Lead Opinion
delivered the opinion of the Court.
This case involves a
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
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 suitеd 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 swpra, at 459, 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, 48 Stat. 891, as amended, 15 U. S. C. § 78j(b) (2006 ed., Supp. V), and Securities and Exchange Commission Rule 10b-5, 17 CFR
“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,
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
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.,
B
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.
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.
Amgen raised two arguments on appeal. First, Amgen contended that the District Court erred by certifying the proposed class without first requiring Connecticut
The Court of Appeals rejected both contentions. Am-gen’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 observed, is evident: “[Because 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,
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 mémbers 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,
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,
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.
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.,
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,
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 495, 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 оnly 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 elasswide proof.” Post, at 491. See also post, at 496 (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 491, 495. See also post, at 496 (“[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 491. 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).
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, Rule 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. Nagar-eda, 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 рroof 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,
B
Insisting that materiality must be proved at the class-certification stage, Amgen relies chiefly on two arguments, neither of which we find persuasive.
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.’ ”
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,
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,
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
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,
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), 109 Stat. 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 “extraction]” 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 seeurities-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,
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 minitrial 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,
Given the tenuousness of Amgen’s judicial-economy argument, Amgen’s policy arguments ultimately return to the contention that private seeurities-fraud actions should be hemmed in to mitigate their potentially “vexatiou[s]” character. Blue Chip Stamps v. Manor Drug Stores,
C
Justice Sc alia acknowledges that proof of materiality is not required to satisfy Rule 23(b)(3)’s predominance requirement. See post, at 483. 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 484.
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
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
Ill
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 mаrket,” 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,
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 Am-gen’s rebuttal evidence aimed to prove that the misrepresentations and omissions alleged in Connecticut Retirement’s complaint were immaterial.
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.”
⅜ ⅜ ⅜
For the reasons stated, the judgment of the Court of Appeals for the Ninth Circuit is affirmed.
It is so ordered.
Notes
Part IV of Justice Blackmun’s opinion in Basic—the part endorsing 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. § I (“The Supreme Court of the United States shall consist of а Chief Justice of the United States and eight associate justices, any six of whom shall constitute a quorum.”).
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 489, n. 4. See also post, p. 482 (Alito, J., concurring).
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.
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 502. 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, at 468-470, 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.
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 487. 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.
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 markеt 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 swpra, at 463, 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 re-flectes] 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.,
As earlier noted, see supra, at 459, Amgen does not here contest Connecticut Retirement’s satisfaction of Rule 23(a)’s requirements.
Accordingly, “the timing of the relevant stock trades” is indeed an “element” of the fraud-on-the-market theory. Post, at 490, 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.”).
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 demanded].’ ” Post, at 484 (quoting Basic,
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 484 (quoting Wal-Mart Stores, Inc. v. Dukes,
Amgen attempts to minimize the import of this statement by noting that it was made prior to a 2003 amendment to Rulе 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.”
Concurrence Opinion
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,
Dissenting Opinion
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,
Basic established a presumption that the misrepresentation 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.”
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 judgment.” Ante, at 480. 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,
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 alleged misrepresentation. The opinion need not be read this way, and it should not.
The fraud-on-the-market theory approved by Basic envisions 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.
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 479, 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.”
Dissenting Opinion
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 prеdominate 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 establishing reliance. See Basic Inc. v. Levinson,
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
A
We begin with § 10 of the Securities Exchange Act of 1934, 15 U. S. C. § 78j (2006 ed. and Supp. V).
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.’”
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 811.
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, (8) that the stock was traded after the statement was made but before the truth was revealed, and (4) thе materiality of the statement. Id., at 248, n. 27.
B
Basic’s fraud-on-the-market presumption is highly significant 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).
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,
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 474. 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 473 (acknowledging “that market efficiency and the public nature of the alleged misrepresentations must be proved before а securities-fraud class action can be certified”);
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 473-474. This assertion is an express admission that parties will not know at certification whether reliance is an individual or common question.
It is the Court, not Amgen, that “would have us put the cart before the horse,” ante, at 460, 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 474 (quoting
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.
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,
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 furthеr 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 class-wide 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 certification 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,
Blackie arose from a $90 million loss reported by audio equipment manufacturer Ampex Corp. in its 1972 annual report.
The Ninth Circuit disagreed. Instead, it relieved plaintiffs from providing traditional proof of reliance, explaining 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 Am-pex’s financial statements wаs central to its determination that reliance could be presumed. It asserted that “[m]a-teriality circumstantially establishes the reliance of some market
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.,
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 commonality with respect to questions of reliance.
B
Nor did the importance of materiality diminish in the Sixth Circuit opinion reviewed
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. Critically, 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 “contrasted] the likely market impact of disclosure of the [$90 million Blackie loss] . .. with the disclosure of the information which respondents contended] 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 substantial. . .. [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,
“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, at 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.,
“Putative class representatives, such as respondents, should not be pеrmitted 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.
Ill
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.
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—
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“(b) To use or employ, in. connection with the purchase or sale of any security registered on a national securities exchange ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe ....”
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.”
Courts have also “referred to the element of reliance ... as ‘transaction causation.’” Erica P. John Fund,
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 “[cjonfusion 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.”
Moreover, the Court acknowledges there is disagreement as to whether market efficiency is ‘““a binary, yes or no question,”’” or instead operаtes differently depending on the information at issue, see ante, at 470, 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).
Basic “adopt[ed] the TSC Industries standard of materiality for the § 10(b) and Rule 10b-5 context.”
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.,
There is no dispute that respondent meets the prerequisites of Fed. Rule Civ. Proc. 23(a).
The majority ignores this explanation of the fundamental flaw in its 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 469. But a plaintiff, who is excused from his burden of showing at certification that reliance is a common question, fails to demonstrate that common questions predominate over the individualized questions of reliance 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 469-470, 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.
Of course, the Court’s assertion that materiality will be resolved on the merits presumes that certification will not bring in terrorem settlement pressurеs to bear, foreclosing any materiality inquiry at all. The Court dismisses this concern, ante, at 474-477, 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 475-476, 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, 109 Stat. 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.
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. 27 (discussing Ampex’s revenue and net loss in its 1972 annual report).
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,