WASHINGTON (CN) - To proceed as a class, investors need not prove that alleged lies about Amgen's anemia drugs inflated stock prices, the Supreme Court ruled Wednesday.
In a federal complaint, Connecticut Retirement Plans and Trust Funds accused Amgen of continuing to promote anemia drugs in the face of concerns from the U.S. Food and Drug Administration. It said Amgen hid the true nature of these concerns and shuttered a clinical trial that would have showed exacerbated tumor growth in some patients using the product.
Amgen also allegedly misrepresented the on-label safety of the drugs and improperly promoted off-label usage, according to the complaint.
Connecticut Retirement claimed that it met the requirement for class certification under Federal Rule of Civil Procedure 23 by invoking the presumption of Amgen's "fraud on the market."
This argument ultimately persuaded U.S. District Judge Philip Gutierrez to certify the class in Los Angeles, and the 9th Circuit to affirm
in November 2011.
But Amgen insisted that the investors must prove materiality at this stage since immaterial misrepresentations or omissions would not affect stock prices in an efficient market.
A six-justice majority of the Supreme Court concluded otherwise on Wednesday.
"While Connecticut Retirement certainly must prove materiality to prevail on the merits, we hold that such proof is not a prerequisite to class certification," Justice Ruth Bader Ginsburg wrote for the court.
Amgen's argument "would have us put the cart before the horse," Ginsburg added.
Ginsburg noted that "the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the 'metho[d]' best suited to adjudication of the controversy 'fairly and efficiently.'"
In a concurring opinion, Justice Samuel Alito emphasized the need to revisit the fraud-on-the-market presumption, which was established in the 1988 decision Basic Inc. v. Levinson
"As the dissent observes, more recent evidence suggests that the presumption may rest on a faulty economic premise," Alito wrote. "In light of this development, reconsideration of the Basic
presumption may be appropriate."
Justice Clarence Thomas insisted in the dissent that the investors need to demonstrate materiality at certification to "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)," according to the dissent joined in full by Justice Anthony Kennedy and in part by Justice Antonin Scalia. "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 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," Thomas added. "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."
In the section of the dissent from which Scalia abstained, Thomas prodded the idea that investors should be left to prove materiality at the merits stage.
"This assertion is an express admission that parties will not know
at certification whether reliance is an individual or common question," Thomas wrote (Emphasis in original.)
Quoting the majority opinion, Thomas said that "it is the court, not Amgen, that 'would have us put the cart before the horse,' 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," he added. "A plaintiff who cannot prove materiality does not simply have a claim that is 'dead on arrival' at the merits; 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 fraudon-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible."
Scalia noted in a separate dissent that Connecticut Retirement's superficial grant of class certification may help it secure a "substantial settlement" if Amgen wishses to avoid the high costs and risks of further litigation.
"It does an injustice to the Basic
court to presume without clear evidence - and indeed in the face of language to the contrary - that it was establishing a regime in which not only those market class-action suits that have earned the presumption of reliance pass beyond the crucial certification stage, but all
market-purchase and market-sale class-action suits do so, no matter what the alleged misrepresentation," Scalia wrote. "The opinion need not be read this way, and it should not.
"The fraud-on-the-market theory approved by Basic
envisions a demonstration of materiality not just for substantive recovery but for certification. Today's holding does not merely accept what some consider the regrettable consequences of the four-justice opinion in Basic
; it expands those consequences from the arguably regrettable to the unquestionably disastrous."