Pending US Supreme Court cases could cause significant changes to securities class action practice in the US

January 2013 | MARKET OUTLOOK 2013

Financier Worldwide Magazine

The US Supreme Court is poised to issue a decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds that could have major impacts on securities class actions in the US. For the first time since approving use of the fraud-on-the-market theory in Basic Inc. v. Levinson in 1988, the Court is in a position to address the use of that theory in a significant way. Amgen may thus give the Court the opportunity to change the way parties litigate securities class actions.

The first question in Amgen is whether securities fraud class action plaintiffs must prove that an alleged misrepresentation was material before a class can be certified under the fraud-on-the-market theory. If so, that would require courts to allow defendants to challenge whether plaintiffs had sufficiently proved materiality at the class certification stage instead of later in the case. The second question in Amgen is whether a defendant must be allowed to rebut the applicability of the fraud-on-the-market theory at the class certification stage, such as by showing that the market already knew what plaintiffs claim was not disclosed.

Although technical, these questions are crucial to how securities class actions are litigated and valued in the US. Many plaintiffs’ lawyers assume that, if their case survives a motion to dismiss, it is essentially a foregone conclusion that some class will be certified; this increases the pressure on defendants to settle. Indeed, defendants often do not contest that a class should be certified, and focus instead on narrowing the class by attacking when it starts and ends and who should be included in it. Thus, if the Court uses Amgen to give its approval to the way these cases are currently litigated, it could cement in place the valuation structure that exists now. Parties would know that some sort of class certification was highly likely if a securities class action complaint survived a motion to dismiss, and they would continue to value cases as they do now.

But if the Court uses Amgen to give defendants additional methods of attacking class certification, it could substantially change the way securities class actions are litigated. First, in some cases these new options will be successful in defeating class certification. That result would likely lower the costs of such cases for those companies, their officers and directors, and their insurers. Second, the threat of these new defences will likely change the way plaintiffs’ lawyers think about the value of cases they bring: a case in which class certification is nearly certain will generally be worth more than one in which there is a substantial possibility that certification might be denied. Third, plaintiffs’ lawyers adapt to the way courts decide securities cases. For example, Basic created the opportunity for plaintiffs’ lawyers to bring securities class actions in the volumes we now see. Similarly, the Private Securities Litigation Reform Act of 1995 caused plaintiffs’ lawyers to bring different cases and litigate them differently. It is reasonable to assume that, if the Court uses Amgen to constrain securities class actions, plaintiffs’ lawyers will adapt again. They might, for example, focus more on larger companies with more active trading than on smaller companies with less active trading, in the hope that the constraints that could come out of Amgenwould be less applicable to larger, more liquid companies.

The Court should issue its decision in Amgen before early July 2013, and companies with publicly-traded securities should pay close attention to the result, as it will likely take several years for its full effects to be felt if it endorses a substantial change.

Douglas W. Henkin

Partner

Milbank, Tweed, Hadley & McCloy LLP

T: +1 (212) 530 5393

W: dhenkin@milbank.com

www.milbank.com

Douglas W. Henkin

Milbank, Tweed, Hadley & McCloy LLP