Market intermediation, publicness, and securities class actions.

• Author: Sale, Hillary A.
• Position: III. Twenty-First Century Supreme Court Securities Jurisprudence A. The Four Cases 3. Amgen: Materiality Need Not Be Proved at Class Certification Before Basic Is Invoked through Conclusion, with footnotes, p. 514-552 - New Directions for Corporate and Securities Litigation

3. Amgen: Materiality Need Not Be Proved at Class Certification Before Basic Is Invoked

   In between Halliburton I and Halliburton II, defendants argued that plaintiffs must prove materiality at the class-certification stage in order to invoke the fraud-on-the-market presumption. (120) The Court was no more open to this argument than the loss-causation one. (121) This opinion, however, was substantially longer and more complex. It also generated three dissents and left space for additional litigation of the issues the Court did not decide.

   Materiality, like loss causation, is one of the elements of Rule 10b-5 fraud imported from the common law. Notably, neither of these elements is among the ones that Congress, in the PSLRA, decided to subject to the motion to dismiss and discovery stay. (122) In addition, materiality, unlike loss causation, is specifically mentioned in Basic as one of the prerequisites the plaintiff must show to invoke the fraud-on-the-market presumption of reliance (discussed in more detail in the next Part). (123) Defendants argued that because materiality was a predicate for the presumption of reliance, and without that presumption individual claims would dominate over common ones, plaintiffs should have to prove materiality at class certification. (124)

   The Supreme Court held that although proof of materiality is required to prevail on the merits, it is not a prerequisite to class certification. (125) The Court's opinion is strongly rooted in procedure, and more particularly in Rule 23(b)(3), which requires that common issues predominate to gain class certification. (126) The Court first pointed out that Rule 23(b)(3) requires only a showing that the questions common to the class predominate, not that they are answered on the merits for the class. (127) Then, the Court noted that materiality is an objective standard: it is a question common to all class members. (128) Thus, if the plaintiffs were unable to prove materiality, they would fail to do so for all class members, not for individuals, and therefore individual issues would not predominate on the question of materiality. (129) Specifically, the Court reasoned, "[a]s to materiality, therefore, the class is entirely cohesive: It will prevail or fail in unison." (130) As a result, the Court concluded that Rule 23(b)(3) did not stand in the way of certification. (131) Indeed, the role of 23(b)(3) is to determine only which method of adjudication is best and not to adjudicate the case in its entirety. (132)

   Three other aspects of the Court's opinion are worth noting. First, the Court responded to Amgen's policy argument that the failure to adopt its view would result in unwarranted settlement pressure. (133) The Court emphasized that Congress dealt with this issue through the PSLRA and did not choose to require early proof of materiality (or loss causation). (134) Instead, the Court stated that it had "no warrant to encumber securitiesfraud litigation by adopting an atextual requirement of precertification proof of materiality that Congress, despite its extensive involvement in the securities field, has not sanctioned." (135)

   Second, the Court rejected Amgen's argument that proof of materiality at class certification would conserve judicial resources, stating that, in fact, "Amgen's position ... would waste judicial resources." (136) The Court's point here is that increasing the focus on procedural resolutions of these claims complicates the litigation. Specifically, the Court noted that elevating proof of materiality (or loss causation) to the class-certification stage would create more, not less, litigation, resulting in "a mini-trial ... at the class-certification stage" that "would entail considerable expenditures of judicial time and resources, costs scarcely anticipated by Federal Rule of Civil Procedure 23(c)(1)(A), which instructs that the decision whether to certify a class action be made '[a]t an early practicable time.'" (137)

   Finally, four justices dissented or concurred in Amgen, raising a broader question that set the stage for Halliburton 11. Justice Alito's concurrence pointed out that the majority did not "revisit" Basic or the fraud-on-the-market presumption. (138) He then noted that recent evidence "suggested]" that the market-efficiency presumption might rest on a faulty economic premise, (139) referring to Justice Thomas's dissent, which Justices Kennedy and Scalia, in part, joined. The four justices appeared to be calling for an opportunity to overturn Basic, (140) and within months, the Court granted certiorari in Halliburton II. A holding in line with the four justices would effectively eliminate securities class actions, and, thus, raised heightened interest in the Court's Halliburton II deliberations.

4. Halliburton II: Affirming the Basic Presumption and Rejecting Proof but Allowing Rebuttal, of Presumption at Class Certification

   Halliburton I and Amgen paved the way for a full-on assault on Basic and the fraud-on-the-market presumption. They created the space for a robust challenge to the existence of 1 Ob-5 securities-fraud class actions. Halliburton II posed the question about proving market efficiency at the class-certification stage, but that was not the issue on most minds at the time the case was argued. Instead, the focus was on whether the Court would eliminate the fraud-on-the-market presumption altogether. (141)

   The blockbuster possibility of Halliburton II failed to materialize. Chief Justice Roberts's majority opinion reaffirmed the core holdings of Basic:'42 the element of reliance provides a connection between a misstatement and a purchase or sale, the traditional common-law form of reliance poses an unnecessarily unreasonable burden, and the rebuttable presumption of market reliance resolves the issue in an appropriate fashion for these anonymous transactions. (143) The Court also rejected the defendants' effort to require the plaintiff to prove price impact at class certification in order to invoke the presumption, noting that requirement would "effectively jettison half of [the presumption]." (144) Nevertheless, and in contravention of its expressed concern in Amgen about mini-trials, the Court held that the defendants were entitled to the opportunity at class certification to disprove market efficiency, referring to it as price impact, and creating confusion about the possible conflation of reliance, materiality, and loss causation. (145) As a result, the term "price impact," defined but unused in Halliburton I, and not used in Amgen, became the point of contest left open in Halliburton II. (146)

   Recall that before we detoured to Amgen, the Court had remanded Halliburton I, noting that any arguments properly preserved remained available to Halliburton. (147) Thus, on remand, the defendants argued that class certification remained inappropriate. (148) The core of their argument was that the evidence that they used to attempt to disprove loss causation revealed that the alleged misstatements did not impact the price of the stock. (149) The lack of a price impact at Time 2, they argued, rebutted the Time 1, Basic presumption, created a situation in which individual issues predominated over common ones, and defeated the use of the class-action mechanism. (150)

   The District Court rejected that argument and held that the defendants could not defeat class certification by forcing the plaintiffs to prove (or allowing defendants to disprove) the reliance element before the merits stage. (151) The Fifth Circuit, relying on Amgen, affirmed. (152) According to both courts, the defendants could use the price-impact evidence at trial, where actual proof is required, but not at class certification. (153)

   The defendants again petitioned for and gained a grant of certiorari from the Supreme Court. (154) And, unlike in Amgen, when the Court pushed the defendants back to trial for materiality, the Court opened a window for yet another fight at class certification. (155) To do so, the Court distinguished materiality from reliance, stating that materiality is "an objective issue susceptible to common, classwide proof." (156) All plaintiffs rise and fall together with a material or immaterial misstatement, defeating the claim on the merits. In contrast, the Court opined, price impact differs from materiality, because price impact is fundamental to Basic's premise: "It thus has everything to do with the issue of predominance at the class certification stage.... [Price impact] must be proved before class certification." (157) Although the first part of the Court's opinion affirmed the Basic reliance presumption and, thus, the class-action mechanism, the last part left space for the defendants to rebut the presumption--at the class-certification stage and, thus, before there is a trial or a jury. (158) In reaching its holding, the Court focused on price impact, (159) or more properly, the absence of price impact, as a term that it defined to provide the common link from Basic that would enable the reliance presumption. (160)

   This review of the cases reveals that defendants' dragnet for issues that can be decided at an early stage of litigation has reached almost every element of the traditional fraud claim, with materiality, reliance, and loss causation scrutinized for requirements about what the plaintiff must prove to invoke the presumption of Basic at class certification. We know from Halliburton I that loss causation is not on the list, (161) and from Amgen that materiality is not either. (162) Halliburton II tells us that plaintiffs continue to be entitled to the presumption of reliance, but at the same time, the Court gives prominence to the term "price impact" and permits defendants to deploy it to rebut the presumption at class certification. (163)

   As a group, these three cases, along with Dura, all contain narrow holdings. Until Halliburton II, the Court avoided the big issue left open in Basic...