On March 1, 2010, the Second Circuit Court of Appeals affirmed in part and vacated in part a securities class action brought against a company for failing to update investors concerning problems with an agreement with the United States Postal Service (USPS) to serve as the preferred provider of USPS’s electronic postmark. The claims were for alleged violations of Section 10(b) and Rule 10b-5, and Section 20(a) of the Exchange Act.

The plaintiff’s complaint alleged that the company and several of its executives made material misstatements and omissions regarding the company’s failure to meet certain performance metrics under the agreement with USPS. In September 2004, the defendants received a deficiency notice from USPS for failure to meet the required performance metrics and they attempted to renegotiate the terms of the agreement. During this time, the company made several statements concerning the agreement, initially in September 2004 in a press release and conference call announcing that they had received the deficiency notice but expected to have an amended agreement signed shortly, and later in February and March 2005 when the company announced that it was back in compliance with the required metrics. At some point, negotiations with USPS broke down and the company became aware that there would be no amended agreement but it neglected to publicly disclose this information.

The Appeals Court considered the statements made by the company one at a time and first held that one of the statements at issue, the September 2004 press release, was not actionable under the bespeaks caution doctrine because it was a forward-looking statement and was accompanied by meaningful cautionary language expressly stating that there was “no guarantee” that an agreement could be reached. However, a similar statement made in the same day in a conference call was actionable, the Appeals Court held, because it was not accompanied by meaningful cautionary language. Although the company announced boilerplate risk warnings at the beginning of the conference call, they were not sufficient to put investors on notice of the particular risk that an agreement might not be reached. The next two statements the Appeals Court addressed, from February and March 2005, were actionable because they were not forward-looking statements and therefore the bespeaks caution doctrine and the safe harbor provision of the Private Securities Litigation Reform Act (PSLRA) did not apply. Also, at the time the statements were made, the defendants knew that the company would not meet the performance metrics and that the agreement would not be amended. The Appeals Court held that the company had a duty to update investors with this information and vacated the District Court’s dismissal of these claims because the District Court did not consider these specific statements.

The Appeals Court also held that the plaintiff’s claims met the materiality requirement for pleading under Section 10(b) because the agreement with USPS was such an important part of the company’s revenue stream that any announced changes regarding the agreement would surely have “altered the total mix of information” relied on by investors. Additionally, the Appeals Court affirmed the District Court’s dismissal of all claims relating to the company’s failure to disclose the difficulties it was experiencing reaching the performance metrics prior to July 2004, which is when the company first received the Deficiency Notice from USPS. Prior to July 2004, the company had not made any statements regarding the agreement with USPS so there was no duty to update these statements when it started experiencing difficulty.

Illinois State Bd. of Inv. v. Authentidate Holding Corp., No. 09-1751-cv, 2010 WL 889294 (2d Cir. Mar. 12, 2010).