AMGEN INC. v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
Amgen, Inc. is an American pharmaceutical corporation. The Food and Drug Administration (FDA) approved two Amgen products that stimulate production of red blood cells and reduce the need for blood transfusions in anemic patients. Amgen allegedly made misrepresentations to the FDA about the safety of these products. Connecticut Retirement Plans & Trust Funds brought an action against Amgen alleging four counts of misrepresentation. Connecticut Retirement Plans specifically alleged that Amgen misrepresented the nature of several FDA committee meetings to shareholders. It sought to certify a class of persons who purchased Amgen stock between April 22, 2004 and May 10, 2007, the dates when two of the meetings in question occurred. On May 10, 2007, Amgen’s stock value dropped by more than nine percent.
To certify a class under Rule 23 of the Federal Rules of Civil Procedure, a plaintiff must show that there are questions of law or fact common to the class, and that these questions predominate over questions affecting only individual members. Amgen opposed the class certification, arguing that the that the misrepresentations did not have any impact on the price of Amgen stock. The district court rejected Amgen’s arguments and granted the class certification. The United States Court of Appeals, Ninth Circuit, affirmed, rejecting Amgen’s argument that a plaintiff must give proof that the misrepresentations were material at the class certification stage.
1. Must the district court require proof of materiality before certifying a class action based on the fraud-upon-the-market theory in a misrepresentation case?
2. Must the district court allow Amgen, Inc. to present evidence rebutting the applicability of the fraud-upon-the-market theory before certifying the plaintiff class
Legal provision: Securities Exchange Act (1934)
No, no. Justice Ruth Bader Ginsburg delivered the opinion of the 6-3 majority. The Supreme Court held that the issue of materiality is dealt with when the case is decided on the merits, not during class certification. For a class to be certified, the members of the class must show only that the questions they have in common predominate over questions affecting solely individual members of the class. The Supreme Court also held that the district court ruled appropriately in preventing Amgen from bringing in rebuttal evidence to prevent class certification. Such evidence dealt with material issues of the case that would be decided when the case was considered on the merits, and thus did not relate to the issue of class certification.
In his concurring opinion, Justice Samuel A. Alito, Jr. wrote that, while he joins the majority’s opinion, recent economic evidence suggests that the fraud-on-the-market theory might rest on faulty economic presumptions that would be worth reexamining.
Justice Antonin Scalia wrote a dissenting opinion in which he argued that a presumption of materiality was necessary for class certification in a fraud-on-the-market case. Because such a case is predicated on the idea that the members of the class relied on faulty information, there cannot be a suit without evidence that the faulty information was material.
In his separate dissent, Justice Clarence Thomas argued that plaintiffs seeking to use the fraud-on-the-market theory must show evidence of all aspects of the theory, including materiality, to be certified as a class. Without proof of materiality along with the other elements, there is no evidence that the claim has class-wide relevance. Justice Anthony M. Kennedy and Justice Scalia joined in the dissent.
NOTICE: This opinion is subject to formal revision before publication in the preliminary print of the United States Reports. Readers are requested to notify the Reporter of Decisions, Supreme Court of the United States, Washington, D. C. 20543, of any typographical or other formal errors, in order that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
AMGEN INC., et al., PETITIONERS v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
on writ of certiorari to the united states court of appeals for the ninth circuit
[February 27, 2013]
Justice Ginsburg delivered the opinion of the Court.
This case involves a securities-fraud complaint filed by Connecticut Retirement Plans and Trust Funds (Connecticut Retirement) against biotechnology company Amgen Inc. and several of its officers (collectively, Amgen). Seeking class-action certification under Federal Rule of Civil Procedure 23, Connecticut Retirement invoked the “fraud-on-the-market” presumption endorsed by this Court in Basic Inc. v. Levinson, 485 U. S. 224 (1988) , and recognized most recently in Erica P. John Fund, Inc. v. Halliburton Co., 563 U. S. ___ (2011). The fraud-on-the-market premise is that the price of a security traded in an efficient market will reflect all publicly available information about a company; accordingly, a buyer of the security may be presumed to have relied on that information in purchasing the security.
Amgen has conceded the efficiency of the market for the securities at issue and has not contested the public character of the allegedly fraudulent statements on which Connecticut Retirement’s complaint is based. Nor does Amgen here dispute that Connecticut Retirement meets all of the class-action prerequisites stated in Rule 23(a): (1) the alleged class “is so numerous that joinder of all members is impracticable”; (2) “there are questions of law or fact common to the class”; (3) Connecticut Retirement’s claims are “typical of the claims . . . of the class”; and (4) Connecticut Retirement will “fairly and adequately protect the interests of the class.”
The issue presented concerns the requirement stated in Rule 23(b)(3) that “the questions of law or fact common to class members predominate over any questions affecting only individual members.” Amgen contends that to meet the predominance requirement, Connecticut Retirement must do more than plausibly plead that Amgen’s alleged misrepresentations and misleading omissions materially affected Amgen’s stock price. According to Amgen, certification must be denied unless Connecticut Retirement proves materiality, for immaterial misrepresentations or omissions, by definition, would have no impact on Amgen’s stock price in an efficient market.
While Connecticut Retirement certainly must prove materiality to prevail on the merits, we hold that such proof is not a prerequisite to class certification. Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class. Because materiality is judged according to an objective standard, the materiality of Amgen’s alleged misrepresentations and omissions is a question common to all members of the class Connecticut Retirement would represent. The alleged misrepresentations and omissions, whether material or immaterial, would be so equally for all investors composing the class. As vital, the plaintiff class’s inability to prove materiality would not result in individual questions predominating. Instead, a failure of proof on the issue of materiality would end the case, given that materiality is an essential element of the class members’ securities-fraud claims. As to materiality, therefore, the class is entirely cohesive: It will prevail or fail in unison. In no event will the individual circumstances of particular class members bear on the inquiry.
Essentially, Amgen, also the dissenters from today’s decision, would have us put the cart before the horse. To gain certification under Rule 23(b)(3), Amgen and the dissenters urge, Connecticut Retirement must first establish that it will win the fray. But the office of a Rule 23(b)(3) certification ruling is not to adjudicate the case; rather, it is to select the “metho[d]” best suited to adjudication of the controversy “fairly and efficiently.”I A
This case involves the interaction between federal securities-fraud laws and Rule 23’s requirements for class certification. To obtain certification of a class action for money damages under Rule 23(b)(3), a plaintiff must satisfy Rule 23(a)’s above-mentioned prerequisites of numerosity, commonality, typicality, and adequacy of representation, see supra, at 1–2, and must also establish that “the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” To recover damages in a private securities-fraud action under §10(b) of the Securities Exchange Act of 1934, 48Stat. 891, as amended, 15 U. S. C. §78j(b) (2006 ed., Supp. V), and Securities and Exchange Commission Rule 10b–5, 17 CFR §240.10b–5 (2011), a plaintiff must prove “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___ (2011) (slip op., at 9) (internal quotation marks omitted).
“Reliance,” we have explained, “is an essential element of the §10(b) private cause of action” because “proof of reliance ensures that there is a proper connection between a defendant’s misrepresentation and a plaintiff’s injury.” Halliburton, 563 U. S., at ___ (slip op., at 4) (internal quotation marks omitted). “The traditional (and most direct) way” for a plaintiff to demonstrate reliance “is by showing that he was aware of a company’s statement and engaged in a relevant transaction . . . based on that specific misrepresentation.” Ibid. We have recognized, however, that requiring proof of direct reliance “would place an unnecessarily unrealistic evidentiary burden on [a] plaintiff who has traded on an impersonal market.” Basic, 485 U. S., at 245. Accordingly, in Basic the Court endorsed the “fraud-on-the-market” theory, which permits certain Rule 10b–5 plaintiffs to invoke a rebuttable presumption of reliance on material misrepresentations aired to the general public. Id., at 241–249. 1
The fraud-on-the-market theory rests on the premise that certain well developed markets are efficient processors of public information. In such markets, the “market price of shares” will “reflec[t] all publicly available information.” Id., at 246. Few investors in such markets, if any, can consistently achieve above-market returns by trading based on publicly available information alone, for if such above-market returns were readily attainable, it would mean that market prices were not efficiently incorporating the full supply of public information. See R. Brealey, S. Myers, & F. Allen, Principles of Corporate Finance 330 (10th ed. 2011) (“[I]n an efficient market, there is no way for most investors to achieve consistently superior rates of return.”).
In Basic, we held that if a market is shown to be efficient, courts may presume that investors who traded securities in that market relied on public, material misrepresentations regarding those securities. See 485 U. S., at 245–247. This presumption springs from the very concept of market efficiency. If a market is generally efficient in incorporating publicly available information into a security’s market price, it is reasonable to presume that a particular public, material misrepresentation will be reflected in the security’s price. Furthermore, it is reasonable to presume that most investors—knowing that they have little hope of outperforming the market in the long run based solely on their analysis of publicly available information—will rely on the security’s market price as an unbiased assessment of the security’s value in light of all public information. Thus, courts may presume that investors trading in efficient markets indirectly rely on public, material misrepresentations through their “reliance on the integrity of the price set by the market.” Id., at 245. “[T]he presumption,” however, is “just that, and [can] be rebutted by appropriate evidence.” Halliburton, 563 U. S., at ___ (slip op., at 5). See also Basic, 485 U. S., at 248–249 (providing examples of showings that would rebut the fraud-on-the-market presumption).
Although fraud on the market is a substantive doctrine of federal securities-fraud law that can be invoked by any Rule 10b–5 plaintiff, see, e.g., Black v. Finantra Capital, Inc., 418 F. 3d 203, 209 (CA2 2005); Blackie v. Barrack, 524 F. 2d 891, 908 (CA9 1975), the doctrine has particular significance in securities-fraud class actions. Absent the fraud-on-the-market theory, the requirement that Rule 10b–5 plaintiffs establish reliance would ordinarily preclude certification of a class action seeking money damages because individual reliance issues would overwhelm questions common to the class. See Basic, 485 U. S., at 242. The fraud-on-the-market theory, however, facilitates class certification by recognizing a rebuttable presumption of classwide reliance on public, material misrepresentations when shares are traded in an efficient market. Ibid. 2B
In its complaint, Connecticut Retirement alleges that Amgen violated §10(b) and Rule 10b–5 through certain misrepresentations and misleading omissions regarding the safety, efficacy, and marketing of two of its flagship drugs. 3 According to Connecticut Retirement, these misrepresentations and omissions artificially inflated the price of Amgen’s stock at the time Connecticut Retirement and numerous other securities buyers purchased the stock. When the truth came to light, Connecticut Retirement asserts, Amgen’s stock price declined, resulting in financial losses to those who purchased the stock at the inflated price. In its answer to Connecticut Retirement’s complaint, Amgen conceded that “[a]t all relevant times, the market for [its] securities,” which are traded on the NASDAQ stock exchange, “was an efficient market”; thus, “the market for Amgen’s securities promptly digested current information regarding Amgen from all publicly available sources and reflected such information in Amgen’s stock price.” Consolidated Amended Class Action Complaint ¶¶199–200 in No. CV–07–2536 (CD Cal.); Answer ¶¶199–200.
The District Court granted Connecticut Retirement’s motion to certify a class action under Rule 23(b)(3) on behalf of all investors who purchased Amgen stock between the date of the first alleged misrepresentation and the date of the last alleged corrective disclosure. After granting Amgen’s request to take an interlocutory appeal from the District Court’s class-certification order, see Fed. Rule Civ. Proc. 23(f), the Court of Appeals affirmed. See 660 F. 3d 1170 (CA9 2011).
Amgen raised two arguments on appeal. First, Amgen contended that the District Court erred by certifying the proposed class without first requiring Connecticut Retirement to prove that Amgen’s alleged misrepresentations and omissions were material. Second, Amgen argued that the District Court erred by refusing to consider certain rebuttal evidence that Amgen had proffered in opposition to Connecticut Retirement’s class-certification motion. This evidence, in Amgen’s view, demonstrated that the market was well aware of the truth regarding its alleged misrepresentations and omissions at the time the class members purchased their shares.
The Court of Appeals rejected both contentions. Amgen’s first argument, the Court of Appeals noted, made the uncontroversial point that immaterial misrepresentations and omissions “by definition [do] not affect . . . stock price[s] in an efficient market.” Id., at 1175. Thus, where misrepresentations and omissions are not material, there is no basis for presuming classwide reliance on those misrepresentations and omissions through the information-processing mechanism of the market price. “The problem with that argument,” the Court of Appeals ob-served, is evident: “[B]ecause materiality is an element of the merits of their securities fraud claim, the plaintiffs cannot both fail to prove materiality yet still have a viable claim for which they would need to prove reliance individually.” Ibid. The Court of Appeals thus concluded that “proof of materiality is not necessary” to ensure compliance with Rule 23(b)(3)’s requirement that common questions predominate. Id., at 1177.
With respect to Amgen’s second argument, the Court of Appeals determined that Amgen’s proffered rebuttal evidence was merely “a method of refuting [the] materiality” of the misrepresentations and omissions alleged in Connecticut Retirement’s complaint. Ibid. Having already concluded that a securities-fraud plaintiff does not need to prove materiality before class certification, the court similarly held that “the district court correctly refused to consider” Amgen’s rebuttal evidence “at the class certification stage.” Ibid.
We granted Amgen’s petition for certiorari, 567 U. S. ___ (2012), to resolve a conflict among the Courts of Appeals over whether district courts must require plaintiffs to prove, and must allow defendants to present evidence rebutting, the element of materiality before certifying a class action under §10(b) and Rule 10b–5. Compare 660 F. 3d 1170 (case below); and Schleicher v. Wendt, 618 F. 3d 679, 687 (CA7 2010) (materiality need not be proved at the class-certification stage), with In re Salomon Analyst Metromedia Litigation, 544 F. 3d 474, 484–485, 486, n. 9 (CA2 2008) (plaintiff must prove, and defendant may present evidence rebutting, materiality before class certification). See also In re DVI, Inc. Securities Litigation, 639 F. 3d 623, 631–632, 637–638 (CA3 2011) (plaintiff need not prove materiality before class certification, but defendant may present rebuttal evidence on the issue).II A
The only issue before us in this case is whether Connecticut Retirement has satisfied Rule 23(b)(3)’s requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members.” Although we have cautioned that a court’s class-certification analysis must be “rigorous” and may “entail some overlap with the merits of the plaintiff’s underlying claim,” Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___ (2011) (slip op., at 10) (internal quotation marks omitted), Rule 23 grants courts no license to engage in free-ranging merits inquiries at the certification stage. Merits questions may be considered to the extent—but only to the extent—that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied. See id., at ___, n. 6 (slip op., at 10, n. 6) (a district court has no “ ‘authority to conduct a preliminary inquiry into the merits of a suit’ ” at class certification unless it is necessary “to determine the propriety of certification” (quoting Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 177 (1974) )); Advisory Committee’s 2003 Note on subd. (c)(1) of Fed. Rule Civ. Proc. 23, 28 U. S. C. App., p. 144 (“[A]n evaluation of the probable outcome on the merits is not properly part of the certification decision.”).
Bearing firmly in mind that the focus of Rule 23(b)(3) is on the predominance of common questions, we turn to Amgen’s contention that the courts below erred by failing to require Connecticut Retirement to prove the materiality of Amgen’s alleged misrepresentations and omissions before certifying Connecticut Retirement’s proposed class. As Amgen notes, materiality is not only an element of the Rule 10b–5 cause of action; it is also an essential predicate of the fraud-on-the-market theory. See Basic, 485 U. S., at 247 (“[W]here materially misleading statements have been disseminated into an impersonal, well-developed market for securities, the reliance of individual plaintiffs on the integrity of the market price may be presumed.” (emphasis added)). That theory, Amgen correctly observes, is premised on the understanding that in an efficient market, all publicly available information is rapidly incorporated into, and thus transmitted to investors through, the market price. See id., at 246–247. Because immaterial information, by definition, does not affect market price, it cannot be relied upon indirectly by investors who, as the fraud-on-the-market theory presumes, rely on the market price’s integrity. Therefore, the fraud-on-the-market theory cannot apply absent a material misrepresentation or omission. And without the fraud-on-the-market theory, the element of reliance cannot be proved on a classwide basis through evidence common to the class. See id., at 242. It thus follows, Amgen contends, that materiality must be proved before a securities-fraud class action can be certified.
Contrary to Amgen’s argument, the key question in this case is not whether materiality is an essential predicate of the fraud-on-the-market theory; indisputably it is. 4 Instead, the pivotal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will “predominate over any questions affecting only individual members” as the litigation progresses. Fed. Rule Civ. Proc. 23(b)(3). For two reasons, the answer to this question is clearly “no.”
First, because “[t]he question of materiality . . . is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor,” materiality can be proved through evidence common to the class. TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 445 (1976) . Consequently, materiality is a “common questio[n]” for purposes of Rule 23(b)(3). Basic, 485 U. S., at 242 (listing “materiality” as one of the questions common to the Basic class members).
Second, there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating. Because materiality is an essential element of a Rule 10b–5 claim, see Matrixx Initiatives, 563 U. S., at ___ (slip op., at 9), Connecticut Retirement’s failure to present sufficient evidence of materiality to defeat a summary-judgment motion or to prevail at trial would not cause individual reliance questions to overwhelm the questions common to the class. Instead, the failure of proof on the element of materiality would end the case for one and for all; no claim would remain in which individual reliance issues could potentially predominate.
Totally misapprehending our essential point, Justice Thomas’ dissent asserts that our “entire argument is based on the assumption that the fraud-on-the-market presumption need not be shown at certification because it will be proved later on the merits.” Post, at 11, n. 9. Our position is not so based. We rest, instead, entirely on the text of Rule 23(b)(3), which provides for class certification if “the questions of law or fact common to class members predominate over any questions affecting only individual members.” A failure of proof on the common question of materiality ends the litigation and thus will never cause individual questions of reliance or anything else to overwhelm questions common to the class. Therefore, under the plain language of Rule 23(b)(3), plaintiffs are not required to prove materiality at the class-certification stage. In other words, they need not, at that threshold, prove that the predominating question will be answered in their favor.
Justice Thomas urges that a plaintiff seeking class certification “must show that the elements of [her] claim are susceptible to classwide proof.” Post, at 7. See also post, at 11 (criticizing the Court for failing to focus its analysis on “whether the element of reliance is susceptible to classwide proof”). From this premise, Justice Thomas concludes that Rule 10b–5 plaintiffs must prove materiality before class certification because (1) “materiality is a necessary component of fraud on the market,” and (2) without fraud on the market, the Rule 10b–5 element of reliance is not “susceptible of a classwide answer.” Post, at 6, 10–11. See also post, at 12 (“[I]f a plaintiff wishes to use Basic’s presumption to prove that reliance is a common question, he must establish the entire presumption, including materiality, at the class certification stage.”).
Rule 23(b)(3), however, does not require a plaintiff seeking class certification to prove that each “elemen[t] of [her] claim [is] susceptible to classwide proof.” Post, at 7. What the rule does require is that common questions “predominate over any questions affecting only individual [class] members.” Fed. Rule Civ. Proc. 23(b)(3) (emphasis added). Nowhere does Justice Thomas explain how, in an action invoking the Basic presumption, a plaintiff class’s failure to prove an essential element of its claim for relief will result in individual questions predominating over common ones. Absent proof of materiality, the claim of the Rule 10b–5 class will fail in its entirety; there will be no remaining individual questions to adjudicate.
Consequently, proof of materiality is not required to establish that a proposed class is “sufficiently cohesive to warrant adjudication by representation”—the focus of the predominance inquiry under Rule 23(b)(3). Amchem Products, Inc. v. Windsor, 521 U. S. 591, 623 (1997) . No doubt a clever mind could conjure up fantastic scenarios in which an individual investor might rely on immaterial information (think of the superstitious investor who sells her securities based on a CEO’s statement that a black cat crossed the CEO’s path that morning). But such objectively unreasonable reliance does not give rise to a Rule 10b–5 claim. See TSC Industries, 426 U. S., at 445 (materiality is judged by an objective standard). Thus, “the individualized questions of reliance,” post, at 9, n. 8, that hypothetically might arise when a failure of proof on the issue of materiality dooms the fraud-on-the-market class are far more imaginative than real. Such “individualized questions” do not undermine class cohesion and thus cannot be said to “predominate” for purposes of Rule 23(b)(3). 5
Because the question of materiality is common to the class, and because a failure of proof on that issue would not result in questions “affecting only individual members” predominating, Fed. Rule Civ. Proc. 23(b)(3), Connecticut Retirement was not required to prove the materiality of Amgen’s alleged misrepresentations and omissions at the class-certification stage. This is not a case in which the asserted problem—i.e., that the plaintiff class cannot prove materiality—“exhibits some fatal dissimilarity” among class members that would make use of the class-action device inefficient or unfair. Nagareda, Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 107 (2009). Instead, what Amgen alleges is “a fatal similarity—[an alleged] failure of proof as to an element of the plaintiffs’ cause of action.” Ibid. Such a contention is properly addressed at trial or in a ruling on a summary-judgment motion. The allegation should not be resolved in deciding whether to certify a proposed class. Ibid. See also Schleicher, 618 F. 3d, at 687 (“[W]hether a statement is materially false is a question common to all class members and therefore may be resolved on a class-wide basis after certification.”).B
Insisting that materiality must be proved at the class-certification stage, Amgen relies chiefly on two arguments, neither of which we find persuasive. 61
Amgen points first to our statement in Halliburton that “securities fraud plaintiffs must prove certain things in order to invoke Basic’s rebuttable presumption of reliance,” including “that the alleged misrepresentations were publicly known . . . , that the stock traded in an efficient market, and that the relevant transaction took place ‘between the time the misrepresentations were made and the time the truth was revealed.’ ” 563 U. S., at ___ (slip op., at 5–6) (quoting Basic, 485 U. S., at 248, n. 27). See also Dukes, 564 U. S., at ___, n. 6 (slip op., at 11, n. 6) (“[P]laintiffs seeking 23(b)(3) certification [of a securities-fraud class action] must prove that their shares were traded on an efficient market.”). If these fraud-on-the-market predicates must be proved before class certification, Amgen contends, materiality—another fraud-on-the-market predicate—should be treated no differently.
We disagree. As an initial matter, the requirement that a putative class representative establish that it executed trades “between the time the misrepresentations were made and the time the truth was revealed” relates primarily to the Rule 23(a)(3) and (a)(4) inquiries into typicality and adequacy of representation, not to the Rule 23(b)(3) predominance inquiry. Basic, 485 U. S., at 248, n. 27. 7 A security’s market price cannot be affected by a misrepresentation not yet made, and in an efficient market, a misrepresentation’s impact on market price is quickly nullified once the truth comes to light. Thus, a plaintiff whose relevant transactions were not executed between the time the misrepresentation was made and the time the truth was revealed cannot be said to have indirectly relied on the misrepresentation through its reliance on the integrity of the market price. 8 Such a plaintiff’s claims, therefore, would not be “typical” of the claims of investors who did trade during the window between misrepresentation and truth revelation. Fed. Rule Civ. Proc. 23(a)(3). Nor could a court confidently conclude that such a plaintiff would “fairly and adequately protect the interests” of investors who traded during the relevant window. Rule 23(a)(4). The requirement that the fraud-on-the-market theory’s trade-timing predicate be established before class certification thus sheds little light on the question whether materiality must also be proved at the class-certification stage.
Amgen is not aided by Halliburton’s statement that market efficiency and the public nature of the alleged misrepresentations must be proved before a securities-fraud class action can be certified. As Amgen notes, market efficiency, publicity, and materiality can all be proved on a classwide basis. Furthermore, they are all essential predicates of the fraud-on-the-market theory. Unless those predicates are established, there is no basis for presuming that the defendant’s alleged misrepresentations were reflected in the security’s market price, and hence no grounding for any contention that investors indirectly relied on those misrepresentations through their reliance on the integrity of the market price. But unlike materiality, market efficiency and publicity are not indispensable elements of a Rule 10b–5 claim. See Matrixx Initiatives, 563 U. S., at ___ (slip op., at 9) (listing elements of a Rule 10b–5 claim). Thus, where the market for a security is inefficient or the defendant’s alleged misrepresentations were not aired publicly, a plaintiff cannot invoke the fraud-on-the-market presumption. She can, however, attempt to establish reliance through the “traditional” mode of demonstrating that she was personally “aware of [the defendant’s] statement and engaged in a relevant transaction . . . based on that specific misrepresentation.” Halliburton, 563 U. S., at ___ (slip op., at 4). Individualized reliance issues would predominate in such a lawsuit. See Basic, 485 U. S., at 242. The litigation, therefore, could not be certified under Rule 23(b)(3) as a class action, but the initiating plaintiff’s claim would remain live; it would not be “dead on arrival.” 660 F. 3d, at 1175.
A failure of proof on the issue of materiality, in contrast, not only precludes a plaintiff from invoking the fraud-on-the-market presumption of classwide reliance; it also establishes as a matter of law that the plaintiff cannot prevail on the merits of her Rule 10b–5 claim. Materiality thus differs from the market-efficiency and publicity predicates in this critical respect: While the failure of common, classwide proof on the issues of market efficiency and publicity leaves open the prospect of individualized proof of reliance, the failure of common proof on the issue of materiality ends the case for the class and for all individuals alleged to compose the class. See Brief for United States as Amicus Curiae 20 (“Unless the failure of common proof gives rise to a need for individualized proof, it does not cast doubt on the propriety of class certification.”). In short, there can be no actionable reliance, individually or collectively, on immaterial information. Because a failure of proof on the issue of materiality, unlike the issues of market efficiency and publicity, does not give rise to any prospect of individual questions overwhelming common ones, materiality need not be proved prior to Rule 23(b)(3) class certification.2
Amgen also contends that certain “policy considerations” militate in favor of requiring precertification proof of materiality. Brief for Petitioners 28. An order granting class certification, Amgen observes, can exert substantial pressure on a defendant “to settle rather than incur the costs of defending a class action and run the risk of potentially ruinous liability.” Advisory Committee’s 1998 Note on subd. (f) of Fed. Rule Civ. Proc. 23, 28 U. S. C. App., p. 143. See also AT&T Mobility LLC v. Concepcion, 563 U. S. ___, ___ (2011) (slip op., at 16) (class actions can entail a “risk of ‘in terrorem’ settlements”). Absent a requirement to evaluate materiality at the class-certification stage, Amgen contends, the issue may never be addressed by a court, for the defendant will surrender and settle soon after a class is certified. Insistence on proof of materiality before certifying a securities-fraud class action, Amgen thus urges, ensures that the issue will be adjudicated and not forgone. See also post, at 4 (Scalia, J., dissenting) (expressing the same concerns).
In this regard, however, materiality does not differ from other essential elements of a Rule 10b–5 claim, notably, the requirements that the statements or omissions on which the plaintiff’s claims are based were false or misleading and that the alleged statements or omissions caused the plaintiff to suffer economic loss. See Matrixx Initiatives, 563 U. S., at ___ (slip op., at 9). Settlement pressure exerted by class certification may prevent judicial resolution of these issues. Yet this Court has held that loss causation and the falsity or misleading nature of the defendant’s alleged statements or omissions are common questions that need not be adjudicated before a class is certified. See Halliburton, 563 U. S., at ___ (slip op., at 3) (loss causation need not be proved at the class-certification stage); Basic, 485 U. S., at 242 (“the falsity or misleading nature of the . . . public statements” allegedly made by the defendant is a “common questio[n]”). See also Schleicher, 618 F. 3d, at 685 (falsity of alleged misstatements need not be proved before certification of a securities-fraud class action).
Congress, we count it significant, has addressed the settlement pressures associated with securities-fraud class actions through means other than requiring proof of materiality at the class-certification stage. In enacting the Private Securities Litigation Reform Act of 1995 (PSLRA), 109Stat. 737, Congress recognized that although private securities-fraud litigation furthers important public-policy interests, prime among them, deterring wrongdoing and providing restitution to defrauded investors, such lawsuits have also been subject to abuse, including the “extract[ion]” of “extortionate ‘settlements’ ” of frivolous claims. H. R. Conf. Rep. No. 104–369, pp. 31–32 (1995). The PSLRA’s response to the perceived abuses was, inter alia, to “impos[e] heightened pleading requirements” for securities-fraud actions, “limit recoverable damages and attorney’s fees, provide a ‘safe harbor’ for forward-looking statements, impose new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous litigation, and authorize a stay of discovery pending resolution of any motion to dismiss.” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U. S. 71 –82 (2006). See also 15 U. S. C. §78u–4 (2006 ed. and Supp. V). Congress later fortified the PSLRA by enacting the Securities Litigation Uniform Standards Act of 1998, 112Stat. 3227, which curtailed plaintiffs’ ability to evade the PSLRA’s limitations on federal securities-fraud litigation by bringing class-action suits under state rather than federal law. See 15 U. S. C. §78bb(f)(1) (2006 ed.).
While taking these steps to curb abusive securities-fraud lawsuits, Congress rejected calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic. See Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 153, and n. 8 (noting that the initial version of H. R. 10, 104th Cong., 1st Sess. (1995), an unenacted bill that, like the PSLRA, was designed to curtail abuses in private securities litigation, “would have undone Basic”). See also Common Sense Legal Reform Act: Hearings before the Subcommittee on Telecommunications and Finance of the House Committee on Commerce, 104th Cong., 1st Sess., 92, 236–237, 251–252, 272 (1995) (witnesses criticized the fraud-on-the-market presumption and expressed support for H. R. 10’s requirement that securities-fraud plaintiffs prove direct reliance). Nor did Congress decree that securities-fraud plaintiffs prove each element of their claim before obtaining class certification. Because Congress has homed in on the precise policy concerns raised in Amgen’s brief, “[w]e do not think it appropriate for the judiciary to make its own further adjustments by reinterpreting Rule 23 to make likely success on the merits essential to class certification in securities-fraud suits.” Schleicher, 618 F. 3d, at 686; cf. Smith v. Bayer Corp., 564 U. S. ___, ___ (2011) (slip op., at 17–18) (“Congress’s decision to address the relitigation concerns associated with class actions through the mechanism of removal provides yet another reason for federal courts to adhere in this context to longstanding principles of preclusion.”).
In addition to seeking our aid in warding off “in terrorem” settlements, Amgen also argues that requiring proof of materiality before class certification would conserve judicial resources by sparing judges the task of overseeing large class proceedings in which the essential element of reliance cannot be proved on a classwide basis. In reality, however, it is Amgen’s position, not the judgments of the lower courts in this case, that would waste judicial resources. Amgen’s argument, if embraced, would necessitate a mini-trial on the issue of materiality at the class-certification stage. Such preliminary adjudications would entail considerable expenditures of judicial time and resources, costs scarcely anticipated by Federal Rule of Civil Procedure 23(c)(1)(A), which instructs that the decision whether to certify a class action be made “[a]t an early practicable time.” If the class is certified, materiality might have to be shown all over again at trial. And if certification is denied for failure to prove materiality, nonnamed class members would not be bound by that determination. See Smith, 564 U. S., at ___ (slip op., at 12–18). They would be free to renew the fray, perhaps in another forum, perhaps with a stronger showing of materiality.
Given the tenuousness of Amgen’s judicial-economy argument, Amgen’s policy arguments ultimately return to the contention that private securities-fraud actions should be hemmed in to mitigate their potentially “vexatiou[s]” character. Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 739 (1975) . We have already noted what Congress has done to control exorbitant securities-fraud actions. See supra, at 19–20. Congress, the Executive Branch, and this Court, moreover, have “recognized that meritorious private actions to enforce federal antifraud securities laws are an essential supplement to criminal prosecutions and civil enforcement actions brought, respectively, by the Department of Justice and the Securities and Exchange Commission.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U. S. 308, 313 (2007) ; see H. R. Conf. Rep. No. 104–369, at 31; Brief for United States as Amicus Curiae 1. See also Amchem, 521 U. S., at 617 (“ ‘The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights.’ ” (quoting Mace v. Van Ru Credit Corp., 109 F. 3d 338, 344 (CA7 1997))). We have no warrant to encumber securities-fraud litigation by adopting an atextual requirement of precertification proof of materiality that Congress, despite its extensive involvement in the securities field, has not sanctioned.C
Justice Scalia acknowledges that proof of materiality is not required to satisfy Rule 23(b)(3)’s predominance requirement. See post, at 1. Nevertheless, he maintains that full satisfaction of Rule 23’s requirements is insufficient to obtain class certification under Basic. In Justice Scalia’s view, the Court’s decision in Basic established a special rule: A securities-fraud class action cannot be certified unless all of the prerequisites of the fraud-on-the-market presumption of reliance, including materiality, have first been established. Post, at 2.
The purported rule is Justice Scalia’s invention. It cannot be attributed to anything the Court said in Basic. That decision is best known for its endorsement of the fraud-on-the-market theory. But the opinion also established something more. It stated the proper standard for judging the materiality of misleading statements regarding the existence and status of preliminary merger discussions. See 485 U. S., at 230–241, 250 (“Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities.”). The District Court in Basic certified a class of investors whose share prices were allegedly depressed by misleading statements that disguised ongoing merger negotiations. Id., at 228. Postcertification, the court granted summary judgment to the defendants on the ground that the alleged misstatements were immaterial as a matter of law. Id., at 228–229. The Court of Appeals affirmed the class certification but reversed the grant of summary judgment. Id., at 229. This Court, in turn, vacated the Court of Appeals’ judgment and remanded for further proceedings on the defendants’ summary-judgment motion in light of the materiality standard set forth in the Court’s opinion. Id., at 240–241, 250. Notably, however, we did not disturb the District Court’s class-certification order, which we stated “was appropriate when made.” Id., at 250. 9
If Justice Scalia were correct that our decision in Basic demands proof of materiality before class certification, the Court in Basic should have ordered the lower courts to reconsider on remand both the defendants’ entitlement to summary judgment and the propriety of class certification. Instead, the Court expressly endorsed the District Court’s class-certification order while at the same time recognizing that further proceedings were necessary to determine whether the plaintiffs had mustered sufficient evidence to satisfy the relatively lenient standard for avoiding summary judgment. See Anderson v. Liberty Lobby, Inc., 477 U. S. 242, 248 (1986) (“[S]ummary judgment will not lie if . . . the evidence is such that a reasonable jury could return a verdict for the nonmoving party.”). Unlike Justice Scalia, we are unwilling to presume that Basic announced a rule requiring precertification proof of materiality when Basic failed to apply any such rule to the very case before it. 10III
Amgen also argues that the District Court erred by refusing to consider the rebuttal evidence Amgen proffered in opposing Connecticut Retirement’s class-certification motion. This evidence, Amgen contends, showed that “in light of all the information available to the market,” its alleged misrepresentations and misleading omissions “could not be presumed to have altered the market price because they would not have ‘significantly altered the total mix of information made available.’ ” Brief for Petitioners 40–41 (quoting Basic, 485 U. S., at 232). For example, Connecticut Retirement’s complaint alleges that an Amgen executive misleadingly downplayed the significance of an upcoming Food and Drug Administration advisory committee meeting by incorrectly stating that the meeting would not focus on one of Amgen’s leading drugs. See App. to Pet. for Cert. 17a. Amgen responded to this allegation by presenting public documents—including the committee’s meeting agenda, which was published in the Federal Register more than a month before the meeting—stating that safety concerns associated with Amgen’s drug would be discussed at the meeting. See id., at 41a–42a. See also 69 Fed. Reg. 16582 (2004).
The District Court did not err, we agree with the Court of Appeals, by disregarding Amgen’s rebuttal evidence in deciding whether Connecticut Retirement’s proposed class satisfied Rule 23(b)(3)’s predominance requirement. The Court of Appeals concluded, and Amgen does not contest, that Amgen’s rebuttal evidence aimed to prove that the misrepresentations and omissions alleged in Connecticut Retirement’s complaint were immaterial. 660 F. 3d, at 1177 (characterizing Amgen’s rebuttal evidence as an attempt to present a “ ‘truth-on-the-market’ defense,” which the Court of Appeals explained “is a method of refuting an alleged misrepresentation’s materiality”). See also Reply Brief 17 (Amgen’s evidence was offered to rebut the “materiality predicate” of the fraud-on-the-market theory). As explained above, however, the potential immateriality of Amgen’s alleged misrepresentations and omissions is no barrier to finding that common questions predominate. See Part II, supra. If the alleged misrepresentations and omissions are ultimately found immaterial, the fraud-on-the-market presumption of classwide reliance will collapse. But again, as earlier explained, see supra, at 10–13, individual reliance questions will not overwhelm questions common to the class, for the class members’ claims will have failed on their merits, thus bringing the litigation to a close. Therefore, just as a plaintiff class’s inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class.
We recognized as much in Basic itself. A defendant could “rebut the [fraud-on-the-market] presumption of reliance,” we observed in Basic, by demonstrating that “news of the [truth] credibly entered the market and dissipated the effects of [prior] misstatements.” 485 U. S., at 248–249. We emphasized, however, that “[p]roof of that sort is a matter for trial” (and presumably also for a summary-judgment motion under Federal Rule of Civil Procedure 56). Id., at 249, n. 29. 11 The District Court thus correctly reserved consideration of Amgen’s rebuttal evidence for summary judgment or trial. It was not required to consider the evidence in determining whether common questions predominated under Rule 23(b)(3).* * *
For the reasons stated, the judgment of the Court of Appeals for the Ninth Circuit is affirmed.
It is so ordered.
1 Part IV of Justice Blackmun’s opinion in Basic—the part endors-ing the fraud-on-the-market theory—was joined by Justices Brennan, Marshall, and Stevens. Together, these Justices composed a majority of the quorum of six Justices who participated in the case. See 28 U. S. C. §1 (“The Supreme Court of the United States shall consist of a Chief Justice of the United States and eight associate justices, any six of whom shall constitute a quorum.”).
2 Although describing Basic’s adoption of the fraud-on-the-market presumption of reliance as “questionable,” Justice Thomas’ dissent acknowledges that “the Court has not been asked to revisit” that issue. Post, at 4–5, n. 4. See also post, p. 1 (Alito, J., concurring).
3 Amgen’s allegedly improper marketing practices have sparked federal and state investigations and several whistleblower lawsuits. See Dye, Amgen to pay $762 million in drug-marketing case, Washington Post, Dec. 19, 2012, p. A17.
4 We agree with Justice Thomas that “[m]ateriality was central to the development, analysis, and adoption of the fraud-on-the-market theory both before Basic and in Basic itself.” Post, at 18. We disagree, however, that the history of the fraud-on-the-market theory’s development “confirms that materiality must be proved at the time that the theory is invoked—i.e., at certification.” Ibid. As explained below, see infra this page and 11–13, proof of materiality is not required prior to class certification because such proof is not necessary to ensure satisfaction of Rule 23(b)(3)’s predominance requirement.
5 Justice Thomas is also wrong in arguing that a failure of proof on the issue of materiality would demonstrate that a Rule 10b–5 class action “should not have been certified in the first place.” Post, at 2. Quite the contrary. The fact that such a failure of proof resolves all class members’ claims once and for all, leaving no individual issues to be adjudicated, confirms that the original certification decision was proper.
6 Amgen advances a third argument founded on modern economic research tending to show that market efficiency is not “ ‘a binary, yes or no question.’ ” Brief for Petitioners 32 (quoting Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 167). Instead, this research suggests, differences in efficiency can exist within a single market. For example, a market may more readily process certain forms of widely disseminated and easily digestible information, such as public merger announcements, than information more difficult to acquire and understand, such as obscure technical data buried in a filing with the Securities and Exchange Commission. See, e.g., Macey & Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059, 1083–1087 (1990); Stout, The Mechanisms of Market Inefficiency: An Introduction to the New Finance, 28 J. Corp. L. 635, 653–656 (2003). Amgen, however, never clearly explains how this research on market efficiency bolsters its argument that courts should require precertification proof of materiality. In any event, this case is a poor vehicle for exploring whatever implications the research Amgen cites may have for the fraud-on-the-market presumption recognized in Basic. As noted above, see supra, at 6–7, Amgen conceded in its answer that the market for its securities is “efficient” and thus “promptly digest[s] current information regarding Amgen from all publicly available sources and reflect[s] such information in Amgen’s stock price.” Consolidated Amended Class Action Complaint ¶¶199–200; Answer ¶¶199–200. See also App. to Pet. for Cert. 40a (relying on the admission in Amgen’s answer and an unchallenged expert report submitted by Connecticut Retirement, the District Court expressly found that the market for Amgen’s stock was efficient). Amgen remains bound by that concession. See American Title Ins. Co. v. Lacelaw Corp., 861 F. 2d 224, 226 (CA9 1988) (“Factual assertions in pleadings and pretrial orders, unless amended, are considered judicial admissions conclusively binding on the party who made them.”); cf. Christian Legal Soc. Chapter of Univ. of Cal., Hastings College of Law v. Martinez, 561 U. S. ___, ___ (2010) (slip op., at 10) (“This Court has . . . refused to consider a party’s argument that contradicted a joint ‘stipulation [entered] at the outset of th[e] litigation.’ ” (quoting Board of Regents of Univ. of Wis. System v. Southworth, 529 U. S. 217, 226 (2000) )). We thus find nothing in the cited research that would support requiring precertification proof of materiality in this case.
7 As earlier noted, see supra, at 1–2, Amgen does not here contest Connecticut Retirement’s satisfaction of Rule 23(a)’s requirements.
8 Accordingly, “the timing of the relevant stock trades” is indeed an “element” of the fraud-on-the-market theory. Post, at 6, n. 6 (opinion of Thomas, J.). Unlike Justice Thomas, however, see ibid., we do not understand the United States as amicus curiae to take a different view. See Brief for United States 15, n. 2 (“Precise identification of the times when the alleged misrepresentation was made and the truth was subsequently revealed is . . . important to ensure that the named plaintiff has traded stock during the time the stock price allegedly was distorted by the defendant’s misrepresentations.”).
9 Scouring the Court’s decision in Basic for some semblance of support for his position, Justice Scalia attaches portentous significance to Basic’s statement that the District Court’s class-certification order, although “ ‘appropriate when made,’ ” was “ ‘subject on remand to such adjustment, if any, as developing circumstances demand[ed].’ ” Post, at 2 (quoting Basic, 485 U. S., at 250). This statement, however, merely reminds that certifications are not frozen once made. Rule 23 empowers district courts to “alte[r] or amen[d]” class-certification orders based on circumstances developing as the case unfolds. Fed. Rule Civ. Proc. 23(c)(1) (1988). See also Rule 23(c)(1)(C) (2013).
10 Justice Scalia suggests that the Court’s approach in Basic might have been influenced by the obsolete view that “ ‘Rule 23 . . . set[s] forth a mere pleading standard.’ ” Post, at 3 (quoting Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___ (2011) (slip op., at 10)). The opinion in Basic, however, provides no indication that the Court perceived any issue before it to turn on the question whether a plaintiff must merely plead, rather than “affirmatively demonstrate,” her satisfaction of Rule 23’s certification requirements. Dukes, 564 U. S., at ___ (slip op., at 10).
11 Amgen attempts to minimize the import of this statement by noting that it was made prior to a 2003 amendment to Rule 23 that eliminated district courts’ authority to conditionally certify class actions. See Advisory Committee’s 2003 Note on subd. (c)(1) of Fed. Rule Civ. Proc. 23, 28 U. S. C. App., p. 144. Nothing in our opinion in Basic, however, suggests that the statement relied in any way on district courts’ conditional-certification authority. To the contrary, the Court in Basic stated: “Proof of that sort [i.e., that news of the truth had entered the market and dissipated the effects of prior misstatements] is a matter for trial, throughout which the District Court retains the authority to amend the certification order as may be appropriate.” 485 U. S., at 249, n. 29 (emphasis added). Rule 23(c)(1)(C) continues to provide that a class-certification order “may be altered or amended before final judgment.”
SUPREME COURT OF THE UNITED STATES
AMGEN INC., et al., PETITIONERS v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
on writ of certiorari to the united states court of appeals for the ninth circuit
[February 27, 2013]
Justice Thomas, with whom Justice Kennedy joins, and with whom Justice Scalia joins except for Part I–B, dissenting.I
The Court today allows plaintiffs to obtain certification of securities-fraud class actions without proof that common questions predominate over individualized questions of reliance, in contravention of Federal Rule of Civil Procedure 23(b)(3). The Court does so by all but eliminating materiality as one of the predicates of the fraud-on-the-market theory, which serves as an alternative mode of es-tablishing reliance. See Basic Inc. v. Levinson, 485 U. S. 224 –250 (1988). Without demonstrating materiality at certification, plaintiffs cannot establish Basic’s fraud-on-the-market presumption. Without proof of fraud on the market, plaintiffs cannot show that otherwise individualized questions of reliance will predominate, as required by Rule 23(b)(3). And without satisfying Rule 23(b)(3), class certification is improper. Fraud on the market is thus a condition precedent to class certification, without which individualized questions of reliance will defeat certification.
The Court’s opinion depends on the following assumption: Plaintiffs will either (1) establish materiality at the merits stage, in which case class certification was proper because reliance turned out to be a common question, or (2) fail to establish materiality, in which case the claim would fail on the merits, notwithstanding the fact that the class should not have been certified in the first place, because reliance was never a common question. The failure to establish materiality retrospectively confirms that fraud on the market was never established, that questions regarding the element of reliance were not common under Rule 23(b)(3), and, by extension, that certification was never proper. Plaintiffs cannot be excused of their Rule 23 burden to show at certification that questions of reliance are common merely because they might lose later on the merits element of materiality. Because a securities-fraud plaintiff invoking Basic’s fraud-on-the-market presumption to satisfy Rule 23(b)(3) should be required to prove each of the predicates of that theory at certification in order to demonstrate that questions of reliance are common to the class, I respectfully dissent.A
We begin with §10 of the Securities Exchange Act of 1934, 15 U. S. C. §78j (2006 ed. and Supp. V). 1 We “have implied a private cause of action from the text and purposes of §10(b)” and Securities and Exchange Commission Rule 10b–5, 17 CFR §240.10b–5 (2011). 2 Matrixx Initiatives, Inc. v. Siracusano, 563 U. S. ___, ___ (2011) (slip op., at 9). See also Superintendent of Ins. of N. Y. v. Bankers Life & Casualty Co., 404 U. S. 6, 13, n. 9 (1971) (“It is now established that a private right of action is implied under §10(b)”). The elements of an implied §10(b) cause of action for securities fraud are “ ‘(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrep-resentation or omission; (5) economic loss; and (6) loss causation.’ ” Matrixx, supra, at ___ (slip op., at 9) (quoting Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008) ). This case concerns the reliance element of the §10(b) claim and its interaction with Rule 23(b)(3).
To prove reliance, a plaintiff, whether proceeding individually or as a class member, must show that his stock transaction was caused by the specific alleged misstatement. “[P]roof of reliance ensures that there is a proper ‘connection between a defendant’s misrepresentation and a plaintiff’s injury.’ ” Erica P. John Fund, Inc. v. Hal-liburton Co., 563 U. S. ___, ___ (2011) (slip op., at 4) (quoting Basic, supra, at 243). 3 To satisfy this element, a plaintiff traditionally was required to “sho[w] that he was aware of a company’s statement and engaged in a relevant transaction . . . based on that specific misrepresentation.” Erica P. John Fund, supra, at ___ (slip op., at 4) (emphasis added). In the face-to-face fraud cases from which securities claims historically arose, see, e.g., Dura Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336 –344 (2005) (discussing common-law roots of securities-fraud actions), this requirement was easily met by showing that the seller made statements directly to the purchaser and that the purchaser bought stock in reliance on those statements. However, in a modern securities market many, if not most, individuals who purchase stock from third parties on an impersonal exchange will be unaware of statements made by the issuer of those securities. As a result, such purchaser-plaintiffs are unable to meet the traditional reliance requirement because they cannot establish that they “engaged in a relevant transaction . . . based on [a] specific misrepresentation.” Erica P. John Fund, supra, at ___ (slip op., at 4).
This concern was the driving force behind the development of the fraud-on-the-market theory adopted in Basic. Because individuals trading stock on an impersonal market often cannot show reliance even for purposes of an individual securities-fraud action, Basic permitted “plaintiffs to invoke a rebuttable presumption of reliance.” Erica P. John Fund, supra, at ___ (slip op., at 5). 4 Basic presumes that “ ‘in an open and developed securities market, the price of a company’s stock is determined by the avail-able material information regarding the company and its business.’ ” 485 U. S., at 241 (quoting Peil v. Speiser, 806 F. 2d 1154, 1160–1161 (CA3 1986); emphasis added). 5 “ ‘Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.’ ” 485 U. S., at 241–242. As a result, “[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price,” and “an investor’s reliance on any public material misrepresentations” may therefore “be presumed for purposes of a Rule 10b–5 action.” Id., at 247 (emphasis added).
If a plaintiff opts to show reliance through fraud on the market, Basic is clear that the plaintiff must show the following predicates in order to prevail: (1) an efficient market, (2) a public statement, (3) that the stock was traded after the statement was made but before the truth was revealed, and (4) the materiality of the statement. Id., at 248, n. 27. 6 Both the Court and respondent agree that materiality is a necessary component of fraud on the market. See, e.g., ante, at 9 (materiality is “indisputably” “an essential predicate of the fraud-on-the-market the-ory”); Brief for Respondent 29 (“If the statement is not materially false, then no one in the class can establish reliance via the integrity of the market”). The materiality of a specific statement is, therefore, essential to the fraud-on-the-market presumption, which in turn enables a plaintiff to prove reliance.B
Basic’s fraud-on-the-market presumption is highly sig-nificant because it makes securities-fraud class actions possible by converting the inherently individual reliance inquiry into a question common to the class, which is necessary to satisfy the dictates of Rule 23(b)(3). 7 Rule 23(b)(3) requires the party seeking certification to prove that “questions of law or fact common to class members predominate over any questions affecting only individual members.” A plaintiff seeking class certification is not required to prove the elements of his claim at the certifi-cation stage, but he must show that the elements of the claim are susceptible to classwide proof. See, e.g., Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___, n. 6 (2011) (slip op., at 11, n. 6) (“[P]laintiffs seeking 23(b)(3) certifi-cation must prove that their shares were traded on an ef-ficient market,” an element of the fraud-on-the-market theory (emphasis added)). Without that proof, there is no justification for certifying a class because there is no “ ‘capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.’ ” Id., at ___ (slip op., at 9–10) (quoting Nagareda, Class Certification in the Age of Aggregate Proof, 84 N. Y. U. L. Rev. 97, 132 (2009)).
If plaintiffs fail to show that reliance is a common question at the time of certification, certification is improper. For if reliance is not a common question, each plaintiff would be required to prove that he in fact relied on a misstatement, a showing which is simply not susceptible to classwide proof. Individuals make stock transactions for divergent, even idiosyncratic, reasons. As the leading pre-Basic fraud-on-the-market case recognized, “[a] purchaser on the stock exchanges may be either unaware of a specific false representation, or may not directly rely on it; he may purchase because of a favorable price trend, price earnings ratio, or some other factor.” Blackie v. Barrack, 524 F. 2d 891, 907 (CA9 1975). The inquiry’s inherently individualized nature renders it impossible to generate the common answers necessary for certification under Rule 23(b)(3). See Basic, 485 U. S., at 242 (“Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones”).
The Court’s solution in Basic was to allow putative class members to prove reliance through the fraud-on-the-market presumption. Id., at 241–250. As the Court today recognizes, failure to establish fraud on the market “leaves open the prospect of individualized proof of reliance.” Ante, at 17. Notably, the Court and the Ninth Circuit both acknowledge that in order to obtain the benefit of the presumption, plaintiffs must establish two of the fraud-on-the-market predicates at class certification: (1) that the market was generally efficient, and (2) that the alleged misstatement was public. See ante, at 16 (acknowledging “that market efficiency and the public nature of the alleged misrepresentations must be proved before a securities-fraud class action can be certified”); 660 F. 3d 1170, 1175 (CA9 2011) (same). See also Erica P. John Fund, 563 U. S., at ___ (slip op., at 5) (“It is undisputed that securities fraud plaintiffs must prove,” at certification inter alia, “that the alleged misrepresentations were publicly known . . . [and] that the stock traded in an efficient market”). The Court is correct insofar as its statements recognize that fraud on the market is a condition precedent to showing that there are common questions of reliance at the time of class certification.
Nevertheless, the Court asserts that materiality—by its own admission an essential predicate to invoking fraud on the market—need not be established at certification because it will ultimately be proved at the merits stage. Ante, at 16–18. This assertion is an express admission that parties will not know at certification whether reliance is an individual or common question.
To support its position, the Court transforms the predicate certification inquiry into a novel either-or inquiry occurring much later on the merits. According to the Court, either (1) plaintiffs will prove materiality on the merits, thus demonstrating ex post that common questions predominated at certification, or (2) they will fail to prove materiality, at which point we learn ex post that certification was inappropriate because reliance was not, in fact, a common question. In the Court’s second scenario, fraud on the market was never established, reliance for each class member was inherently individualized, and Rule 23(b)(3) in fact should have barred certification long ago. 8 The Court suggests that the problem created by the second scenario is excusable because the plaintiffs will lose anyway on alternative merits grounds, and the case will be over. See ante, at 17 (“[F]ailure of proof on the issue of materiality [at the merits stage] . . . not only precludes a plaintiff from invoking the fraud-on-the-market presumption of classwide reliance; it also establishes as a matter of law that the plaintiff cannot prevail on the merits of her Rule 10b–5 claim”). But nothing in logic or precedent justifies ignoring at certification whether reliance is susceptible to Rule 23(b)(3) classwide proof simply because one predicate of reliance—materiality—will be resolved, if at all, much later in the litigation on an independent merits element.
It is the Court, not Amgen, that “would have us put the cart before the horse,” ante, at 3, by jumping chronologically to the §10(b) merits element of materiality. But Rule 23, as well as common sense, requires class certification issues to be addressed first. See Rule 23(c)(1)(A) (“At an early practicable time after a person sues or is sued . . . the court must determine by order whether to certify the action as a class action”). A plaintiff who cannot prove materiality does not simply have a claim that is “ ‘dead on arrival’ ” at the merits, ante, at 17 (quoting 660 F. 3d, at 1175); he has a class that should never have arrived at the merits at all because it failed Rule 23(b)(3) certification from the outset. Without materiality, there is no fraudon-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible. And the fact that evidence of materiality goes to both fraud on the market at certification and an independent merits element is no issue; Wal-Mart expressly held that a court at certification may inquire into questions that also have later relevance on the merits. See 564 U. S., at ___ (slip op., at 10–11). The Court reverses that inquiry, effectively saying that certification may be put off until later because an adverse merits determination will retroactively wipe out the entire class. However, a plaintiff who cannot prove materiality cannot prove fraud on the market and, thus, cannot demonstrate that the question of reliance is susceptible of a classwide answer.
The fact that a statement may prove to be material at the merits stage does not justify conflating the doctrinally independent (and distinct) elements of materiality and reliance. 9 The Court’s error occurs when, instead of asking whether the element of reliance is susceptible to classwide proof, the Court focuses on whether materiality is susceptible to classwide proof. Ante, at 10 (“[T]he piv-otal inquiry is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will ‘predominate’ ”). The result is that the Court effectively equates §10(b) materiality with fraud-on-the-market materiality and elides reliance as a §10(b) element. But a plaintiff seeking certification under Rule 23 bears the burden of proof with regard to all the elements of a §10(b) claim, which includes materiality and reliance. As Wal-Mart explained, “[a] party seeking class certification must affirmatively demonstrate his compliance with the Rule—that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc.” 564 U. S., at ___ (slip op., at 10). If the elements of fraud on the market are not proved at certification, a plaintiff has failed to carry his burden of establishing that questions of individualized reliance will not predominate, without which the plaintiff class cannot obtain certification. Cf. id., at ___ (slip op., at 12) (holding in Rule 23(a)(2) context that “[w]ithout some glue holding the alleged reasons for all those decisions together, it will be impossible to say that examination of all the class members’ claims for relief will produce a common answer”). It is only by establishing all of the elements of the fraud-on-the-market presumption that reliance can be proved on a classwide basis. Therefore, if a plaintiff wishes to use Basic’s presumption to prove that reliance is a common question, he must establish the entire presumption, including materiality, at the class certification stage.
Nor is it relevant, as respondent argues, that requiring plaintiffs to establish all predicates of fraud on the market at certification will make it more difficult to obtain certification. See Brief for Respondent 35–38. In Basic, four Justices of a six-Justice Court created the fraud-on-the-market presumption from a combination of newly minted economic theories, 485 U. S., at 250–251, n. 1 (White, J., concurring in part and dissenting in part), and “considerations of fairness, public policy, and probability,” id., at 245 (majority opinion), to allow claims that otherwise would have been barred due to the plaintiffs’ inability to show reliance, id., at 242. Basic is a judicially invented doctrine based on an economic theory adopted to ease the burden on plaintiffs bringing claims under an implied cause of action. There is nothing untoward about requiring plaintiffs to take the steps that the Basic Court created in an effort to save otherwise inadequate claims.II
The majority’s approach is, thus, doctrinally incorrect under Basic. Its shortcomings are further highlighted by the role that materiality played in the pre-Basic development of the fraud-on-the-market theory as a condition precedent to showing that there are common questions of reliance in the class-action context. Materiality, at the time of certification, has been a driving force behind the theory from the outset. This fact further supports the need to prove materiality at the time the fraud-on-the-market theory is invoked to show that questions of reliance can be answered on a classwide basis.A
Before Basic, two signposts marked the way for courts applying the fraud-on-the-market theory. Both demonstrate that the materiality of an alleged falsehood was not a mere afterthought but rather one of the primary reasons for allowing traditional proof of reliance to be brushed aside at certification. This fact weighs strongly in favor of the conclusion that materiality must be resolved at certi-fication when the fraud-on-the-market presumption is invoked to show that reliance can be proved on a classwide basis.
The first signpost was the Ninth Circuit’s 1975 opinion in Blackie, termed by one pre-Basic court the “seminal fraud on the market case.” Peil, 806 F. 2d, at 1163, n. 16. See also Basic, supra, at 251, n. 1 (White, J., dissenting) (“The earliest Court of Appeals case adopting this theory cited by the Court is Blackie v. Barrack, 524 F. 2d 891 (CA9 1975), cert. denied, 429 U. S. 816 (1976) ”).
Blackie arose from a $90 million loss reported by audio equipment manufacturer Ampex Corp. in its 1972 annual report. 524 F. 2d, at 894. 10 Ampex’s independent auditors not only refused to certify the 1972 annual report but also withdrew certification of all 1971 financial statements “because of doubts that the loss reported for 1972 was in fact suffered in that year.” Ibid. In resultant class actions, the defendants argued that reliance stood in the way of class certification under Rule 23(b)(3) because it was not a common question.
The Ninth Circuit disagreed. Instead, it relieved plaintiffs from providing traditional proof of reliance, ex-plaining that “causation is adequately established in the impersonal stock exchange context by proof of purchase and of the materiality of misrepresentations, without direct proof of reliance.” Id., at 906 (emphasis added). The court left no doubt that the materiality of the $90 million shortfall in Ampex’s financial statements was central to its determination that reliance could be presumed. It asserted that “[m]ateriality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price—when the purchase is made[,] the causational chain between defendant’s conduct and plaintiff’s loss is sufficiently established to make out a prima facie case.” Ibid. Materiality was not merely an important factor that allowed reliance to be presumed at certification; materiality was the factor. It demonstrated that the defendants had committed a fraud on the market, that all putative class plaintiffs had relied on it in purchasing stock, and, therefore, that questions of reliance would be susceptible to common answers. 11
The second fraud-on-the-market signpost prior to Basic was a note in the Harvard Law Review, which described the nascent theory. See Note, The Fraud-on-the-Market Theory, 95 Harv. L. Rev. 1143 (1982) (hereinafter Harv. L. Rev. Note). The Sixth Circuit opinion reviewed in Basic termed the Note “[t]he clearest statement of the theory of presumption of reliance.” Levinson v. Basic Inc., 786 F. 2d 741, 750 (1986). Indeed, in the briefing for Basic itself, the plaintiffs, the United States, and plaintiffs’ amicus cited the article repeatedly as an authoritative statement on the subject. See Brief for Respondent 43, n. 18, 46, n. 20 (cited in Peil, supra, at 1160), Brief for Securities and Exchange Commission as Amicus Curiae 22, n. 25, 24, n. 30, 26, n. 32, and Brief for Joseph Harris et al. as Amicus Curiae 4, n. 2, in Basic Inc. v. Levinson, O. T. 1987, No. 86–279.
Like Blackie, the Note also hinged the fraud-on-the-market presumption of reliance on proof of materiality. Harv. L. Rev. Note 1161 (“In developed markets, which are apparently efficient, reliance should be presumed from the materiality of the deception” (emphasis added)). Ultimately, in language that will be familiar to anyone who has read Basic, the Note formulated a “pivotal assumption” underlying the fraud-on-the-market theory as the belief that:
“market prices respond to information disseminated (or not disseminated) concerning the companies whose securities are traded. In such a setting—often described as an ‘efficient market’—the reliance of some traders upon a material deception influences market prices and thereby affects even traders who never read or hear of the deception.” Harv. L. Rev. Note 1154 (footnote omitted).
Again, the materiality of the alleged misstatement was a key component, without which the market could not be presumed to move. As a result, without materiality it is impossible to say that there has been a fraud on the market at all, and if that is not the case there is no reason to believe that the market price at which stock transactions occurred was affected by an alleged misstatement or, by extension, that any market participants relied on it. Materiality should thus be proved when the fraud-on-the-market presumption is invoked, or there is no common-ality with respect to questions of reliance.B
Nor did the importance of materiality diminish in the Sixth Circuit opinion reviewed in Basic. Rather, the court followed the path marked by the signposts discussed above. It excused plaintiffs from offering traditional evidence of reliance, so long as “a defendant is shown to have made a material public misrepresentation that, if relied on directly, would fraudulently induce an individual to mis-judge the value of the stock.” Levinson, 786 F. 2d, at 750 (emphasis added). The court’s analysis made clear that materiality should be demonstrated at the time the presumption was invoked: “In order to invoke the presumption of reliance based upon the fraud on the market theory, a plaintiff must allege and prove . . . that the mis-representations were material . . . .” Ibid. (citing Blackie, 524 F. 2d, at 906).C
Finally, the briefing before this Court in Basic itself built upon this framework and the foundational principle that materiality is an integral part of the theory. Criti-cally, the Basic defendants argued that the plaintiffs could not establish fraud on the market at certification even if the theory were valid because the alleged misstatement was immaterial. They “contrast[ed] the likely market impact of disclosure of the [$90 million Blackie loss] . . . with the disclosure of the information which respondents contend[ed] rendered Basic’s statements materially misleading.” See Brief for Petitioners in O. T. 1987, No. 86–279, p. 42. The Basic defendants concluded that “the differences between a company’s $90 million loss and a company’s sporadic contacts with a friendly suitor are sub-stantial. . . . [T]he fraud on the market theory, if it has vitality, should not be applied in a case such as this.” Id., at 43.
In response, the plaintiffs in Basic did not argue that the defendants misunderstood the role of materiality in the fraud-on-the-market theory. They instead advanced a now-foreclosed interpretation of dicta from Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 177 (1974) :
“Petitioners’ final argument—that respondents will be unable to establish that Basic’s repeated false and misleading statements impacted the price of Basic stock over a fourteen month period—represents an effort to litigate the merits of this case on the motion for class certification. . . . As this Court held in Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 177 (1974) : ‘We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action.’ ” Brief for Respondents in O. T. 1987, No. 86–279, p. 54.
The Court rejected this reading of Eisen two Terms ago, explaining that the very language the Basic plaintiffs quoted was “sometimes mistakenly cited” as prohibiting inquiry into “the propriety of certification under Rules 23(a) and (b).” Wal-Mart Stores, Inc., 564 U. S., at ___, n. 6 (slip op., at 10, n. 6). That reading, the Court explained, “is the purest dictum and is contradicted by our other cases.” Ibid. The Basic defendants’ reply is consistent with Wal-Mart:
“Putative class representatives, such as respondents, should not be permitted to invoke the fraud on the market theory while, at the same time, arguing that courts may not make any preliminary inquiry into the claimed impact on the market. See, e.g., Resp. Br., p. 54. By seeking the benefit of the presumption, respondents necessarily invite judicial scrutiny of the circumstances in which it is invoked.” Reply Brief for Petitioners in O. T. 1987, No. 86–279, p. 18.
Well said. The history of Basic is worth the volume of argument offered by the majority. Cf. New York Trust Co. v. Eisner, 256 U. S. 345, 349 (1921) (majority opinion of Holmes, J.). Materiality was central to the development, analysis, and adoption of the fraud-on-the-market theory both before Basic and in Basic itself. Materiality, therefore, must be demonstrated to prove fraud on the market, and until materiality of an alleged misstatement is shown there is no reason to believe that all market participants have relied equally on it. Otherwise individualized questions of reliance remain. This history confirms that materiality must be proved at the time that the theory is invoked—i.e., at certification.III
I, thus, would reverse the judgment of the Ninth Circuit and hold that a plaintiff invoking the fraud-on-the-market presumption bears the burden to establish all the elements of fraud on the market at certification, including the materiality of the alleged misstatement.
1 Section 10 states, in relevant part: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange— . . . . . “(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange . . . any manipu-lative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe . . . .”
2 Rule 10b–5 states: “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, “(a) To employ any device, scheme, or artifice to defraud, “(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or “(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
3 Courts have also “referred to the element of reliance as ‘transaction causation.’ ” Erica P. John Fund, 563 U. S., at ___ (slip op., at 6) (quoting Dura Pharmaceuticals, Inc. v. Broudo, 544 U. S. 336 –342 (2005), in turn citing Basic Inc. v. Levinson, 485 U. S. 224 –249 (1988)). This alternative phrasing recognizes that the reliance inquiry is directed at determining whether a particular piece of information caused an individual to enter into a given transaction.
4 The Basic decision itself is questionable. Only four Justices joined the portion of the opinion adopting the fraud-on-the-market theory. Justice White, joined by Justice O’Connor, dissented from that section, emphasizing that “[c]onfusion and contradiction in court rulings are inevitable when traditional legal analysis is replaced with economic theorization by the federal courts” and that the Court is “not well equipped to embrace novel constructions of a statute based on contemporary microeconomic theory.” 485 U. S., at 252–253 (concurring in part and dissenting in part). Justice White’s concerns remain valid today, but the Court has not been asked to revisit Basic’s fraud-on-the-market presumption. I thus limit my dissent to demonstrating that the Court is not following Basic’s dictates. Moreover, the Court acknowledges there is disagreement as to whether market efficiency is “ ‘ “a binary, yes or no question,” ’ ” or in-stead operates differently depending on the information at issue, see ante, at 14, n. 6 (quoting Brief for Petitioners 32, in turn quoting Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 167).
5 Basic “adopt[ed] the TSC Industries standard of materiality for the §10(b) and Rule 10b–5 context.” 485 U. S., at 232. That standard indicates that “ ‘[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.’ ” Id., at 231 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976) ; alteration in original). “[T]o fulfill the materiality requirement ‘there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ” 485 U. S., at 231–232 (quoting TSC Industries, supra, at 449).
6 The United States as amicus curiae invokes Rule 23(a)(3) to suggest that the third element, the timing of the relevant stock trades, is a “limit on the definition of the class.” Brief for United States 15, n. 2. But it is also necessary to establish the timing of the allegedly material, public misstatement made into an allegedly efficient market (as well as when the fraud ended due to entry of truth on the market) before the fraud-on-the-market theory can be evaluated under Rule 23(b)(3). Thus, the lower court opinion in Basic expressly identified “the time the misrepresentations were made and the time the truth was revealed” as part of fraud on the market. Levinson v. Basic Inc., 786 F. 2d 741, 750 (CA6 1986). The Basic Court cited the formulation approvingly, 485 U. S., at 248, n. 27, and recently in Erica P. John Fund, Inc. v. Halliburton Co., 563 U. S. ___ (2011), the Court cited the same language as part of the “undisputed” elements a securities-fraud plaintiff must prove to invoke Basic. 563 U. S., at ___ (slip op., at 5–6) (quoting Basic, supra, at 248, n. 27). Unless the timing of the misrepresentation and truth is established at certification, there is no framework within which to determine whether fraud on the market renders reliance a common question. Thus, insofar as the majority recognizes that timing is a factor of the fraud-on-the-market theory, ante, at 16, n. 8, I agree. It would be incorrect to suggest that timing solely relates to Rules 23(a)(3) and (4). It is equally important to establish the timing range at certification for Rule 23(b)(3) reliance purposes. This fact undercuts the majority’s attempt to isolate materiality as the only factor of fraud on the market that need not be shown at certification to demonstrate that reliance is a common question.
7 There is no dispute that respondent meets the prerequisites of Fed. Rule Civ. Proc. 23(a).
8 The majority ignores this explanation of the fundamental flaw inits position, asserting that I never “explain how . . . a plaintiff class’s failure to prove an essential element of its claim for relief will result in individual questions predominating over common ones.” Ante, at 12. But a plaintiff, who is excused from his burden of showing, at certifi-cation that reliance is a common question, fails to demonstrate that common questions predominate over the individualized questions of re-liance that are inherent in a securities fraud claim. A plaintiff must carry this burden at certification for certification to be proper. The majority does not respond to the inherent timing problem in its position. It does not explain how ignoring questions of reliance—that undeniably will be individualized in some cases—at certification is justified by the fact that those questions will be resolved months or years later on the merits in a way that indicates reliance was indeed an individualized question all along. Far from obeying the dictates of Rule 23(b)(3) as it claims, ante, at 12–13, the majority unjustifiably puts off a critical part of the Rule 23(b)(3) inquiry until the merits. The only way the majority can purport to follow Rule 23(b)(3) is by ignoring the fact that, under its own analysis, reliance may be an individualized question that predominates over common questions at certification.
9 Of course, the Court’s assertion that materiality will be resolved on the merits presumes that certification will not bring in terrorem settlement pressures to bear, foreclosing any materiality inquiry at all. The Court dismisses this concern, ante, at 18–20, attempting to give fraud-on-the-market analysis the imprimatur of congressional enactment instead of recognizing it as a judicially created doctrine grafted onto an implied cause of action. But the fact that Congress has enacted legislation to curb excesses in securities litigation while leaving Basic intact, see ante, at 19–20, says nothing about the proper interpretation of Basic at issue here. The Court retains discretion over the contours of Basic unless and until Congress sees fit to alter them—a fact Congress must also have realized when it passed the Private Securities Litigation Reform Act of 1995, 109Stat. 737, and other legislation. The Court’s entire argument is based on the assumption that the fraud-on-the-market presumption need not be shown at certification because it will be proved later on the merits; insofar as certification makes that later determination unlikely to occur, it at least counsels against the certitude with which the Court assures us that its gloss on Basic is correct.
10 Ampex’s sales for 1971 were just under $284 million. See Reckert, A. & P. Registers Deficit for First Fiscal Quarter, N. Y. Times, July 1, 1972, p. 30 (discussing Ampex’s revenue and net loss in its 1972 Annual Report).
11 Blackie’s use of materiality to satisfy reliance for purposes of Rule 23(b)(3) predominance continued to form the foundation for the fraud-on-the-market concept in subsequent pre-Basic appellate cases. See, e.g., Peil v. Speiser, 806 F. 2d 1154, 1161 (CA3 1986) (“[W]e hold that plaintiffs who purchase in an open and developed market need not prove direct reliance on defendants' misrepresentations, but can satisfy their burden of proof on the element of causation by showing that the defendants made material misrepresentations” (footnote omitted)); Panzirer v. Wolf, 663 F. 2d 365, 368 (CA2 1981) (“Blackie held that the materiality of a fraud creates a presumption of reliance through its presumed effect on the market. . . . Our holding is no more than an extension of Blackie”).
SUPREME COURT OF THE UNITED STATES
AMGEN INC., et al., PETITIONERS v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
on writ of certiorari to the united states court of appeals for the ninth circuit
[February 27, 2013]
Justice Scalia, dissenting.
I join the principal dissent, that of Justice Thomas, except for Part I–B.
The fraud-on-the-market rule says that purchase or sale of a security in a well functioning market establishes reliance on a material misrepresentation known to the market. This rule is to be found nowhere in the United States Code or in the common law of fraud or deception; it was invented by the Court in Basic Inc. v. Levinson, 485 U. S. 224 (1988) . Today’s Court applies to that rule the principles of Federal Rule of Civil Procedure 23(b)(3), and thereby concludes (logically enough) that commonality is established at the certification stage even when material-ity has not been shown. That would be a correct procedure if Basic meant the rule it announced to govern only the question of substantive liability—what must be shown in order to prevail. If that were so, the new substantive rule, like the more general substantive rule that reliance must be proved, would be subject, at the certification stage, to the commonality analysis of Rule 23(b)(3). In my view, however, the Basic rule of fraud-on-the-market—a well functioning market plus purchase or sale in the market plus material misrepresentation known to the market establishes a necessary showing of reliance—governs not only the question of substantive liability, but also the question whether certification is proper. All of the elements of that rule, including materiality, must be established if and when it is relied upon to justify certification. The answer to the question before us today is to be found not in Rule 23(b)(3), but in the opinion of Basic.
Basic established a presumption that the misrepresen-tation was relied upon, not a mere presumption that the plaintiffs relied on the market price. And it established that presumption not just for the question of substantive liability but also for the question of certification. “We granted certiorari . . . to determine whether the courts below properly applied a presumption of reliance in certifying the class, rather than requiring each class member to show direct reliance on Basic’s statements.” 485 U. S., at 230 (emphasis added). Of course it makes no sense to “presume reliance” on the misrepresentation merely because the plaintiff relied on the market price, unless the alleged misrepresentation would likely have affected the market price—that is, unless it was material. Thus, as Justice Thomas’ dissent shows, the Basic opinion is shot through with references to the necessary materiality. The presumption of reliance does not apply, and hence neither substantive liability will attach nor will certification be proper, unless materiality is shown. The necessity of materiality for certification is demonstrated by the last sentence of the Basic opinion, which comes after the Court has decided to remand the case for reconsideration of materiality under the appropriate legal standard: “The District Court’s certification of the class here was appropriate when made but is subject on remand to such adjustment, if any, as developing circumstances demand.” Id., at 250. Those circumstances are the establishment of facts that rebut the presumption, including of facts that show the misrepresentation was not material, or was not known to the market.
The Court argues that if materiality were a predicate to certification on a fraud-on-the-market theory, the Basic Court would not have approved the class certification order while remanding for reconsideration of “whether the plaintiffs had mustered sufficient evidence to satisfy the relatively lenient standard for avoiding summary judg-ment.” See ante, at 23–24. The Court manufactures an inconsistency on the basis of doctrine that did not govern class certification at the time of Basic. We recently clarified that “Rule 23 does not set forth a mere pleading standard.” Wal-Mart Stores, Inc. v. Dukes, 564 U. S. ___, ___ (2011) (slip op., at 10). But review of the Basic certification order shows that the District Court’s fraud-on-the-market analysis was based exclusively on the pleadings: “[T]he allegations of plaintiffs’ complaint are sufficient to bring this section 10(b) and Rule 10(b)(5) claim within the so-called ‘fraud on the market’ theory.” App. to Pet. for Cert. in Basic Inc. v. Levinson, O. T. 1987, No. 86–279, p. 115a (emphasis added); see also ibid. (citing complaint paragraphs as establishing fraud on the market). Under a pleadings standard, the District Court found that the plaintiffs had satisfied Rule 23(b)(3) with regard to fraud on the market, including its materiality predicate. See id., at 133a (denial of reconsideration) (“This court ruled on December 10 that transaction causation [i.e., reliance] could be established by the following: proof of a material misrepresentation which affected the market price of the stocks with a resulting injury to the plaintiffs” (emphasis added)). Thus, even if the plaintiffs sufficiently pleaded materiality that the certification order “was appropriate when made,” Basic, supra, at 250, the defendants retained an opportunity on remand to rebut the pleading in order to defeat certification.*
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. It does an injustice to the Basic Court to presume without clear evidence—and indeed in the face of language to the contrary—that it was establishing a regime in which not only those market class-action suits that have earned the presumption of reliance pass beyond the crucial certification stage, but all market-purchase and market-sale class-action suits do so, no matter what the al-leged misrepresentation. The opinion need not be read this way, and it should not.
The fraud-on-the-market theory approved by Basic en-visions a demonstration of materiality not just for substantive recovery but for certification. Today’s holding does not merely accept what some consider the regrettable consequences of the four-Justice opinion in Basic; it expands those consequences from the arguably regrettable to the unquestionably disastrous.
1 * As for the Court’s contention that I have “[s]cour[ed] the Court’s decision in Basic” to find “some semblance of support” for my reading of the case, ante, at 23, n. 9: It does not take much scouring to come across the Court’s opening statement that “[w]e granted certiorari . . . to determine whether the courts below properly applied a presumption of reliance in certifying the class.” 485 U. S., at 230 (emphasis added).
SUPREME COURT OF THE UNITED STATES
AMGEN INC., et al., PETITIONERS v. CONNECTICUT RETIREMENT PLANS AND TRUST FUNDS
on writ of certiorari to the united states court of appeals for the ninth circuit
[February 27, 2013]
Justice Alito, concurring.
I join the opinion of the Court with the understanding that the petitioners did not ask us to revisit Basic’s fraud-on-the-market presumption. See Basic Inc. v. Levinson, 485 U. S. 224 (1988) . As the dissent observes, more recent evidence suggests that the presumption may rest on a faulty economic premise. Post, at 4, n. 4 (opinion of Thomas, J.); see Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wis. L. Rev. 151, 175–176. In light of this development, reconsideration of the Basic presumption may be appropriate.
ORAL ARGUMENT OF SETH P. WAXMAN ON BEHALF OF THE PETITIONERS
Chief Justice John G. Roberts: We'll hear argument next in Case 11-1085, Amgen, Incorporated v. The Connecticut Retirement Plans and Trust Funds.
Seth P. Waxman: Mr. Chief Justice, and may it please the Court:
Our case is about whether the claim of liability is in a fundamental sense class wide or individual.
The heart of a 10b-5 claim is, I bought or sold in reliance on a misleading statement.
The question at the class cert stage is whether each individual will have to prove his own reliance directly on the statement, or whether every -- he can prove indirectly reliance on the statement by showing that everybody relied on a distorted market price.
A market price will reflect a statement if and only if the statement is material and is made publicly on an efficient market.
So, absent materiality, the market price cannot be presumed to reflect the statement in question.
And the plaintiffs--
Chief Justice John G. Roberts: Why is that -- why is that the case?
I would suppose if there's no materiality, that means that the effect on the market price just happens to be zero.
Seth P. Waxman: --That's exactly correct.
And the point here is--
Chief Justice John G. Roberts: Well, why isn't that common to all parties?
Seth P. Waxman: --Mr. Chief Justice, every one of the four predicates to the fraud-on-the-market theory, which is a shortcut that -- that excuses plaintiffs from proving that I heard the statement and relied on it -- every one of those predicates is common.
Whether the market is efficient is common.
Whether the statement is public is common.
Whether the stocks were bought and sold during the period of market distortion is common.
And materiality is common.
The question is not whether--
Justice Sonia Sotomayor: So is the falsity of the statement common as well?
Seth P. Waxman: --The falsity of the statement is common, but it is not a predicate to whether or not you can prove reliance on a statement indirectly by relying on the integrity of the market price, because in an efficient market, material public statements, whether they are true or false, will presumably move the market price.
And if you're trying to prove reliance on a false--
Justice Sonia Sotomayor: Can an individual who has -- it has been deemed in -- in a cert certification that an issue is immaterial, could an individual claimant ever prove it's material?
Seth P. Waxman: --Sure.
I'm not arguing--
Justice Sonia Sotomayor: On the truth-on-the-market -- the truth-on-the-market defense, which is the type of defense that you're raising here.
Seth P. Waxman: --Yes.
Let me explain why.
There's no doubt that this Court's standard for materiality announced in TSC v. Northway, and since reiterated, is an objective standard.
It doesn't depend on who the relier was.
But the inability to prove to a certifying judge that class-wide reliance can be -- that class-wide reliance exists because the statement was material doesn't preclude a plaintiff like Connecticut Retirement, which has said it's going to proceed whether there's a class or not, or any other member of the class, from coming to court and saying either,
"I directly relied on this statement and here's my proof that it's material to the trier-of-fact. "
because the decision that the judge makes at certification is not binding on the trier-of-fact; or even to say,
"I relied on the integrity of the market price, and I have proof that the market price was affected because here are three investors, they're all reasonable people, and they say that it was relevant, important to them in the total mix of information involved. "
Justice Sonia Sotomayor: I'm sorry--
Justice Elena Kagan: Mr. Waxman, that's just to say that a plaintiff can always relitigate the question of materiality.
But at the class certification stage, isn't it correct that if the Court holds that a statement is immaterial, it's immaterial for all members of the class, and the suit has to be dismissed?
Isn't that right?
Seth P. Waxman: The suit cannot -- that is, the suit cannot proceed as a class action.
Connecticut Retirement, or any--
Justice Elena Kagan: It can't proceed as an anything action, can it?
I mean, the -- the remedy, if you had thought that the statement was immaterial, is not to say, I won't approve a class.
It would be to say the suit has no merit.
Seth P. Waxman: --I -- I think that's wrong.
I think that's conceptually wrong, Justice Kagan, in the sense that all that the class certification decision says is that the putative class representative can sue on his own behalf, but he can't drag everybody else into the--
Justice Elena Kagan: Well, do you mean to say that a judge who has just ruled that a statement is immaterial is going to keep the case in his court litigated by an individual plaintiff, even though he's just ruled that the statement is immaterial?
Seth P. Waxman: --Well, I want to -- I'd like to come back to the question of why whether, even if your -- the premise of your question is correct, it doesn't matter for this case.
But let me take one more run at -- at your premise.
The next thing that would happen if I'm right, presumably, and the case isn't over, the class just isn't certified, is that defendant, you know, emboldened by the judge's rule, will file a motion for summary judgment on the grounds that materiality -- the element of the substantive offense, not materiality, the predicate to class certification -- has just been determined in favor of me.
That is a very different question for the Court.
Materiality, as this Court has said, is fact-sensitive, and it involves a balancing of credibility of witnesses or of expert opinions, and the judge at the -- at the class cert stage has to find facts and has to make a ruling.
When it comes up on summary judgment, what the -- if there is a dispute of material facts, what the judge should do under the law is to say: Look, I just held that I didn't think it was material, but I resolved disputed material facts, and that's for the jury, and this case will go to the jury.
Justice Elena Kagan: So you're saying that a judge on a class certification stage can say: This is immaterial, the statement is immaterial; therefore, this can't proceed as a class action.
But when a summary judgment motion comes in arguing the exact same thing, the judge will say: Oh, it's not immaterial after all, or it's disputed enough that the case can continue?
Seth P. Waxman: Well, in some cases if -- if the alleged fact is, you know, that Amgen's president got a haircut at 10:30, the judge presumably can say there are -- you know, this is immaterial as a matter of law.
But the vast majority of cases -- this is a perfect example -- where they have statements that in the abstract, extracted from the total mix of information, look pretty material.
These are flagship drugs.
On the other hand, the evidence we wanted to introduce and the judge wouldn't hear because in the Ninth Circuit the test is not proving facts, but simply alleging them--
Justice Elena Kagan: I guess the question, Mr. Waxman, is if it is not immaterial as a matter of law at the summary judgment stage, how could a judge possibly say it is material at the class certification stage?
Seth P. Waxman: --The judge at the class certification stage is required to weigh competing evidence and -- and render his or her best judgment.
At the summary judgment stage, a judge is precluded from doing that.
Justice Elena Kagan: So the class certification stage becomes kind of a super merits inquiry?
Seth P. Waxman: No, not at all.
Justice Elena Kagan: --where the plaintiff has to -- has to surmount a higher burden on the merits?
Seth P. Waxman: No, no, no.
The -- the class certification stage requires the moving party, the putative -- the -- the class representative who is proposing to arrogate to himself and his method of proof the fortunes of all the absent class members, whether they are direct reliers or indirect reliers, tie their fortunes to his fortune at trial.
And the judge simply has to say: Is this a case in which reliance is a common issue?
That is the key through the certification gate in 10b-5 cases.
Justice Ruth Bader Ginsburg: I thought we were talking about, Mr. Waxman, the materiality of the alleged misstatement; and I am really nonplussed by your answer that if the judge says it's immaterial, that doesn't end it for everybody.
Certainly it ends it for the class; you said that.
Should it also end it for the representative of the class to say: Okay, now I'm going to come back, and this statement, this finding of the immateriality doesn't bind me.
Of course it's going to bind the class representative.
So if it's immaterial, the case ends.
And if it is material, then it is material to everybody in the class.
Seth P. Waxman: Well, Justice Ginsburg, let's take an easier case.
Let's say I'm somebody who bought Amgen during the relevant period, and they -- the judge says, you know, I've heard your -- I've considered your event studies and I think this is -- information isn't material.
There is nothing whatsoever that precludes me from bringing a suit and saying, here's my evidence of -- I directly relied; here's my evidence of materiality.
Justice Sonia Sotomayor: --How could that be--
Justice Anthony Kennedy: Are you saying that there -- are you saying that there is a difference between materiality for the fraud-on-the-market theory and for direct reliance, or that there can be a difference?
Seth P. Waxman: The standard of--
Justice Anthony Kennedy: And that if there was fraud on the market, that is a materiality question addressed at the certification stage, but if the class isn't certified, the investor can still show that he had had direct reliance that was reasonable?
Seth P. Waxman: --Yes.
Justice Anthony Kennedy: Am I right about that?
Seth P. Waxman: You are -- You are either right or wrong, depending on how I understood you.
Let me start with you're right, Justice Kennedy, you're absolutely right.
Justice Anthony Kennedy: --Do the first part.
Seth P. Waxman: Okay.
Materiality -- the quirk of this case is that materiality is both, as all my friends on the other side agree, an essential predicate of the fraud-on-the-market theory, that is the essential predicate of the ability to prove indirect reliance on the statement through an assertion that the market price -- that the statement distorted the market price.
Everyone agrees that if the statement isn't material, it didn't distort the market price, and therefore reliance is an individualized issue for those who actually heard and detrimentally relied on the statement.
One of the elements that has to be proven in a 10b-5 case is reliance, which is what we were talking about on the class cert stage, and there materiality is a predicate for reliance.
But even if reliance is proven, materiality is also an element of a 10b-5(b) cause of action, and the standard for materiality is the same.
The real question in this case is what is the purpose of Rule 23?
If you think that the purpose of Rule 23 is to postpone to the merits everything that can be postponed without a risk of foreclosing valid individual claims, we lose.
But that's not the purpose.
The purpose is for a court to determine whether all of the preconditions for forcing everyone into a class action are present before you certify.
Justice Stephen G. Breyer: Or you can take exactly what you said and phrase it the opposite way.
Seth P. Waxman: But I wouldn't.
Justice Stephen G. Breyer: I know you wouldn't, but I suspect your opponents might.
That if it's the purpose of the certification stage to try out every element of liability at that stage rather than waiting for the trial?
Seth P. Waxman: No.
Justice Stephen G. Breyer: No, it's not.
Now, once you say that, what you have said is, you know, it could still be material for some individual, even though there is no market reliance.
And similarly, a silence going [indicating,] some odd set of words or whatever it is, although it's not false for almost anybody, for some particular person it could seem -- convey something false in some particular set of circumstances.
So let's try out falsity at the certification stage, too.
In fact, let's try out everything, because we could always think of a few examples where, despite the fact that, you know, that it's only a common issue 99 percent of the time, we can dream up a situation where it's not a common issue.
Seth P. Waxman: Justice Breyer, the point of class certification is not to pre-try the merits of the case.
Justice Stephen G. Breyer: No, but you are saying with a cert -- class certification here, if there is no materiality there is no class; and you are repeatedly faced with the question: You are absolutely right; in fact there is no case.
And so then what you say is, and indeed I have a few instances here in which there could be a case, and I would say I bet if we are, you know, professorial enough, we could dream up a hypothetical for anything, where there still is a case.
Seth P. Waxman: The point of the class certification, as this Court explained in Amchem and other cases, and as the Rules Advisory Committee notes, is the question of whether there is class coherence in the first place.
It's not the merits issue.
It's whether it's fair for the class representative to impose on the defendant the juggernaut of class action and on the absent class members their fortunes in his or her hands.
Justice Elena Kagan: Mr. Waxman, that is right, and that's what we said in Walmart recently, that the question is a question of coherence; it's a question of whether the class wins or loses together.
And here, for materiality, the class wins or loses together.
If it's material, it's material as to everybody.
If it's not material it's not material as to everybody.
And that's just a function of the fact that materiality, as we've repeatedly said, is an objective test.
It doesn't have anything to do with whether a particular person finds it material.
And where that's the case, it seems to me that the Walmart test, which is, is an issue central to the -- you know, when you rule on the issue, do you rule on each of the claims in one stroke?
The answer to that is yes.
Seth P. Waxman: --Justice Kagan, this Court has explained more than once, and I am now quoting from Amchem, that “ class ” --
"It is class cohesion and only class cohesion that legitimizes representative action in the first place. "
And that question, quote,
"preexists any settlement and therefore any fortiori any litigation. "
Justice Elena Kagan: Mr. Waxman, I was saying that's right.
Seth P. Waxman: --Okay.
Justice Elena Kagan: There is class cohesion as to materiality.
People win or lose on materiality together.
Seth P. Waxman: The -- there is class -- with respect, there is class cohesion, investors cohere into a class, only when the alleged misinformation was significant enough to affect the price, thus enabling the common claim of relying on the misinformation in the same way.
Letting a putative representative through the certification gate without showing that key is like, on a theory of no harm, no foul, because we will all lose together--
Justice Ruth Bader Ginsburg: Mr. Waxman--
Seth P. Waxman: --is like letting--
Justice Ruth Bader Ginsburg: --Mr. Waxman, there is no question about 23(a), right?
The 23(a) prerequisites have been satisfied.
Seth P. Waxman: --Not challenged in this case.
Justice Ruth Bader Ginsburg: So the only thing is (b)(3), that is a question of law or fact common to the class members predominates over questions affecting only individual members.
The question that predominates is the question of were these representations material; if they were material, then the certification is proper.
If they were immaterial, it's not.
It's just -- I don't understand why this isn't just a clear case of a question common to the class; that is, the question of materiality.
Seth P. Waxman: The answer, Justice Ginsburg, is that the question at the class certification stage, the predominance question is the reliance element, not the materiality element.
Everyone agrees that materiality, like falsity, like scienter, like loss causation, are all common questions.
As this Court explained in Basic and reiterated last term in Halliburton, in 10b-5 actions, the question at class certification is whether reliance needs to be proven directly; that is, individually by people who heard and acted in response; or whether the shortcut that this Court authorized in Basic of allowing indirect proof by proving that the statement caused a distortion of the market, is the way to go.
There are two tracks, and it happens in this case that materiality is both an element which is common and a predicate to class-wide reliance.
Everyone agrees that you can't rely as a class on the -- the challenged misstatement unless the statement moved or had the capability of moving the market price, and that's why the materiality is the glue that holds--
Justice Antonin Scalia: Mr. Waxman, you have a habit of not pausing between sentences.
You pause in the middle of the sentence, and you end a sentence and go right on to the next.
So I apologize for interrupting but--
Seth P. Waxman: --Not at all.
Justice Antonin Scalia: --but you leave me no alternative.
Seth P. Waxman: It's the red light.
Justice Antonin Scalia: Yes, I understand.
Seth P. Waxman: The purity.
Justice Antonin Scalia: Is it not the case that one of the other elements necessary for the fraud-on-the-market theory would also be decided conclusively for future individual litigants, namely the efficiency of the market?
A future litigant will ordinarily claim: I either sold it at a depressed price or bought it at an inflated price because of the market's reaction to this particular fraudulent statement.
Seth P. Waxman: Yes.
Justice Antonin Scalia: So -- so you can say the same thing about the efficiency of the -- of the market being determined in this preliminary question as you can say about -- about the issue here.
Seth P. Waxman: That's absolutely right.
And the same is true for public statement.
The way that the Government in responding--
Justice Elena Kagan: What is that statement, Mr. Waxman?
Seth P. Waxman: --I'm sorry.
Justice Elena Kagan: Because the difference is if there is an insufficient market, the case goes forward and people have to prove individual reliance, and that means that the class splits apart and you don't get a coherent class.
So the function of your winning an argument either on publicity or on the efficient market is that the class becomes incoherent, that everybody then has to prove individual reliance.
But that's not what happens when you prove immateriality.
When you prove immateriality, the whole class falls together, because it's immaterial for everybody.
Seth P. Waxman: That's not correct, and in any event, that analysis, that approach is, as I was trying to say, is like letting the fruits justify the search.
The question is at the time that class certification is sought, the question is do common issues predominate?
And the question in a securities case is, is reliance in fact, to quote this Court's opinion, “ in fact a common issue ”?
You also have to -- to show that in fact it's a common issue, you have to show that the market reacted to the statement, whether it was true or false, whether it was made with scienter or not, whether there was loss causation or not, the market had to react, and to do that, you need all three legs of the stool.
The statement has to be material because immaterial statements don't move markets.
Justice Ruth Bader Ginsburg: Mr. Waxman, the -- the Basic opinion that started all this off, on page 242, lists materiality as a common question.
The materiality of the misrepresentation, if any, is listed as a common question, and that made perfect sense to me.
Seth P. Waxman: It makes perfect sense to me as well, Justice Ginsburg, and I'm not being sarcastic.
Materiality is a common question.
Just as are many of the other elements of a 10b-5 action--
Chief Justice John G. Roberts: So at certification you just assume that materiality -- you don't have to show it.
If it's always a common question, you assume it in trying to weigh out the number of -- whether or not common issues predominate or not.
Seth P. Waxman: --Well, the question, Justice -- I mean, for -- if it worked for class certification, that would be fine.
The question is, what the purported class representative has to show to get through the certification gate to transform an ordinary bilateral dispute about
"you made a false statement, I relied on it, it caused me to lose money. "
into something entirely different, a class of tens or hundreds of thousands of people, all of whom are proceeding together, all of their fortunes are married, and the defendant is faced with the full class, what you have to show.
And you have to show that reliance is a common issue.
Regardless of what you have to show down the road.
Justice Ruth Bader Ginsburg: Mr. Waxman, you seem to be setting out two determinations of materiality.
You say in order to certify the class you have to show that the misrepresentation was material.
And in order to win on the merits, you certainly have to show that the misrepresentation was material.
How do those two findings of materiality differ?
How does the finding that you say must be made at the certification stage differ from the finding that must be made at the trial?
Seth P. Waxman: They differ temporally, they differ functionally, and they differ in terms of who decides it and with what level of finality.
They differ temporally because the first question is, is this case going to -- which of two tracks is this case going to proceed?
Is it going to proceed as a -- as a direct reliance case -- I heard the statement and I relied on it -- or is it going to proceed on a theory on behalf of everybody that whether -- the people who relied on it, the people who heard it or who didn't hear it on a theory that the -- we rely on the integrity of the market, and the integrity of the market was impaired if the statement was false.
In any event, there was a price effect.
And there isn't a price effect if the statement wasn't material and made publicly into an efficient market.
Justice Ruth Bader Ginsburg: But I still -- what does “ material ” mean at the trial level, what does “ material ” mean at the certification level?
Seth P. Waxman: Material means at both, as this Court said, that there is a substantial likelihood that the information would have been viewed by a reasonable investor as having significantly altered the total mix of information available.
That is the test.
Justice Ruth Bader Ginsburg: So it's the same question.
It has to be -- if it's established at the certification stage, it has to be established again at trial?
Seth P. Waxman: That's correct.
Just like the market efficiency and the public statement and the market timing.
Every one of those predicates has to be proven to the jury's satisfaction at trial.
All of them are exactly the same in that respect.
May I reserve the balance of my time?
Chief Justice John G. Roberts: Yes, you may.
ORAL ARGUMENT OF DAVID C. FREDERICK ON BEHALF OF THE RESPONDENT
David C. Frederick: Thank you, Mr. Chief Justice, and may it please the Court:
The class certification process determines whether the case can generate common answers for all class members.
So for three reasons--
Justice Sonia Sotomayor: Why don't you answer the question that was asked earlier, if Basic set forth a presumption, and are you disputing that at the class certification stage a defendant can prove that the market is inefficient?
David C. Frederick: --Yes.
Justice Sonia Sotomayor: So why shouldn't we hold Basic to its position that all of its presumptions can be rebutted as well, not just efficiency?
Why do we set out efficiency as the one issue that can be rebutted?
David C. Frederick: There is a lot to said about Basic, and let me just start the ball rolling by making these observations.
First, Basic did not try to distinguish between the requisites of Rule 23 and the substantive component of the fraud-on-the-market theory.
And that's important, because in that case the court remanded for a redetermination of materiality, but it upheld the class certification order.
So in the context of Basic, the court seemed to be thinking there was a difference between what needed to be proved for class certification and what would need to be proved on the merits of the case.
Now, the second thing to be said is that Basic needs to be read against the backdrop of Rule 23, and especially this Court's recent decision in Walmart v. Dukes.
Because materiality always generates a common answer for all class members, it is the quintessential common issue that does not splinter the class or cause it to be noncohesive for purposes of understanding predominance.
Justice Anthony Kennedy: Doesn't -- doesn't that assume that the efficient market theory is always relevant to materiality?
And there might be instances in which there is subjective reliance, which we inquire into, that is objectively reasonable, but that does not involve a fraud on the market?
David C. Frederick: Only in a hypothetical case, Justice Kennedy.
And this is the absolute most important point that I can try to make today.
In a fraud-on-the-market case, the idea of reliance, the only theory of reliance that is being advanced, is indirect reliance on the integrity of the market.
There is no other theory of reliance.
Why do we know that in this case?
For two reasons.
First, the Connecticut Retirement System could not be the class representative if it did not meet the typicality requirement of Rule 23(a), which the district court found.
This is on page 25A of the petition appendix, and has not been challenged subsequently.
But why doesn't Connecticut have a direct reliance theory?
We know they don't because they have a fiduciary duty to their investors to apply whatever theory they have of securities fraud.
So we know in this case, and this is by far clear in the run-of-the-mine fraud-on-the-market case, that the class representative will only establish reliance indirectly by showing that the integrity of the market was impaired.
And so their construct is an entirely hypothetical and theoretical one.
It simply does not arise in the real world of fraud-on-the-market cases.
Justice Antonin Scalia: Mr. Frederick, you -- you say that, you know, it's a flukey hypothetical where -- where the -- the issue here would -- would come up again in a different context in an individual suit.
Let -- let me give you a -- a case that's not flukey and hypothetical.
That is, it is usually the case that people who are allegedly defrauded in stocks rely upon the fact that they bought it at an -- at an inflated price or sold it at a depressed price.
Both of those questions depend upon the efficiency of the market.
If the market is not efficient, a question that has to be decided for the class certification case, the individual investor is not going to be able to say, you know, that's -- that's why I got cheated, because the market reflected this false statement and I paid more money for the stock than I should have.
That -- that is not a flukey hypothetical.
That is what will happen in most individual cases.
And yet, that question of the efficiency of the market has to be decided at the class certification stage.
David C. Frederick: Right, precisely because we have to know are all the investors standing in the same position.
If the market is efficient and it is absorbing information into the price, all investors will have the same question with respect to materiality.
Justice Antonin Scalia: You could say the same about materiality.
If it's immaterial, it isn't reflected in -- in the market.
David C. Frederick: They all lose on the merits if there is no materiality.
The question about efficiency, Justice Scalia, and the reason why it is advanced at class certification is because it serves a gatekeeping role in determining whether all the investors can show indirect reliance on the market.
If the -- if the stock is thinly traded, there are no public analysts, there are no stock reports given about it, and no one knows exactly why is the price being determined, that creates exactly the kind of individual issues that would predominate in a securities fraud case.
Justice Antonin Scalia: So -- so the difference you assert is that, with respect to the issue here, it will be an issue in all individual cases, whereas with regard to the efficiency of the market it will only be an issue in what, 95 percent of -- of the individual cases?
David C. Frederick: No, the question is, does efficiency serve as a means of determining are all the investors similarly situated?
Are they a cohesive class?
If the market is not efficient, and mind you, they conceded this question in their answer and they did not challenge the expert that was put into this report on the question of efficiency, so that question's really not in this case.
But in the case that you're hypothesizing, Justice Scalia, efficiency serves the gatekeeping function of determining are all the investors similarly situated so that indirect reliance can be a -- a method of showing that predicate for a common answer to be determined at trial.
Justice Sonia Sotomayor: Could we--
David C. Frederick: Publicity serves the same function.
Justice Sonia Sotomayor: --Could we get a hypothetical that I actually think could occur, which is not a truth-on-the-market defense, but a known truth to the individual person seeking certification.
So that is, it's immaterial to that person because they were told this information by someone and still trading.
Would that defense be available at certification?
David C. Frederick: I think it -- where it gets appropriately done is the adequacy and typicality prongs of Rule 23(a), because that person has a different factual basis for attempting to assert a securities fraud, and that person is not typical of the class and so therefore would not meet the typicality requirement of 23(a).
Now, it is possible, certainly, that in other cases there might be investors out there who do have a direct reliance theory, but they are protected by Rule 23 in a couple of ways.
One is they can bring their own case, and they can say, I directly relied on Amgen's misstatements and the false things that they said about their flagship products and I therefore have my own 10b-5 case, or if the class is certified and they think they have a direct reliance theory, they can opt out of the class.
Justice Stephen G. Breyer: This is true, but I'm -- I'm -- I'm trying to work out what, as I understand it now, Mr. Waxman's point is -- is basically this, that -- that why do we use an efficient market theory?
We use it because if the market is efficient and the statement is public, then someone who bought over the market is buying in a -- in a world that reflects the false statement.
I mean, that's -- so he -- there was sufficient reliance indirectly.
So I think his point is, yes, I can see materiality is something that's relevant to everybody.
Of course it is, a common issue in the case.
But also it is a feature of materiality that if it wasn't material, then our theory of market reliance -- market -- efficient markets goes out the window, because you can have all the efficiency in the world, all the publicity in the world, but still where something to a reasonable stockbroker is irrelevant, his reaction is “ who cares ”?
And therefore, although there could be special cases, the efficient market theory plays no role.
Now, I think that's what his theory is, if I understand it.
And -- and I don't hope it is if I've got it -- I mean, I hope I got it right.
But -- but if that -- so what's your direct answer to that?
David C. Frederick: My direct answer to that is that materiality still serves as a common answer.
All the investors are going to lose if it is not a material misstatement that has any effect, and they will win or they will have the potential to win if it is a material--
Justice Anthony Kennedy: Well, that -- that--
Justice Antonin Scalia: The issue -- the issue is not whether -- whether it's a common question or not.
David C. Frederick: --Well--
Justice Antonin Scalia: The issue is whether there's any reason to believe that the -- that the market reflects reality.
David C. Frederick: --Right.
Justice Antonin Scalia: That's the issue.
David C. Frederick: But, Justice Scalia, I think that the issue that you want to decide or you think that you want to decide is what constitutes the efficiency of the market, and that is a hotly litigated issue in many securities cases.
It just happens not to be at issue in this one.
And so the question of, you know, you've got a Fortune 200 company with 1.1 billion shares outstanding, nine million traded a day during the class period.
I mean, this is a hugely efficient market for the stock that is at issue before you.
Justice Stephen G. Breyer: All right.
So you're saying in this kind of case, the -- the materiality or not is not likely to be specially sufficient -- specially significant.
In fact, you are going to decide if it is a common issue, and there is no reason to import that common issue into the preliminary finding, even if what I just parroted, we hope is true.
David C. Frederick: Right.
What you're ending up doing, Justice Breyer, is you are front loading.
You are having a mini trial on the merits, because the materiality question here goes into what did the executives think and mean when they were making certain statements about clinical trials for their drug.
Justice Anthony Kennedy: --You -- you are saying that if everyone loses, if it's not material, that's a common issue and therefore, the trial court at the certification stage does not have to determine it.
David C. Frederick: --No, what I'm saying is that it is -- because it is a common question, it is not one to be decided at class certification.
Just like falsity--
Justice Anthony Kennedy: I'm not sure how that's different from what I said.
But in other words, you are saying that market efficiency is just presumed and everybody wins or everybody loses, and so you can have a class action even though the trial judge is convinced that there is no adequate common market theory to support the common -- the common injury.
David C. Frederick: --That's not our position.
Our position is that efficiency and publicity are gate-keeping functions to determine whether or not the answer for indirect reliance on the market is a common question.
Justice Ruth Bader Ginsburg: Mr. Frederick, you say -- you say, you point out quite rightly that the efficiency of the market was conceded -- was conceded below.
David C. Frederick: Yes.
Justice Ruth Bader Ginsburg: It was not challenged.
Except that now, in Amgen's brief, there is a suggestion that the efficiency of the market is a more sophisticated question.
And it's not my note -- binary, I think is what they said -- it isn't that it's either efficient or it's not efficient; it depends on other factors.
David C. Frederick: It's a new concoction they have not argued before this stage of the briefing in this case, and it's wrong because all investors will rise or fall based on whether or not those statements that may have some subsidiary materiality effect are going to be able to show that there was some consequence to the market.
And it is that why -- that is why it is still a common question, even if there are the subsidiary inefficiencies--
Justice Stephen G. Breyer: Right.
So if I've got this, your answer -- which I am trying to follow it; don't tell me I'm right if I'm not -- that with efficiency of the market, that's not a traditional element of a tort--
David C. Frederick: --Correct.
Justice Stephen G. Breyer: --that is something special to get into this theory.
David C. Frederick: That's correct.
Justice Stephen G. Breyer: The publicity of the matter, that is not traditionally a common element of the tort, that is something special to get into this theory.
David C. Frederick: Correct.
Justice Stephen G. Breyer: With materiality, it is a common element of the tort always; it is traditionally there; it will be litigated, so there is no special reason to or desirability in or need for litigating at the outset.
David C. Frederick: That's correct.
And Congress recognized that there were issues concerning these various elements.
And that's why, in 1995, when it enacted the PSLRA, it addressed scienter by imposing a heightened pleading requirement and loss causation, but it was asked to address materiality and reliance and it chose not to.
The first bill that was proposed would have dealt with Basic, and the -- and the Congress voted that down, and instead--
Justice Antonin Scalia: But there is -- there is a reason for deciding it earlier, and the reason is the -- the enormous pressure to settle once the class is certified.
In most cases, that's the end of the lawsuit.
There's -- there's automatically a settlement.
Now, one way of -- of certifying the class is to show, well, you know, it's an efficient market and you can presume that everybody in the class relied on the market.
But that's only true if -- if the -- the statement was material to the market.
If it was immaterial to the market, that isn't true.
And you should not proceed any further, and you should not begin this -- this class action which, in most cases, is simply the preliminary to a settlement.
There is a good reason for deciding it sooner.
David C. Frederick: --Well, Justice Scalia, you would consign district court judges to having many trials on the merits because the fact that materiality is such a highly contextual inquiry--
Justice Anthony Kennedy: Well, you have the -- you have the burden of justifying class certification--
David C. Frederick: --True.
Justice Anthony Kennedy: --is that not correct?
David C. Frederick: That's correct.
Justice Anthony Kennedy: All right.
Now suppose there is some real question of whether or not the causal chain hasn't been broken, the causal chain between the misstatement and the movement in price.
Don't you have to prove the integrity of the causal chain?
David C. Frederick: Yes.
Justice Anthony Kennedy: At the certification stage?
David C. Frederick: Yes, but that's where efficiency comes in, Justice Kennedy, and that's why, when efficiency is contested at the class certification stage, what comes in are proofs of does information end up having an effect?
And economists do event studies to try to show the general level at which information will be absorbed into the market price.
That's where that issue gets contested.
It does not get contested on the question of materiality, because materiality looks at the total mix of information that would be relevant to an investor, not--
Justice Anthony Kennedy: You say it's material even though there is no cause in fact?
I don't understand that.
David C. Frederick: --What I'm saying is that the efficiency question goes into the individual stock's ability to absorb information, both material and nonmaterial information.
Now, the question on the merits, for which all investors will either rise or fall together, is was this company's misrepresentation a material one to the reasonable investor?
And that's why all investors are going to have this same answer, because it's the same objective inquiry.
The question that you -- you and Justice Scalia are positing about the efficiency of the market is one on which there are disagreements among the lower courts as to how to challenge and how to deal with that question, but they do not do it on the basis of materiality.
Judge Easterbrook had a very sound opinion in the Schleicher case in which he goes through and he explains that when there is a fraud on the market case, the notion of indirect reliance, where efficiency is established, really evolves -- devolves down to the core merits question of materiality.
And that is a common question that -- in which all of the investors are going to rise together.
But I do want to end by saying that, when Congress looked at this question, it decided not to deal with this question of efficiency or materiality.
It was faced with a specter of 300 lawsuits being filed per year that were securities fraud cases, in 1995, where a 93 percent settlement rate was occurring, an average settlement of nearly $9 million.
In 2011 the statistics showed that what Congress did was successful in achieving the purpose Congress attained.
In the year 2011, there were 188 class actions filed; 50 percent of them were dismissed mostly on the high-end pleading standards that Congress had enacted in the PSLRA.
So it's not really for this Court's province to be imposing policy judgments about what additional requirements ought to be put on 23(b)(3); Congress made that judgment.
And these proceedings that have gone along in -- in this way were perfectly sound by -- with the district court and the court of appeals.
If the Court has no further questions?
Chief Justice John G. Roberts: Thank you, counsel.
ORAL ARGUMENT OF MELISSA ARBUS SHERRY ON BEHALF OF THE UNITED STATES, AS AMICUS CURIAE, SUPPORTING THE RESPONDENT
Melissa Arbus Sherry: Mr. Chief Justice and may it please the Court:
I would like to start by going back to the language of Rule 23 and, in particular, the predominance requirement.
The only question is whether common issues predominate over individual issues.
As several of the justices have recognized, materiality is an objective inquiry, at least to a common answer, and that common answer unites the class rather than divides it.
If materiality is shown, the class members can proceed together on the fraud-on-the-market theory.
Justice Sonia Sotomayor: But as Justice Scalia pointed out earlier, so is efficiency or nonefficiency.
Melissa Arbus Sherry: --And the difference--
Justice Sonia Sotomayor: So that -- that differentiation, articulating it that way, doesn't move the ball.
Melissa Arbus Sherry: --I would disagree with that because the difference is with efficiency and with publicity.
If the -- depending on the common answer, the class may divide.
It may fragment because, even if the market is inefficient, individual members can make out claims of direct reliance.
You can rely on an inefficient market and prevail.
You can rely on nonpublic statements--
Justice Antonin Scalia: What's the difference between 100 percent and 95 percent?
I mean, most of the other claims in -- in stock cases are going to be based on what -- what the market price was when the person bought or sold.
So, you know, 95 percent instead of 100 percent, that's -- that's the basic difference?
Melissa Arbus Sherry: --The -- the purpose of the class certification stage with respect to predominance is to weigh the common issues against individual issues.
And with respect to market efficiency -- excuse me -- market efficiency and publicity, those are two matters that -- that either bind the class together or divide them.
To the extent the market is inefficient, or to the extent the statements are not public, they are not all getting the information from the same source.
Justice Stephen G. Breyer: There are preconditions -- there are preconditions, not related to the merits, that do, in fact, justify the use of a special reliance theory.
Now I've said that; of course, so is materiality.
Melissa Arbus Sherry: But--
Justice Stephen G. Breyer: But materiality, unlike the other two, is part of the element of the basic case where it is a common issue in this case -- and in most -- to everybody.
Melissa Arbus Sherry: --And that is exactly right.
And the difference is--
Justice Stephen G. Breyer: Is that exactly right?
Because I am getting the -- facing the problem a few minutes from now somebody is going to say: Well, why is that exactly right?
I mean, it is a precondition.
Melissa Arbus Sherry: --I am going to say it's exactly right, because the confusion here is that materiality in a fraud-on-the-market case serves two purposes: It is a predicate to the fraud-on-the-market theory, but it is also an independent, separate element.
And what Petitioners would have this Court do is isolate the two inquiries when they're really the same question.
It is asking the same question that leads to the same answer, and it's one that unites the class.
There's -- Petitioners phrase the question as whether reliance--
Justice Antonin Scalia: If you have the same question, then maybe we shouldn't have this fraud-on-the-market theory.
Because the whole purpose of it is -- is to -- to assume that -- that the whole class was -- 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 -- that simply collapses once you remove the materiality element.
Melissa Arbus Sherry: --The fraud-on-the-market theory, however, is a substantive theory.
It's not a procedural doctrine.
To be sure, one of the practical consequences is it allows classes to be certified, but it's a means of proving reliance in an impersonal market in which investors trade today.
What the Court did in Basic was adapt the direct reliance concept which envisioned face-to-face transactions to the impersonal market.
And so with respect to actually proving a fraud on the market, you're absolutely right, but what we're talking about here is not whether a fraud on the market can be proven; we're talking about whether common issues predominate over individual issues.
And Petitioners still fail to point to any individual issues that would come into play in a case where materiality is not able to be shown.
None would, because materiality would kill the case for all.
Justice Antonin Scalia: 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.
Melissa Arbus Sherry: With all due respect, the two really do collapse into one.
Once you've proven that the market is efficient, and once you've proven that the statements are public, you're asking the same question.
You can call it reliance or you can call it materiality.
Justice Anthony Kennedy: Well, that then -- that imparts the question of 24 years of economic scholarship -- I think that's how long it's been since Basic was decided -- has shown that the efficient market theory is -- 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.
Melissa Arbus Sherry: No, I -- a couple responses to that.
The first one is the one that my colleague made, which is that market efficiency isn't disputed here.
It was conceded in the answer at paragraph 199.
And not only is it not -- is it not contested here, Petitioners actually -- actually embrace an efficient market in order to pursue their truth-on-the-market defense.
And so my first response would be that's not something to be addressed in this case.
And my second response is Basic didn't adopt any particular economic model of market efficiency.
If you look at footnote 24 of Basic, if you look at footnote 28 of Basic, the Court makes very clear that it's not adopting an economic theory as far as how quickly or completely the information is incorporated into the market price.
Instead, it was looking at congressional intent.
It was looking at difficulties in direct proof.
And it was looking at common sense to reach a result and again to adapt a reliance theory that was premised on face-to-face transactions to the impersonal market that exists today.
And so, again, I wouldn't consider market efficiency in this case.
It's not presented.
To the extent there's questions about how the determinations should be made in terms of levels of generality, that's something that the lower courts can decide.
Today, all we're talking about is the materiality component and again focusing on whether or not common issues predominate over individual issues.
It's a comparative inquiry.
It requires comparing common issues on the one hand and individual issues on the other.
And Petitioners have not identified any individual issues that will actually come into play as the case is litigated.
The -- going to the -- some of the policy concerns that were raised, I'd make a couple points.
One is the one that my colleague made.
Congress addressed those policy concerns in the PSLRA, in SLUSA, and it chose to address them through different means.
The second point I would make is the same argument could be made with respect to the other elements of the securities fraud cause of action.
If the argument is you should have to prove it at class certification because otherwise the case is going to settle, you could say the same thing with respect to scienter, with respect to falsity, with respect to loss causation, which this Court in Erica John of course did said did not have to be proven at the class certification stage.
So in short, it proves too much.
The third response is that there are countervailing policy concerns and there are countervailing concerns that are actually tethered to Rule 23 in terms of efficiency.
Chief Justice John G. Roberts: Do you -- do you agree that you have to show materiality to rely on the fraud-on-the-market theory to establish reliance?
Melissa Arbus Sherry: --As a substantive matter on the merits, yes.
It is a predicate.
Chief Justice John G. Roberts: I don't understand why that is.
If you're trying to show reliance, and you show that it's an efficient market, and that the information was -- was public, doesn't that show reliance without regard to whether the statement's material or not?
Melissa Arbus Sherry: I think in terms of transaction causation, what you're -- and reliance is referred to as transaction causation -- what you're trying to show is whether or not the information affected or distorted the market price.
And in order to show price distortion, it does require that the information be material.
And so we accept that in terms of the fraud-on-the-market theory--
Justice Antonin Scalia: Or, to put it differently, an efficient market is a market that takes account of material factors, right?
Melissa Arbus Sherry: --I -- I would say it's--
Justice Antonin Scalia: It's not an efficient market if it's, you know -- it's, who knows, random?
It takes account of material factors.
Melissa Arbus Sherry: --I would make a minor quibble on that.
I would say that the market takes account of all public information, but it only -- it only moves based on material information, so that's exactly right.
And so our issue is not with the predicates for the fraud-on-the-market theory.
Our issue is with Petitioners equating the predicate from the fraud-on-the-market theory with the actual prerequisites of Rule 23.
And this Court made it very clear in Shady Grove that the only question at the Rule 23 stage is whether the prerequisites have been met.
The only one that we're talking about here is predominance.
It's a comparative inquiry between common issues and individual issues.
And if I can quickly go back to my point about countervailing policy concerns, as Petitioners acknowledge, a determination of the class certification stage is not binding on anybody -- in that case on the ultimate fact-finder, or in any other case.
And so the problem with Petitioners' position is that it would require relitigation of the materiality question at the merits stage to the extent the class is certified.
Or if it's not in every other case that is brought on the same issue.
That doesn't serve the efficiency purposes that underlie Rule 23.
The -- in terms of absent class members, he suggests that absent class members would somehow be prejudiced, but as Your Honor, Justice Kagan, pointed out, the only prejudice is that they wouldn't be able to relitigate the very same issue.
That is protected by allowing opt out.
That is protected by Rule 23's adequacy of representation requirement.
And so that's already sufficiently protected.
The most efficient course is to actually focus on common issues.
Materiality is a common issue.
It will result in the same answer for all.
The class rises or falls together.
And class certification is not about only certifying meritorious cases.
In 1966, when the current version of Rule 23(b)(3) was adopted, it was an innovation.
It was a change from the spurious class actions where it was a one-way ratchet, where only the defendant was bound.
In the current rule of Rule 23(b)(3), you want to certify class actions that are both meritorious and those that are not, so it reaches a binding judgment.
Chief Justice John G. Roberts: Thank you, counsel.
Mr. Waxman, you have 5 minutes.
REBUTTAL ARGUMENT OF SETH P. WAXMAN ON BEHALF OF THE PETITIONERS
Seth P. Waxman: Thank you, Mr. Chief Justice.
The advisory committee notes to the very amendment that Ms. Sherry was referring to states,
"A fraud case may be unsuited for treatment as a class action if there was a material variation in the kinds or degrees of reliance by the persons to whom they were addressed. "
That is this case.
The anomaly of our -- my friend's position is they concede that materiality is a predicate for class reliance.
They agree that unless the statement is material, however efficient the market, however loudly the statement was published, there is no detrimental reliance on the integrity of the market price.
Reliance can only be approved -- and Justice Breyer, this goes to your traditional paradigm case -- in the paradigm case, reliance was proven by the fact that you heard the statement and you did something in reliance on it, to your detriment.
The innovation of Basic, and the notion that Basic didn't say anything about class certification under Rule 23 is astonishing, given the fact that the whole reason that the question of the fraud-on-the-market theory was presented was the inquiry about whether there could be -- whether the traditional bilateral method of proving detrimental reliance on a statement could be aggregated into a ginormous class by allowing everyone to say well, we relied on the integrity of the market price and a material misstatement -- a material statement affected that price.
They said “ could have ”--
Justice Stephen G. Breyer: Traditionally, how did that work?
How did that work traditionally?
No class, okay?
Joe -- Farmer Jones comes in, you have to show it's false?
You have to show it's material, and then you show the reliance that he did something on that basis--
Seth P. Waxman: --Right.
Justice Stephen G. Breyer: --So the materiality was not part of reliance.
Materiality was an element that was always proved, and then you went on to show reliance.
Seth P. Waxman: Exactly right.
And what the Court in Basic could have said, Justice Breyer, was: Forget the fraud-on-the-market theory; we are going to absolve, we are going to say that for 10b-5 actions, you don't have to prove reliance directly on the statement.
We are going to allow you to -- we -- we posit that investors rely in common on the integrity of the market price; and if you can demonstrate to us that a challenged statement moved the market, if there was market effect, we will allow you to proceed as a class; because then the common answer to the common question, how are you going to prove reliance is we are going to prove it all the same way, because investors rely on the integrity of the market price.
Now, the Court in Basic--
Justice Ruth Bader Ginsburg: It sounds like you are saying you have to win on the merits of the materiality question in order to get the class certified.
Seth P. Waxman: --You have to prove that there -- the Court explained correctly in Basic, and this -- this actually goes to -- anticipates my next point, Justice Ginsburg, the Court in Basic didn't say: Well, we're going to allow you to--
Justice Antonin Scalia: Excuse me.
Seth P. Waxman: --we're going to allow you to--
Justice Antonin Scalia: You -- you don't have to prove it to get the class certified.
You only have to prove it to get the class certified with the benefit of the fraud-on-the-market theory.
Seth P. Waxman: --Correct.
Justice Antonin Scalia: Which is a shortcut to getting the class certified, right?
Seth P. Waxman: Yes.
Justice Antonin Scalia: So this is just a condition to the shortcut.
Seth P. Waxman: Yes.
And in fact it's a shortcut to a shortcut.
What the Court in Basic could have said is: If you want to proceed as a class, you prove to the Court that reliance is common by showing that the market misstatement affected the market price.
But the Court in Basic went further in the direction of class plaintiffs and said: You don't have to prove that directly.
All you have to prove -- we will allow that to be presumed if you can demonstrate without effective rebuttal four things: the statement was of a type that the market would care about; the statement was made publicly in an efficient market; and the trading occurred during the period between the misstatement and the correction--
Justice Stephen G. Breyer: And the reason that we want to prove it upfront in the 23 rather than wait till the merits, where it will be argued anyway in exactly the same way -- the reason that we want to do it first is since it's going to be there anyway and going to be litigated anyway, unlike publicity, unlike efficiency.
But the reason we take this one and run it upfront is?
And it can't be the answer we should litigate everything before we litigate anything.
Seth P. Waxman: --Of course not.
Justice Stephen G. Breyer: Okay.
So -- so what's the answer?
Seth P. Waxman: The answer is that this is the -- that 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.
Chief Justice John G. Roberts: Thank you, counsel.
The case is submitted.