The District Court granted defendants’ motion to dismiss various federal and state law claims, including for violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5. The plaintiff-investors alleged, among other things, that the defendant-company, a manufacturer of clear plastic devices designed to straighten teeth, concealed material facts concerning two lawsuits brought against it by a competitor who alleged that the company’s use of intellectual property critical to its products infringed upon competitor’s rights. Plaintiffs further asserted that the defendants falsely represented that the competitor’s claims were “meritless.” Plaintiffs filed their lawsuit following the company’s announcement that it had resolved the two infringement lawsuits by agreeing to cease all operations and assigning all of its intellectual property rights to its competitor for a payment of $20 million.

The Court found plaintiffs’ claims defective for multiple reasons, including the failure to plead sufficient facts that materially misleading statements were made. In contrast to the alleged misrepresentation, the Court noted that defendants disclosed in stock purchase agreements entered into with each plaintiff that the purchase of the shares was “highly speculative” and that if the company did not prevail in the pending infringement litigations “such an outcome could have a substantial adverse effect on the Company and on any investments in the Shares.”

Plaintiffs argued that, notwithstanding the disclosures in the purchase agreements, because the defendant settled the infringement litigations, the company knew it had committed infringement when the purchase agreements were executed and, accordingly, omitted material statements from those agreements. The Court disagreed, ruling that settlements can be made for many reasons without any indication of the merit of the allegations in the matter settled. The Court further found that the $20 million payment made to the company as part of the settlement reflected that its opposition to the infringement claims was not without merit. Accordingly, because plaintiffs were, as they acknowledged in the purchase agreements, experienced and sophisticated investors, and because the risks of the investment and of the infringement litigations were disclosed, the Court ruled that plaintiffs had failed to plead any material misrepresentations or omissions to support their securities fraud claims. (Eshelman v. Orthoclear Holdings, Inc., 2008 WL 171059 (N.D. Cal. Jan. 18, 2008))