Thousand Oaks-based Amgen is set to argue a case before the U.S. Supreme Court that could make it harder for shareholders to band together and sue publicly traded companies over public comments made by top officials.
The court agreed to hear a stock-fraud case this fall between Amgen and Connecticut Retirement Plans and Trust Funds, the lead plaintiff in a class-action suit alleging that Amgen misled investors for three years about the safety of its Aranesp and Epogen drugs, inflating the company’s stock price. The anemia drugs can cut down on blood transfusions for certain patients.
The case centers on deeply procedural questions about when judges should allow shareholders to proceed with lawsuits as a class. Amgen lost its bid to deny shareholders class status in the 9th Circuit Court of Appeals in San Francisco. If Amgen prevails in the appeal, the net effect would likely be a higher bar for class certification.
That is important because the granting of class certification is when companies often opt to settle a case, regardless of the merits, rather than take it to trial. They pay large settlements to avoid the risk of potentially much larger judgments and legal bills, Amgen and its supporters argue.
The case is also important because shareholder class-action suits alleging that a company’s management misled investors into losses have become routine any time bad news breaks unexpectedly or a stock price plunges. Santa Barbara Bank & Trust parent Pacific Capital Bancorp faced such suits in 2009 after it announced losses that totaled more than $400 million for the year. And Goleta-based Deckers Outdoor Corp. is currently the target of lawsuits alleging that management misled investors about inventory and supply problems that led to a 50 percent decline in the company’s share prices.
In a brief supporting Amgen’s side for why the case should be heard at the Supreme Court, the U.S. Chamber of Commerce and the Pharmaceutical Research and Manufacturers of America argued that continuing to allow class certification the way it’s handled now “will inevitably lead to the settlement of countless marginal cases — indeed, cases that are not only meritless, but which never should have been certified — because the amounts at stake are simply too enormous to justify the risk of litigation.”
Arguing that the case shouldn’t be heard, the Connecticut pension group wrote that Amgen is attempting to spur the high court to rule on how hard it should be to pursue a shareholder class actions suit, a question that is better suited to Congress than the courts.
“Instead of a coherent legal argument, [Amgen] advances naked public policy arguments about the perceived unfairness of securities fraud defendants having to face the prospect of defending against claims brought by a certified class,” the brief reads.
The Connecticut pension fund argues that Amgen’s leaders downplayed or concealed safety concerns about Aranesp and Epogen starting in 2004, as the U.S. Food and Drug Administration was set to review the labeling on the drugs. The investors argue that reassurances from Amgen’s top brass kept the stock price high until 2007, when an adverse decision from the FDA sent shares tumbling.
The case turns on process and timing. In class-action lawsuits, the courts typically decide whether a group of plaintiffs should be allowed to band together before considering any of the merits of the case. The idea is that a hearing on the merits of the case should be reserved for trial.
Nonetheless, shareholders have to prove a few perquisites in order to become a class. To do so, many rely on a legal theory called fraud-on-the-market theory. The theory is that if a stock trades in an efficient market, then all public material information is reflected in the price of the stock. Therefore, if the shareholder relied on the price of the stock to make a decision to buy or sell, the shareholder implicitly relied on the public statements of the company’s top brass. And if those statements were false and the shareholder lost money when the truth came out, the shareholder can sue. The net effect is to allow nearly any shareholder who bought or sold stock during a particular time period to participate in a class.
The question that Amgen wants the Supreme Court to resolve is a disagreement among appeals courts around the nation about what shareholders need to show to become a class. Some of the courts require only that the shareholders prove there was an efficient market for shares — an easy burden for a widely held blue-chip stock like Amgen — to secure class certification. The question of whether public comments made by Amgen’s leaders were material — that is, whether they affected the stock price — is a question of merit that those courts leave for a trial.
Amgen, along with several appeals courts, disagrees. They argue that shareholders should have to show that the company’s statements moved the share price and were material. Amgen said it should have the chance to present evidence defending itself against allegations that statements it made misled investors. In this particular case, Amgen said it showed that analysts and savvy investors were well aware the safety of its drugs was on the FDA’s agenda regardless of any comments from its leaders, and it therefore concealed nothing from shareholders.
In recent years, the Supreme Court has been receptive to many of the positions put forth or endorsed by the U.S. Chamber of Commerce, and observers say Amgen’s odds of success are better than even.
“The conservative majority on the U.S. Supreme Court is extremely hostile to class actions. I would not be surprised if Amgen gets a hospitable audience,” said Herb Fox, a Santa Barbara-based appeals attorney who works in both state and federal courts. The Chamber of Commerce “is unbelievably influential, and a lot of their cases get accepted, and a lot of their positions get adopted.”
But an Amgen victory could also change the way class-action lawsuits proceed. In most class-action cases, discovery — the process of each side wringing documents and evidence out of each other — doesn’t take place unless the case goes to trial. When class certification is denied or the case is settled, the inner workings of big companies never comes to light. Tom Foley of Foley Bezek Behle & Curtis in Santa Barbara said that out of fairness to shareholders, courts are likely to allow more discovery during the class certification process if the bar for certification is raised.
“Be careful what you wish for, because if big companies want to move that burden of proof up in the case, then they will have to allow for fact discovery,” Foley said. “It’s going to weed out the weak cases, but it’s going to show the strong cases, too.”