On May 5, 2017, the United States Court of Appeals for the Ninth Circuit affirmed a lower court’s decision dismissing a putative securities fraud class action against orthodontics and dental products maker Align Technology, Inc., finding that plaintiff’s allegations failed to meet the falsity standard for statements of opinion established by the Supreme Court in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). City of Dearborn Heights Act 345 Policy & Fire Retirement Sys. v. Align Tech. Inc., No. 14-16814 (9th Cir. May 5, 2017). Plaintiff alleged that Align and certain of its officers violated Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) by misleading investors about the goodwill valuation of a business unit of a company that it had recently purchased. In affirming the district court’s decision that Align’s statements regarding goodwill were inactionable statements of opinion, the Ninth Circuit joined the Second Circuit in applying the Omnicare standard to Section 10(b) claims.

Plaintiff’s claims related to Align’s acquisition in April 2011 of Cadent Holdings, Inc., a company that made oral scanning equipment. Align attributed a large portion of the Cadent purchase price to “goodwill,” which is “the amount of the purchase price exceeding the fair value of the net assets of the acquired company.” Plaintiff alleged that Align deliberately overvalued the goodwill when Align conducted its 2011 annual goodwill impairment test and continued to do so during the class period, thereby injecting falsity into statements concerning Align’s goodwill estimates and related financial statements. According to plaintiff, in late 2012, Align’s stock price dropped by 20 percent after Align announced that it would conduct an interim goodwill impairment test for the key business unit at issue and warned that this test might result in a significant impairment of that unit’s goodwill.

In affirming the district court’s dismissal of the complaint, the Ninth Circuit determined that the standard for liability that the Supreme Court established in Omnicare for opinion statements under Section 11 of the Securities Act of 1933 also applies to claims brought under Section 10(b) of the Exchange Act. The court explained that in order for a plaintiff to plead that a statement of opinion is a material misrepresentation under Omnicare—one of three ways that Omnicare provided for pleading the falsity of opinion statements—the plaintiff must allege both that “the speaker did not hold the belief she professed” (i.e., subjective falsity) and that the belief is objectively untrue. The court determined that to the extent that the Ninth Circuit’s pre-Omnicare standard permitted plaintiffs to plead that opinion statements are material misrepresentations (as opposed to omissions) by alleging that “there is no reasonable basis for the belief,” that standard is “‘clearly irreconcilable’ with Omnicare, and is therefore overruled.”

The Ninth Circuit explained that statements related to goodwill valuations are statements of opinion because they “are inherently subjective and involve management’s opinion regarding fair value.” Plaintiff failed to allege the subjective falsity of defendants’ statements, because the complaint did not allege any basis to infer that defendants believed that the goodwill was impaired in 2011 or that they were required to perform additional impairment testing.

In determining that Omnicare’s standard of liability for statements of opinion applies to Section 10(b) of the Exchange Act, the court followed the reasoning of the Second Circuit, which the court noted is the only other circuit to have considered the issue. This decision thus further clarifies the scope of liability for statements of opinion under the Exchange Act.

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