Securities and Shareholder Litigation & Class Actions
Opinion Liability and Scienter
The Ninth Circuit, in City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
No. 14-16814 (9th Cir. May 5, 2017), affirmed the dismissal under Omnicare of a Section 10(b) complaint alleging that a company misled the market by a series of statements and financial reports declining to take a goodwill impairment that the company would later take on an acquisition. The court joined the Second Circuit in applying Omnicare to Section 10(b) goodwill claims and held that Omnicare overruled the Ninth Circuit’s previous test that had allowed statements of opinion to be challenged on the ground of lacking a reasonable basis.
Align arose from a March 2011 acquisition; the acquirer accounted for 71 percent of the purchase price as goodwill. It found no goodwill impairment in its 2011 Form 10-K and allegedly did no interim testing until it announced it was doing so in October 2012. The acquirer ultimately took three goodwill impairments between November 2012 and April 2013.
The Ninth Circuit began by explaining why Omnicare applies to Section 10(b) cases, joining the Second Circuit:[T]he Supreme Court’s reasoning is equally applicable to Section 10(b) and Rule 10b-5 claims….The Supreme Court’s definition of opinion statements and differentiation of them from factual statements was specific to Section 11 only to the extent that Section 11 imposes liability for “untrue statement[s] of . . . fact.…” Rule 10b-5, which was promulgated pursuant to Section 10(b), contains an identical limitation of liability to “untrue statement[s]” and omissions of “fact.”Slip op. at 17 (citations and alterations omitted). The court additionally agreed with the Second Circuit that statements about goodwill valuation, which involve the application of subjective judgment, are treated under Omnicare as statements of opinion, and contrasted two statements by the company, one of which qualified as a statement of pure opinion, the other of which could be challenged as a factual statement because the company stated that, during the prior fiscal year, “there were no facts or circumstances that indicated that the fair value” of the acquired company was less than the recorded goodwill:Statement 3 expresses Defendants’ qualitative assessment of the…division’s fair value. Because that reference point itself is subjective, the attendant comment comparing fair value to carrying value cannot be objectively verified. However, Statement 2’s reference to “no facts or circumstances” asserts an objectively verifiable fact by identifying an aspect of Defendants’ goodwill methodology as opposed to a qualitative aspect of the valuation itself. Accordingly, while the district court properly concluded that Statement 3 is an opinion statement, Statement 2 should be considered an opinion statement with an embedded statement of fact.Id. at 13 (emphasis added). The court then described its test for opinion statements, holding that “Omnicare affirms [the Ninth Circuit’s prior] requirement that both objective and subjective falsity must be alleged to sufficiently plead falsity for a … claim based on a material misrepresentation theory of liability.” Id. at 15. As the court explained:Omnicare establishes three different standards for pleading falsity of opinion statements. First, when a plaintiff relies on a theory of material misrepresentation, the plaintiff must allege both that the speaker did not hold the belief she professed and that the belief is objectively untrue. Second, when a plaintiff relies on a theory that a statement of fact contained within an opinion statement is materially misleading, the plaintiff must allege that the supporting fact the speaker supplied is untrue. Third, when a plaintiff relies on a theory of omission, the plaintiff must allege facts going to the basis for the issuer’s opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.… Omnicare clarifies that pleading falsity by alleging that “there is no reasonable basis for the belief” is permissible only under an omissions theory of liability…. We thus hold that to the extent our current standard permits plaintiffs to plead falsity by alleging that “there is no reasonable basis for the belief” under a material misrepresentation theory of liability, it is “clearly irreconcilable” with Omnicare, and is therefore overruled.Id. at 16-18 (citations and alterations omitted).
Turning to the application of this standard, the court found a critical failure to allege what the company had actually done to support its conclusions – under Omnicare, plaintiffs must plead these facts:The common element underlying both flaws in Plaintiff’s theory of falsity is Plaintiff’s failure to allege the actual assumptions that Defendants relied upon in conducting their goodwill analysis. Without this allegation, it cannot be plausibly inferred that Defendants intentionally disregarded the aforementioned events and circumstances when conducting their goodwill analysis, such that the goodwill valuations were knowingly false or misleading when made…. Plaintiff’s allegation that Defendants failed to conduct any goodwill impairment testing at the end of 2011 is not a fact, but rather Plaintiff’s conclusion based on its belief that no set of reasonable assumptions could support Defendants’ determination in the fourth quarter of 2011 that the [acquired division’s] goodwill was unimpaired.Id. at 21, 23 (emphasis added). One of the key allegations was that the acquired company had engaged in “channel stuffing” to inflate its revenue in 2010 in order to make itself a more desirable acquisition target, but the court found that the plaintiffs had failed to connect that to subsequent years’ goodwill assessments:Plaintiff fails to plead any facts establishing that Defendants continued to use [the acquired company]’s inflated 2010 revenue figures in conducting its goodwill impairment testing for [the acquired division]. While Plaintiff relies on confidential informants to substantiate the allegations of [the acquired company]’s channel stuffing, none of these witnesses subsequently participated in [the acquirer]’s accounting or goodwill analysis. Plaintiff’s confidential informants therefore cannot link [the acquired company]’s channel stuffing to Defendants, much less the set of assumptions that Defendants used to conduct its goodwill valuation of the [the acquired division] unit at the end of 2011…. Without any allegations tying [the acquired company]’s channel stuffing to any of Defendants’ goodwill valuations, a reasonable investor would not find the fact of [the acquired company]’s channel stuffing, which occurred in 2010, to undermine [the acquirer]’s conclusion at the end of 2011 that the [acquired division’s] goodwill was not impaired.19-20, 22 (emphasis added). The court also emphasized that it could consider “positive and mitigating events” that the company “could have found to either balance or outweigh” the negative factors. Id. at 20. This assumed significance as well in the failure to plead scienter: [A] corporation must exercise its judgment in assessing both positive and negative factors when determining whether interim goodwill impairment testing is necessary. It therefore follows that a corporation’s mere knowledge of negative factors that potentially indicate goodwill impairment does not of itself support an inference that a corporation acted with scienter in exercising its judgment to conclude that no goodwill impairment is likely to occur. To plead an inference of scienter in this context, a plaintiff must allege additional facts that call into question the manner in which the corporation conducted its goodwill analysis.Id. at 27 (emphasis added).
http://cdn.ca9.uscourts.gov/datastore/opinions/2017/05/05/14-16814.pdf
Service of Process Abroad
The U.S. Supreme Court, in Water Splash, Inc. v. Menon, No. 16-254 (U.S. May 22, 2017), resolved a
long-standing Circuit split and joined with most other non-U.S. jurisdictions in holding that service of process by mail is permitted under the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, except of course where particular signatory nations do not permit such service as an acceptable method under the Convention.
https://www.supremecourt.gov/opinions/16pdf/16-254_5iel.pdf
Comcast and Adequacy
The Fifth Circuit, in Slade v. Progressive Security Ins. Co., No. 15-30010 (5th Cir. May 9, 2017), rejected a Comcast challenge to the class’ proposed damages methodology, but remanded for consideration of the adequacy of the class representatives precisely because they had waived certain damages theories on their breach of contract claims in order to avoid a Comcast problem. The case thus illustrates the continuing challenge for plaintiffs presented by Comcast even when they are able to satisfy its requirements. The court additionally rejected certification of a common-law fraud class due to the intractable problems with showing reliance on a class-wide basis when insureds could individually negotiate claims on their policies. Slip op. at 10.
Slade involved an auto insurer's formula for determining the loss on a vehicle that had been totalled. The plaintiffs proposed to compute damages by a different “base value” method than the allegedly unlawful one used by the insurer, and because these were publicly available baseline scores, the court found that the Comcast “fit” and methodology requirements were satisfied: the replacement base-value measurement “isolates the effect of the allegedly unlawful base value” and uses a sound methodology to do so. Id. at 3. The court further noted that this could be separated from the second step of the process (the “condition adjustment” for the condition of the individual car) by using the same adjustment actually used by the defendant.
But this victory came at a cost: the named plaintiffs were able to isolate the portion of damages that could be computed on a class-wide basis only by waiving claims to challenge the condition adjustment, and the court was skeptical that this waiver to eliminate individual issues was necessarily in the class' best interests:If Plaintiffs had raised challenges to both the condition adjustment and the base value calculation, Plaintiffs’ class certification motion may have run into predominance problems because condition adjustments appear to be highly individualized. Perhaps recognizing this concern, Plaintiffs disclaimed any challenge to the condition adjustment. This waiver may have resolved the predominance problem—all parties agree that the base value calculation is formulaic and non-individualized. But resolving the predominance problem with a waiver of claims raises a separate potential bar to class certification—adequacy.... When the class representative proposes waiving some of the class’s claims, the decision risks creating an irreconcilable conflict of interest with the class.Id. at 4-5 (emphasis added; footnote omitted). The court remanded in part because this was a new argument on appeal, but also noted that not every waiver of claims will show the class representatives to be inadequate, that waiver to satisfy class certification may be a legitimate motive if in the best interests of the class– and that
opt– outs could change the calculus on adequacy:The predominance problem may re-emerge, or may morph into a superiority problem, if too many unnamed plaintiffs wish to bring individual condition adjustment claims.... [T]he risk to unnamed class members is smaller than usual here because of the opportunity for opt outs...if the number of plaintiffs opting out demonstrated a cogent conflict, the district court could decertify the class.... The opt-out procedure is not a panacea. If the risk of future preclusion of a valuable claim is disproportionately high, a class representative may be inadequate even assuming opt-out protections.Id. at 4 n. 2, 8, 9 n. 3 (emphasis added).
http://www.ca5.uscourts.gov/opinions/pub/15/15-30010-CV0.pdf
Common Injury and Class Certification
The Eighth Circuit, in Webb v. Exxon Mobil Corp., No. 15-2879 (8th Cir. May 11, 2017), upheld an order decertifying a class seeking rescission of decades-old easements granted to build an oil pipeline, finding that the plaintiffs' claims of property harms arising from the defendant's alleged unsafe operation of the pipeline did not satisfy the commonality and predominance requirements of Rules 23(a)(2) and 23(b)(3), because a common breach of duty by the defendant does not eliminate individual issues of economic injury:The plaintiffs argue they satisfy Rule 23(a)(2) because [defendant], owing the same contractual promises to class members, operates the pipeline uniformly as “one continuous unit.” Pivotal to commonality, however, is whether the class members have suffered the same injury, in addition to being owed identical duties....Even if [defendant]’s decisions concerning the transportation of contents throughout the 850-mile pipeline can be considered uniform, the effect is not....The claims here are for breach of contract, not [tort], but establishing breach would require examination of how [defendant]’s operation of the pipeline affects the plaintiffs, which, as the district court found, varies depending on where individual class members’ property is located, as well as many other factors.Slip op. at 6-7 (bold added; italics in original; citations and quotations omitted).
http://media.ca8.uscourts.gov/opndir/17/05/152879P.pdf
CAFA Amount in Controversy
In Dammann v. Progressive Direct Ins. Co., No. 16-3591 (8th Cir. May 11, 2017), the Eighth Circuit held that the amount in controversy was satisfied for purposes of removal under the Class Action Fairness Act where “plaintiffs have failed to show that it is legally impossible for them to recover more than $5,000,000.” Slip op. at 5. The court found that plaintiffs resisting removal “have not offered evidence to establish the amount they collectively paid in premiums” that they seek refunded from an auto insurer. Id. Specifically, the court computed the potential for return of all premiums for policies containing an allegedly illegal provision, and rejected the plaintiffs' effort to restrict their proposed class to only those insureds who actually suffered losses as a result of the illegal provision (regarding deductible limits).
http://media.ca8.uscourts.gov/opndir/17/05/163591P.pdf
CAFA Mass Actions
Another appeal involving when cases consolidated for pretrial purposes can be considered “mass actions” consolidated for trial under the Class Action Fairness Act, this time finding that there was no request for a joint trial (unlike the Third Circuit case noted in last month’s report). The Ninth Circuit, in Dunson v. Cordis Corp., No. 17-15257 (9th Cir. Apr. 14, 2017), held that a request for a
“bellwether-trial process” for product liability cases is not a request for a trial with preclusive effect on the plaintiffs unless specified: “when plaintiffs propose a bellwether trial without saying anything more, we presume that they mean a bellwether trial in which the results will not be binding on the plaintiffs in the other cases but will instead be used for informational purposes only.”
Slip op. at 7.
http://cdn.ca9.uscourts.gov/datastore/opinions/2017/04/14/17-15257.pdf
Federal Arbitration Act: Agreement to Arbitrate
The U.S. Supreme Court, in Kindred Nursing Centers Ltd. P’Ship v. Clark, No. 16-32 (U.S. May 15, 2017), invalidated a Kentucky rule prohibiting a power of attorney from being used to consent to arbitration (on the theory that it involved a waiver of the right of access to the courts); the Court noted that this violated the Federal Arbitration Act’s ban on treating arbitration agreements differently from other contracts, and that Kentucky did not even prevent a power of attorney signature on a settlement agreement. Slip op. at 6 n. 1. The decision continues the Court’s practice of stringent enforcement of the FAA against state-law efforts to erode arbitration clauses.
https://www.supremecourt.gov/opinions/16pdf/16-32_o7jp.pdf
Federal Arbitration Act: Dismissal
The Sixth Circuit, in an unpublished disposition in Hilton v. Midland Funding LLC, No. 16-1556
(6th Cir. Apr. 28, 2017), upheld an order dismissing rather than staying litigation after ordering arbitration. However, the court also held that the decision to dismiss meant that the district court had no jurisdiction to decide the question of whether a party waived the right to arbitrate, which was properly for the arbitrators. Slip op. at 7-8.
While the FAA provides that courts should stay the litigation on motion of one of the parties, the Sixth Circuit concluded that neither party had asked for a stay, therefore dismissal rather than a stay was proper. Id. at 5.
http://www.opn.ca6.uscourts.gov/opinions.pdf/17a0245n-06.pdf
Appellate Procedure
In In re Target Corp. Customer Data Security Breach Litig., No. 15-3909 (8th Cir. May 2, 2017), a divided panel of the Eighth Circuit held that a letter submitted after the submission of another party's brief on appeal is sufficient to adopt that party's arguments under Federal Rule of Appellate Procedure 28(i). The court thus rejected the argument that only arguments on an issue actually mentioned in the party's own brief may be incorporated under Rule 28(i):Olson (the party adopting part of another’s brief) filed his brief before Sciaroni. His Rule 28(i) letter clearly identifies the parts of Sciaroni’s brief that he is adopting. The dissent’s rule would make adoption by a first-filing party like Olson extraordinarily cumbersome: If the first filer did not correctly predict the issues that other parties would raise, it would have to move the court for permission to amend its first-filed brief to add issues to its statement of issues, and receive that permission, before it could join in those unpredicted issues. Rule 28(i) renders unnecessary that time-consuming, formalistic exercise by permitting adoption of additional issues through a letter like Olson’s.The Rules impose no limit on the volume of words one party may adopt. And for good reason. Permitting unlimited adoption of briefs will generally not cause the problems that word limits are designed to avoid, since courts and parties already have to read and respond to the briefs being adopted. There is, therefore, generally no cost to permitting unlimited adoption.
http://media.ca8.uscourts.gov/opndir/17/05/153909P.pdf
Foreign Sovereign Immunities Act and Jurisdictional Facts
The U.S. Supreme Court, in Bolivarian Repub. Of Venezuela v. Helmerich & Payne Int’l Drilling Co.,
No. 15-423 (U.S. May 1, 2017), rejected the argument that federal jurisdiction could be sustained under the Foreign Sovereign Immunities Act’s expropriation-of-property provision merely by a “nonfrivolous” assertion of such a taking. Helmerich involves the specific statutory context of the FSIA, in which immunity from suit is intertwined with jurisdiction, and as the Court noted, denial of a motion to dismiss on immunity grounds is immediately appealable, whereas a 12(b)(6) denial is not. Slip op. at 10-11, 14. Nonetheless, the Court’s treatment of the need to find the actual facts supporting the basic outlines of jurisdiction could have broader application – especially to other exceptions to immunity under the FSIA:[A] party’s nonfrivolous, but ultimately incorrect, argument that property was taken in violation of international law is insufficient to confer jurisdiction. Rather, state and federal courts can maintain jurisdiction to hear the merits of a case only if they find that the property in which the party claims to hold rights was indeed “property taken in violation of international law.” Put differently, the relevant factual allegations must make out a legally valid claim that a certain kind of right is at issue (property rights) and that the relevant property was taken in a certain way (in violation of international law). A good argument to that effect is not sufficient. But a court normally need not resolve, as a jurisdictional matter, disputes about whether a party actually held rights in that property; those questions remain for the merits phase of the litigation.
Moreover, where jurisdictional questions turn upon further factual development, the trial judge may take evidence and resolve relevant factual disputes. But, consistent with foreign sovereign immunity’s basic objective, namely, to free a foreign sovereign from suit, the court should normally resolve those factual disputes and reach a decision about immunity as near to the outset of the case as is reasonably possible.Id. at 2 (italics in original).
https://www.supremecourt.gov/opinions/16pdf/15-423_4357.pdf
More
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.