoked.” Reply Brief for Petitioners in O. T. 1987, No. 86–279, p. 18.
Well said. The history of Basic is worth the volume of argument offered by the majority. Cf. New York Trust Co. v. Eisner, 256 U. S. 345, 349 (1921) (majority opinion of Holmes, J.). Materiality was central to the development, analysis, and adoption of the fraud-on-the-market theory both before Basic and in Basic itself. Materiality, therefore, must be demonstrated to prove fraud on the market, and until materiality of an alleged misstatement is shown there is no reason to believe that all market participants have relied equally on it. Otherwise individualized questions of reliance remain. This history confirms that materiality must be proved at the time that the theory is invoked—i.e., at certification.
I, thus, would reverse the judgment of the Ninth Circuit and hold that a plaintiff invoking the fraud-on-the-market presumption bears the burden to establish all the elements of fraud on the market at certification, including the materiality of the alleged misstatement.