It's been a rough couple of years for class action plaintiffs attorneys, and a reversal by the U.S. Supreme Court on a securities case it will hear this month could make the job tougher and perhaps more financially rewarding as well.
Securities lawyers are speculating whether the Court will tighten the criteria for certifying classes in securities cases when it rules on Connecticut Retirement Plans and Trust Funds v. Amgen, Inc.
(660 F.3d 1170 (9th Cir. 2011) cert. granted, 132 S. Ct. 2742 (2012)).
If the Court reverses the Ninth Circuit's decision on the role of materiality at the certification stage, it would "give defendants another tool to terminate the litigation," says Catherine Kevane, a securities litigation partner at Fenwick & West in San Francisco.
In their suit, shareholders of the Southern California biotech and medical company Amgen, Inc. claim that the company misled the public about FDA safety concerns over two of its anemia drugs. When the health risks associated with the two drugs, Aranesp and Epogen, were ultimately disclosed, share prices fell and shareholders cried foul.
The Supreme Court will now decide if a securities plaintiff must prove - or simply plausibly allege - at the class- certification stage whether a defendant made public misrepresentations that materially affected the stock price, a necessary element of 10(b)(5) securities cases.
The ruling hopefully will resolve a split among the circuits. The Ninth, Third, and Seventh circuits have held that a plausible allegation of materiality is sufficient for class certification, while the First, Second, and Fifth circuits require a higher level of proof. The Supreme Court will also hear a Third Circuit antitrust case about evidentiary requirements at the class certification stage (Behrend v. Comcast Corp.
, 655 F.3d 182 (3d Cir. 2011) cert. granted 2012 WL 113090).
Requiring proof of materiality for certification could shake up the Ninth Circuit, a hotbed of securities class actions. It is traditionally one of three circuits, along with the Second and Third, where cases with the largest financial losses are filed, according to Cornerstone Research. In 2011, shareholder losses totaled $50 billion in cases heard by the Ninth Circuit, the highest tally nationwide.
Joseph Tabacco, a partner in the San Francisco office of the plaintiffs securities firm Berman DeValerio, would like to see the Court uphold the ruling. "What defendants seem to be arguing is that plaintiffs be denied the chance to litigate [the issue of materiality] at trial by jury," he contends.
But echoing one of Amgen's arguments, Kevin Muck, chair of securities litigation at Fenwick & West in San Francisco, says the Court should consider that "after certification of a class, there is a lot of pressure on defendants to settle. And courts are often reluctant to consider materiality at the motion-to-dismiss stage. So, as a practical matter, if materiality isn't tested at class certification, it may never be," says Muck.
Requiring securities plaintiffs to prove materiality for class certification will almost certainly lengthen what are often already very long pre-merits proceedings. Amgen
, for example, has taken five years to get where it is today. Requiring proof "would unduly complicate [the] class-certification procedure, making the process much more protracted," says Tabacco.
On the plus side for plaintiffs, if they have to demonstrate materiality for class certification, says Kevane, they may try to negotiate larger settlements, arguing that an important element of their case has already been proved.