Plaintiffs, purchasers of stock in defendant Orthoclear Holdings, Inc. (Orthoclear), a company that manufactured clear plastic devices to straighten teeth, brought an action arising out of Orthoclear’s purported statements regarding the merits of a litigation in which it was involved. Specifically, Align Technology (Align) sued Orthoclear for infringement of intellectual property rights and violations of the Lanham Act. Plaintiffs alleged that during the course of that litigation, Orthoclear repeatedly told investors and its shareholders that Align’s claims were meritless, and that it had a valid ownership interest in the intellectual property upon which its business was based. After Orthoclear settled with Align, agreeing to cease operations and transfer all existing rights to its intellectual property to Align in exchange for $20 million, plaintiffs brought an action against Orthoclear and certain of its offers and directors, asserting claims for alleged securities law violations including, inter alia, violations of Section 10(b) of the Securities Exchange Act of 1934.
Defendant Orthoclear moved to dismiss the complaint, arguing, inter alia, that plaintiffs failed to meet the heightened pleading requirements under the Private Securities Litigation Reform Act. In granting the motion to dismiss, the District Court rejected plaintiffs’ argument that Orthoclear misrepresented the risks of the Align litigation. The Court held that because Orthoclear had disclosed the risks of the Align litigation in the share purchase agreements with the plaintiffs, plaintiffs, who were experienced investors, could not demonstrate that they were misled.
In addition, the Court ruled that the fact that defendants settled the Align litigation was not sufficient to raise a strong inference of scienter, that is, that defendants made misleading statements intentionally or with deliberate recklessness. The Court ruled that the decision to settle litigation does not indicate that defendants’ statements concerning the merits of the litigation were false, as numerous factors other than the merits can contribute to the decision to settle a case. In addition, the Court noted that the fact that Orthoclear received $20 million for its intellectual property as part of the settlement further undercuts any claim that the settlement demonstrates that Orthoclear’s statements about its intellectual property were false when made. (Eshelman v. Orthoclear Holdings, Inc., No. C 07-1429 (JSW), 2009 WL 506864 (N.D.Cal. Feb. 27, 2009))