Connecticut Retirement Plans v. Amgen: Ninth Circuit Clarifies Role of Fraud-on-the-Market Presumption on Certification

Here's another older case that I never got around to discussing.

In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., 660 F.3d 1170 (9th Cir., 11/8/11), the Ninth Circuit Court of Appeals discussed the fraud-on-the-market presumption of reliance in securities fraud class actions.  The presumption provides that the market price of a security traded in an efficient market reflects all public information. Therefore that a buyer of the security is presumed to have relied on the truthfulness of that information in purchasing the security. The Court held that the plaintiff must do the following in order to invoke the fraud-on-the-market presumption of reliance when moving for class certification:

1. Show that the security in question was traded in an efficient market;
2. Show that the alleged misrepresentations were public; and 
3. "Plausibly allege" that the alleged misrepresentations were material. 

660 F.3d at 1172. The plaintiff need not prove at the time of certification that the representations were material. That is a merits issue for summary judgment or trial. A defendant's rebuttal of the presumption -- in other words, the defendant's proof that the alleged misinformation was not material -- also is a merits issue that should be considered at trial or on summary judgment, rather than on certification.  Ibid.  

In Connecticut Retirement, the parties stipulated that the defendant's stock traded in an efficient market, the plaintiff plausibly alleged that the defendant made material, public misrepresentations.  The fraud-on-the-market presumption applied, and the trial court did not err in certifying the class.  Ibid.  

The Court explained as follows:

If the misrepresentations turn out to be material, then the fraud-on-the-market presumption makes the reliance issue common to the class, and class treatment is appropriate. But if the misrepresentations turn out to be immaterial, then every plaintiff's claim fails on the merits (materiality being a standalone merits element), and there would be no need for a trial on each plaintiff's individual reliance. Either way, the plaintiffs' claims stand or fall together—the critical question in the Rule 23 inquiry. As the Supreme Court said in [Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541 (2011)], "[w]hat matters to class certification ... is not the raising of common `questions'—even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation. Dissimilarities within the proposed class are what have the potential to impede the generation of common answers." 131 S.Ct. at 2551 (quoting Richard A. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N.Y.U. L.Rev. 97, 132 (2009)). 

660 F.3d at 1175.  

The Ninth Circuit joined the Third and Seventh Circuits in holding that the plaintiff need not prove materiality to invoke the presumption at certification.  In contrast, the First, Second, and Fifth Circuits require such proof.  It will be interesting to see whether the Supreme Court takes the opportunity to resolve this conflict.  If the Court were to take the issue up, the odds are that it will reverse the Ninth Circuit.  (According to SCOTUSblog, the Supreme Court reversed in 63% of the cases it took up in the 2011 term, and reversed in 71% of those from the Ninth Circuit.)  

The opinion is available here.