I attended the Supreme Court argument in Amgen yesterday. Law360 and the 10b-5 Daily, written by my former Wilson Sonsini partner Lyle Roberts (now at Cooley), have posted good summaries of the argument.
After a reminder about the legal issue, I offer some thoughts about the argument, including Justice Scalia’s statement, “So maybe we should overrule Basic ….”
The Legal Issue
Reliance is an essential element of a Section 10(b) claim. Absent some way to harmonize individual issues of reliance, however, class treatment of a securities class action is not possible; individual issues would overwhelm common ones, precluding certification under Federal Rule of Civil Procedure 23(b)(3).
In Basic v. Levinson, the Supreme Court provided a solution: a rebuttable presumption of reliance based on the “fraud-on-the-market” theory, which provides that a security traded in an efficient market reflects all public material information. Purchasers (or sellers) rely on the integrity of the market price, and thus on a material misrepresentation. Decisions following Basic have established three conditions to its application: market efficiency, a public misrepresentation, and a purchase (or sale) between the misrepresentation and the disclosure of the “truth.”
At issue in Amgen is whether the materiality of an alleged misrepresentation is also a condition to the presumption’s application for purposes of Rule 23(b)(3).
The Core of the Dispute
Most of the Amgen argument centered on the following debate: Materiality is a substantive element of a Section 10(b) claim. Amgen and the plaintiffs agree that materiality, as a substantive element, is a legal question common to the class. The United States (and I suspect the plaintiffs too, if they had been asked) agreed that materiality is a condition to the application of the fraud-on-the-market doctrine for purposes of the merits, but not for purposes of Rule 23.
So the dispute boils down to this: if courts were to determine materiality at class certification, they would be deciding a “common question” (i.e. materiality as a substantive element), albeit for purposes of determining whether reliance is a common question; but if courts do not determine materiality at class certification, they are either prematurely or improperly certifying a class, because materiality is necessary to make reliance a common question. Justice Scalia amplified the latter point as follows:
Materiality is a common issue. Reliance is only a common issue if you accept the fraud-on-the-market theory. That’s the problem. And you are using the one, which is a common issue, to leapfrog into the second, to make the efficiency of the market reasoning something that it isn’t.
There was a lot of fairly technical discussion about the considerations bearing on these issues, including (a) the legal and practical effect of an immateriality ruling at class certification on a class member’s individual claim, (b) the difference between adjudication of materiality at class certification and summary judgment, and (c) the fact that market efficiency and a public statement – both undisputed conditions to the presumption’s application – also are common to all class members.
I’m not a Supreme Court observer and thus will leave the oral argument tea-leaf reading to others. But it seems to me that, in resolving the technical legal question, the Court will be influenced by precedent proscribing the limits of securities class actions because of the “danger of vexatiousness” they present and the extraordinary pressure a certified class places on defendants to settle. Justice Scalia emphasized the settlement-pressure point. In response to a question from Justice Breyer, Seth Waxman of Wilmer Hale, on Amgen’s behalf, synthesized the technical legal point and policy point nicely:
the point of Rule 23 is to say, you get to use this very useful and powerful device if you have the key to the gate, and the key to the gate is showing that the answer to the question, will reliance be proven commonly – not lost commonly, but proven commonly – is in fact yes.
Is Materiality Relevant to the Market-Efficiency Condition to the Fraud-on-the-Market Presumption of Reliance?
As I wrote in my October 15 blog post, one of the most interesting features of the briefing was Amgen’s argument that materiality is relevant to market efficiency, which the plaintiffs concede is a condition to application of the fraud-on-the-market presumption of reliance at class certification. Amgen based its argument on modern economic research showing that whether a market is efficiently processing information depends on the type of specific information at issue. During oral argument, plaintiffs called this argument “a new concoction.”
There was some questioning about Amgen’s market-efficiency argument – including by Justice Ginsburg, whose questioning otherwise seemed favorable to the plaintiffs. Justice Kennedy remarked that there have been “24 years of economic scholarship” since the Court decided Basic, and this scholarship “has shown that the efficient market theory is really an overgeneralization. It could be much more subtle than that and so you have an advanced theory. But you want us to ignore that.”
A rule that includes materiality in the analysis of market efficiency – an agreed condition to application of the presumption – might be a point on which a majority of justices can agree.
Last But Certainly Not Least: “So Maybe We Should Overrule Basic”
Fifty minutes into the argument, Justice Scalia finally raised the possibility of overruling Basic:
[T]hen maybe we shouldn’t have this fraud-on-the-market theory. Because the whole purpose of it is to assume that the whole class was damaged and relied – because you can rely on an efficient market. But you can only rely on an efficient market where there has been a material misrepresentation. So maybe we should overrule Basic because it was certainly based upon a theory that simply collapses once you remove the materiality element.