On July 28, 2017, the United States Circuit Court of Appeals for the Ninth Circuit reversed a district court decision dismissing a putative class action lawsuit against Quality Systems, Inc., (“QSI” or the “Company”), a company that develops and markets management software for medical and dental providers, and several of its officers. In re Quality Systems, Inc. Secs. Litig., No. 15-55173 (9th Cir. July 28, 2017). Plaintiffs brought a putative shareholder class action against defendants alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 in connection with statements made over the course of several months regarding the Company’s past and projected sales as well as guidance given to investors about the Company’s projected growth and revenue. The Ninth Circuit reversed, finding that many of the defendants’ statements “mixed” forward and non-forward looking statements and holding for the first time in the Ninth Circuit that it is appropriate to consider the forward and non-forward looking aspects of a “mixed” statement separately when evaluating a securities claim.
Plaintiffs alleged that defendants made false and misleading statements at various healthcare conferences and on analyst calls regarding its sales “pipeline,” including sales that were expected to close with 70% certainty within eight months, and that the Company’s stock price dropped significantly when QCI eventually issued a press release announcing a steep decline in earnings and stating that it could not affirm its previous guidance. Plaintiffs also alleged—through statements attributed to several confidential witnesses—that defendants had access to updated sales pipeline information and knew that sales were declining.
Reviewing the complaint de novo, the Court categorized the statements at issue as either “mixed statements” containing “mixed” forward and non-forward looking statements about revenue and earnings or non-forward-looking statements about the Company’s sales pipeline. With respect to the “mixed statements,” the Court held that a defendant may not transform non-forward looking statements into forward looking statements protected by the PSLRA safe harbor by combining forward and non-forward looking, and that non-forward statements must be evaluated separately from coincidental forward-looking statements. The Court then found that statements regarding the sales pipeline were non-forward-looking statements that “affirmatively created an impression of a state of affairs that differed in a material way from the one that actually existed.” The Court also rejected arguments these statements were corporate puffery or “feel good” optimistic statements because they “provided a concrete description of the past and present state of the pipeline.”
In addition, the Court found that the allegations—including statements attributed to confidential witnesses—sufficed to give rise to a strong inference of scienter because they established that defendants had access to and used sales pipeline reports documenting in real time the decline in sales during the relevant period.
This decision serves as a reminder that the PSLRA safe harbor may not extend to non-forward looking statements that are mixed with forward-looking statements and that such “mixed” statements may be subject to parsing by courts.
Click here to view In re Quality Systems, Inc. Secs. Litig.