Thousand Oaks-based Amgen has lost a case before the U.S. Supreme Court that would have made it much more difficult for shareholders of public companies to band together and sue firms when their leaders make false or misleading statements.
In Amgen v. Connecticut Retirement Plans and Trust Funds, the biotech giant sought to tighten the rules around when shareholders can form a class and sue over things that management did — or, more often, did not — say. When share prices suddenly decline, executives are often accused of having hidden information from investors.
So-called “fraud on the market” lawsuits have become commonplace and are sometimes settled regardless of merit in order to prevent a costly class-action trial. In the Tri-Counties, Pacific Capital Bancorp and Deckers Outdoor Corp. have faced such claims.
Amgen’s legal dispute revolved around the question of whether a shareholder needed to prove the materiality of a company’s statements — that is, whether words or comments from executives had an impact on the firm’s share prices — before forming a class.
Under the current legal theory, shareholders need only to show that they relied on the price of a stock to form a class. Markets are presumed to be efficient, meaning that any material statements are integrated into the price of the stock on the open markets. The question of whether management’s statements actually affected the share price is seen as core to the substance of the case, to be proven at trial rather than in the early stages of certifying a class to go to that trial.
In an 6-3 opinion by Ruth Bader Ginsberg that included Chief Justice John Roberts, the court wrote that Amgen’s position “puts the cart before the horse.” Requiring shareholders to individually prove materiality would destroy the purpose of a class action suit to let like-situated parties band together to prove a case. If there’s no materiality, there’s no case.
The court also rejected Amgen’s argument, on policy grounds, that granting class status to investors drives up the cost of doing business because the cases are often settled to avoid the expense of trial.
“Congress has rejected calls to undo the fraud-on-the-market theory. And contrary to Amgen’s argument that requiring proof of materiality before class certification would conserve judicial resources, Amgen’s position would necessitate time and resource intensive mini-trials on materiality at the class-certification stage,” the court wrote.
The dissenters were Justices Anthony Kennedy, Antonin Scalia and Clarence Thomas. In Scalia’s dissent, he argued that there was clear evidence that the prior cases mean that the class certification process shouldn’t require evidence that executives’ comments unduly boosted prices.
“Certification of the class is often, if not usually, the prelude to a substantial settlement by the defendant because the costs and risks of litigating further are so high,” Scalia wrote. The current case “expands [the prior case’s] consequences from the arguably regrettable to the unquestionably disastrous.”