Companies disclose pending litigation in their SEC filings where such disputes could have a material impact on operations. In one recent decision, the court dismissed claims challenging the adequacy of such litigation disclosures brought pursuant to Section 10(b) of the Securities Exchange Act of 1934. See Eshelman v. OrthoClear Holdings, Inc., No. C 07-1429 JSW, 2008 WL 171059 (N.D. Cal. Jan. 18, 2008). The plaintiffs in Eshelman alleged that the corporate defendant and its directors and officers deliberately deceived investors in the Company’s public filings regarding the merits of certain intellectual property infringement litigation against the company and the company’s ownership interests in the intellectual property upon which the litigation was based.
The court held that the plaintiffs failed to plead with particularity as required by the Private Securities Litigation Reform Act that any false statements were made by defendants. Indeed, the text of defendants’ public disclosures on the underlying litigation belied plaintiffs’ claims that defendants misrepresented the risks associated with that litigation. The disclosures explicitly described the nature of the pending litigation and the risk that a negative outcome “could have a substantial adverse effect on the Company.” Eshelman, 2008 WL 171059, at *5.
The court also rejected as insufficiently pled plaintiffs’ scienter allegations, which were based on circumstantial evidence that (1) the company’s officers were in a position to infringe a competitor’s intellectual property rights and (2) the fact that the company ultimately settled the litigation. Recognizing that the existence of a settlement was not an indication of the relative merits of the lawsuit, the court refused to find that plaintiffs had alleged a strong inference of scienter. Moreover, the fact that the company settled the litigation by selling its intellectual property rights to its competitor for $20 million “indicate[d] that [the defendant’s] intellectual property was valuable and demonstrate[d] relatively little about the merit[s] of [the competitor’s] litigation arguments.” Id. at *7.
Plaintiffs also failed to plead facts sufficient to show that they had purchased any securities in reliance on particular statements concerning the litigation. The complaint did not specify any allegedly false statements on the litigation that were made prior to plaintiffs’ investment in the company’s stock.