Pleading Standards Ninth Circuit Extends Supreme Court’s Omnicare Standard to Claims Brought Under Section 10(b)

Skadden, Arps, Slate, Meagher & Flom LLP

City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech. Inc., No 14-16814 (9th Cir. May 5, 2017)

The Ninth Circuit affirmed the dismissal of a putative securities fraud class action brought under Sections 10(b) and 20(a) of the Securities Exchange Act and Securities and Exchange Commission (SEC) Rule 10b-5, holding that the pleading standards announced in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), apply to claims brought under the Securities Exchange Act, and that the allegations here failed to satisfy those standards.

The plaintiff alleged that the defendants made false and misleading statements in press releases and public filings regarding the company’s goodwill valuation of a subsidiary it acquired in 2011. In 2012, defendants announced that the company was conducting interim goodwill impairment tests. The announcement led to a drop in the company’s stock price.

In affirming dismissal of the claims, the Ninth Circuit first held that goodwill valuations are statements of opinion because they are inherently subjective and depend on management’s opinion of fair value. Next, the panel held that the three standards for pleading falsity of opinions statements articulated in Omnicare, a case that involved Section 11 claims under the Securities Act, apply equally to Section 10(b) and Rule 10b-5 claims. Under Omnicare, a plaintiff can plead falsity under three theories: (1) a material misrepresentation theory, whereby the plaintiff must allege both that “‘the speaker did not hold the belief she professed’ and that the belief is objectively untrue”; (2) the theory that a statement of fact contained within an opinion statement is materially misleading, whereby “the plaintiff must allege that ‘the supporting fact [the speaker] supplied [is] untrue’”; and (3) a theory of omission, where 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.” The panel held that to the extent the Ninth Circuit’s prior standard permitted plaintiffs to plead falsity by alleging that “there is no reasonable basis for the belief ” under a material misrepresentation theory of liability, the prior standard was “clearly irreconcilable” with Omnicare and was therefore overruled.

Under the proper Omnicare standard, the Ninth Circuit held, the complaint contained no allegations of subjective falsity and the plaintiff did not allege the actual assumptions that defendants relied upon in conducting their goodwill analysis. Absent such allegations, the court could not conclude that the defendants intentionally ignored the subsidiary’s artificially inflated revenue when conducting the goodwill analysis, such that the goodwill valuations was knowingly false or misleading when made.

This summary can be found in the September 2017 issue of Inside the Courts.