Supreme Court Update: Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (11-1085), Levin v. United States (11-1351), Calhoun v. United States (12-6142) and Order List
Greetings, Court fans!
We're back to round out our coverage of recent decisions and orders, including Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (11-1085), on whether securities fraud plaintiffs must establish the materiality of the allegedly fraudulent statements at the class certification stage; Levin v. United States (11-1351), on the government's waiver of sovereign immunity for intentional torts committed by armed services medical personnel; and a remarkable statement respecting denial of cert in Calhoun v. United States (12-6142), regarding racially charged comments made by a federal prosecutor during trial.
Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds (11-1085) is the latest skirmish in the longstanding battle between plaintiffs' attorneys and defense attorneys regarding the requirements for bringing class actions alleging securities fraud, which can be expensive to defend and which carry the risk of huge liability. Chalk this one up as a victory for the plaintiffs' side, as the Court held that plaintiffs do not have to prove the materiality of the statements they allege to be fraudulent in order to obtain class certification (though they will have to do so to prevail on the merits).
To obtain class certification under Rule 23(b)(3), a plaintiff must establish that "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, a plaintiff must prove, among other things, that the defendant made a material misrepresentation or omission, and that the plaintiff relied on the misrepresentation or omission. Traditionally, a plaintiff would prove reliance by showing that she knew about the allegedly false statement, and acted upon it. But this poses a problem for class action plaintiffs: questions about whether each individual plaintiff relied on a particular statement would overwhelm questions common to the class. Enter the fraud-on-the-market theory. This theory holds that because the price of a security in an efficient market reflects all publicly available information about a company, anyone who trades in that security may be presumed to have relied on that information. The Court adopted the fraud-on-the-market theory in Basic Inc. v. Levinson (1988), and it has been the cornerstone for meeting the predominance requirement for certifying securities class actions ever since.
In this case, Connecticut Retirement alleged that biotech company Amgen made misrepresentations regarding the safety, efficacy, and marketing of two of its flagship drugs. Connecticut Retirement sought class certification, invoking the "fraud-on-the-market" presumption. Amgen conceded that the market for its securities was efficient, but argued that Connecticut Retirement should also have to prove that the alleged misrepresentations were material in order to get the benefit of the presumption on class certification. The District Court certified the class without requiring the Connecticut Retirement to prove materiality, and without giving Amgen an opportunity to prove that the alleged misrepresentations were not material. The Ninth Circuit affirmed.
The Court affirmed as well, in a fractured 6-3 decision with four separate opinions. Justice Ginsburg wrote for the majority, joined by the Chief and Justices Breyer, Alito, Sotomayor, and Kagan. The majority focused, laser-like, on the requirements of Rule 23(b)(3). Although the Court has acknowledged that class certification analysis may involve some overlap with the merits of the plaintiffs' underlying claim, "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." Amgen argued that because immaterial information, by definition, does not affect market price, plaintiffs should be required to prove that the alleged misrepresentations were material in order to rely on the fraud-on-the-market theory at class certification. The Court rejected that argument: the critical question was not whether materiality was an essential predicate of the fraud-on-the-market theory—"indisputably it is"—but, rather, whether proof of materiality is needed to ensure that the "questions of law or fact common to class members" will predominate over questions affecting only individual members as litigation progresses. The Court concluded that the answer to that question is "no," for two reasons. First, because materiality is judged by an objective standard, based on what a "reasonable investor" would deem important, it can be proved through evidence common to the class. Second, because materiality is an essential element of a securities fraud claim, there is no risk that plaintiffs' failure to prove materiality will result in individual questions predominating; rather, it would "end the case for one and for all."
The Court also rejected Amgen's policy argument for requiring precertification proof of materiality. While an order granting class certification can exert substantial pressure on a defendant to settle, materiality was no different from other essential elements of a securities fraud claim – namely, falsity and proof of economic loss – which Congress and the Court had not required plaintiffs to prove before certification. The Court also noted that Congress had enacted the Private Securities Litigation Reform Act of 1995, followed by the Securities Litigation Uniform Standards Act of 1998, to address perceived abuses in securities fraud class actions, while rejecting calls to undo the fraud-on-the-market presumption of classwide reliance endorsed in Basic. In sum, the Court held, "we have no warrant to encumber securities-fraud litigation by adopting a textual requirement of precertification proof of materiality that Congress, despite its extensive involvement in the securities field, has not sanctioned."
Justice Alito joined the majority, but only with the understanding that Amgen had not asked the Court to revisit Basic's fraud-on-the-market presumption. In a short concurrence, Justice Alito made it clear that he would have been willing to do so.
Justice Thomas dissented, joined fully by Justice Kennedy, and in part by Justice Scalia. In a section joined by Scalia, Thomas argued that materiality was "not a mere afterthought" in the development of the fraud-on-the-market theory, "but rather one of the primary reasons for allowing traditional proof of reliance to be brushed aside at certification." As an early Ninth Circuit case put it, materiality "circumstantially establishes the reliance of some market traders and hence the inflation in the stock price," and from there, the "causational chain between defendant's conduct and plaintiff's loss." In the section not joined by Scalia, Thomas criticized the majority for suggesting that it was acceptable to certify classes that haven't yet established materiality because they will fail on the merits later anyway. That approach, Justice Thomas believed, puts the cart before the horse: "Without materiality, there is no fraud-on-the-market presumption, questions of reliance remain individualized, and Rule 23(b)(3) certification is impossible."
Justice Scalia wrote a separate dissenting opinion. Pointing to the Basic Court's opening statement that it had granted cert "to determine whether the courts properly applied a presumption of reliance in certifying the class," Scalia argued that when the Court "invented" the fraud-on-the-market rule in Basic, it required proof of materiality not only to establish substantive liability on the merits, but also to obtain class certification. (The majority dismissed this purported rule as one of "Justice Scalia's invention.") In Scalia's view, it "does an injustice" to the Basic Court to presume that it was establishing a regime that allowed all market-based class action suits to pass beyond the crucial certification stage no matter what the alleged misrepresentation.
In Levin v. United States (11-1351), the Court addressed whether the United States has waived sovereign immunity for intentional torts committed by armed services medical personnel. Steven Levin, a veteran, received cataract surgery at a U.S. Naval Hospital. Levin claimed that immediately before surgery he orally withdrew his consent, but the ophthalmologist ignored him and proceeded with the surgery. Levin was injured and sued the ophthalmologist and the United States for medical negligence as well as battery. Levin sought compensation from the United States under the Federal Tort Claims Act ("FTCA"), which generally waives the government's sovereign immunity, except for intentional torts.
Levin argued that the intentional tort exception did not apply to his battery claim because the Gonzalez Act—a statute that makes the FTCA the exclusive remedy for injuries caused by armed services medical personnel—declares that "for the purposes" of the Gonzalez Act, the FTCA intentional tort exception "shall not apply." The government argued that the Gonzalez Act language did not waive sovereign immunity but instead merely directed courts to "pretend" that the intentional tort exception did not apply. This counterfactual assumption, the government contended, reinforced the immunity of federal employees working as medical personnel and was not a further waiver of sovereign immunity. The district court substituted the United States as the sole defendant, dismissed the negligence claim for lack of expert testimony, and dismissed the battery claim based on the FTCA's intentional tort exception. On appeal, Levin abandoned his negligence claim, but re-raised his Gonzalez Act argument with regard to the battery claim. The Ninth Circuit affirmed, with the court holding that the Gonzalez Act subsection merely reinforced immunity for armed services medical personnel.
The Supreme Court did not see eye-to-eye with the lower courts. Led by Justice Ginsburg, the Court reversed in a unanimous decision. The Court recognized that the FTCA generally excludes intentional torts from the government's waiver of sovereign immunity. However, the Court found that the Gonzalez Act's plain language made clear that the FTCA intentional tort exception "shall not apply" for the purposes of the Gonzalez Act. A contrary reading, the Court reasoned, would require the term "shall not apply" to mean "does apply." Had Congress intended to make such a counterfactual inference, the Court reasoned, it could have used alternative statutory language such as "shall be deemed" or "shall be considered," as Congress did in adjacent statutory subsections. Therefore, the Court concluded, the Gonzalez Act authorizes battery claims against the United States when military doctors operate without a patient's consent.
Moreover, the government had previously advanced the position now embraced by Levin in United States v. Smith (1991). Smith presented the question whether a person injured by a military doctor's negligence while abroad could recover in a U.S. court. Addressing concerns that a subsequent statute, the Liability Reform Act, would render the Gonzalez Act a nullity, the government argued that the Gonzalez Act would "allow a FTCA suit against the United States if the doctor . . . performed a procedure to which the plaintiff did not consent." Because Smith was informed by the government's position at the time, the Court declined to adopt the government's disavowal of that position now.
True to form, Justice Scalia joined the opinion, except for all footnotes that relied on legislative history.
Although the Court did not grant cert in the case of Calhoun v. United States (12-6142), Justice Sotomayor, joined by Justice Breyer, took the unusual step of issuing a statement "to dispel any doubt whether the Court's denial of certiorari should be understood to signal our tolerance of a federal prosecutor's racially charged remark." Calhoun was charged with participating in a drug conspiracy. At trial, Calhoun testified in his own defense that he had accompanied a friend on a road trip with no knowledge that the friend and others intended to engage in a drug transaction, and had detached himself from the group when his friend arrived at their hotel room with a bag of money. On cross-examination, the prosecutor pressed Calhoun on why he did not want to be in the hotel room, culminating with this question: "You've got African-Americans, you've got Hispanics, you've got a bag full of money. Does that tell you—a light bulb doesn't go off in your head and say, This is a drug deal?" Calhoun argued on appeal that the remark violated his constitutional rights. But his lawyer hadn't objected to it at trial, which meant that Calhoun had to show that the error affected the outcome of the trial under plain-error review. He failed to do that, and he also failed to argue for a different standard of review in the Fifth Circuit. Given the "unusual way in which this case has been litigated," Justice Sotomayor did not disagree with the decision to deny cert. But she wrote to emphasize that the question was wholly improper: "By suggesting that race should play a role in establishing a defendant's criminal intent, the prosecutor here tapped a deep and sorry vein of racial prejudice that has run through the history of criminal justice in our Nation." Justice Sotomayor also admonished the Government for its apparent reluctance to concede the wrongfulness of the prosecutor's question on appeal – calling the remark only "impolitic" before the Fifth Circuit, and initially waiving a response to the cert petition – until the Court directed a response and the SG finally acknowledged that the remark was "unquestionably improper."
The Court did grant cert in three cases:
Burt v. Titlow (12-414) presents three questions involving the Antiterrorism and Effective Death Penalty Act of 1996 ("AEDPA") and the Court's recent decision in Lafler v. Cooper (2012) expanding ineffective-assistance-of-counsel claims to include rejected plea offers: (1) "Whether the Sixth Circuit failed to give appropriate deference to a Michigan state court under AEDPA in holding that defense counsel was constitutionally ineffective for allowing Respondent to maintain his claim of innocence;" (2) "Whether a convicted defendant's subjective testimony that he would have accepted a plea but for ineffective assistance, is, standing alone, sufficient to demonstrate a reasonable probability that defendant would have accepted the plea;" and (3) "Whether Lafler always requires a state trial court to resentence a defendant who shows a reasonable probability that he would have accepted a plea offer but for ineffective assistance, and to do so in such a way as to ‘remedy' the violation of the defendant's constitutional right."
Kansas v. Cheever (12-609) asks: "When a criminal defendant affirmatively introduces expert testimony that he lacked the requisite mental state to commit capital murder of a law enforcement officer due to the alleged temporary and long-term effects of the defendant's methamphetamine use, does the State violate the defendant's Fifth Amendment privilege against self-incrimination by rebutting the defendant's mental state defense with evidence from a court-ordered mental evaluation of the defendant?"
Finally, Walden v. Fiore (12-574) asks: (1) "Whether due process permits a court to exercise personal jurisdiction over a defendant whose sole ‘contact' with the forum State is his knowledge that the plaintiff has connections to that State;" and (2) "Whether the judicial district where the plaintiff suffered injury is a district ‘in which a substantial part of the events or omissions giving rise to the claim occurred' for purposes of establishing venue under 28 U.S.C. § 1391(b)(2) even if the defendant's alleged acts and omissions all occurred in another district." This case does not involve the internet, as you might think, but rather, the claims of two professional gamblers alleging that DEA agents submitted a false probable cause affidavit to freeze their legitimate gambling proceeds as drug money in Georgia, which caused them harm in Nevada.
We look forward to seeing whether the gamblers are as successful before the Court as they are at the card tables. In the meantime, thanks, as always, for reading!
Kim, Jenny & Julie