On July 7, 2022, a panel of the United States Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of a putative securities fraud class action against a medical device manufacturer company (the “Company”) and certain of its executives. Macomb County Employees’ Retirement System et al. v. Align Technology Inc. et al., No. 21-15823 (9th Cir. July 7, 2022). Plaintiff alleged that defendants violated Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, by misrepresenting the Company’s prospects about its future success in China. The Court affirmed the district court’s order granting defendants’ motion to dismiss, holding that six of the challenged statements were non-actionable “puffery,” and the remaining six statements did not misrepresent the Company’s growth in China.
According to the complaint, the Company is a medical device manufacturer that sells clear plastic braces for dental realignment, with growth that skyrocketed from 2002 to 2019, during which time its customers grew from roughly 44,000 to 7 million. Plaintiff alleged that much of the growth during that period occurred in China. According to the complaint, in 2019, the Company’s growth fell to between 20% and 30% by the second quarter due to increased competitive pressure and diminished consumer demand. Plaintiff further alleged that the Company’s stock dropped roughly 27% on a single day in July 2019, “erasing approximately $5.4 billion in shareholder value.” Plaintiff filed suit a year later, alleging that several of the Company’s senior executives had misrepresented the Company’s growth in China throughout the second quarter of 2019 by claiming that the Company’s numbers were strong despite allegedly knowing its growth in China had slowed significantly.
Before addressing the twelve alleged statements at issue, the Court rejected defendants’ argument that the complaint relied on the “unsupported premise” that the Company’s growth “had, in fact, ‘significantly declined.’” The Court cited “settled precedent that the passage of just a short period of time between executives’ rosy statements about their company’s prospects and a downturn in those prospects is ‘circumstantial evidence’ that the challenged statements were ‘false when made,’” and found that plaintiff’s allegations of multiple reports from former employees adequately supported, for pleading purposes, the inference that the Company’s growth rate was declining substantially at the time the challenged statements were made.
However, the Court upheld the district court’s finding that six of the twelve statements were non-actionable “puffery”—specifically, the statements that: (i) “China is still a great growth market for us;” (ii) China was “a huge market opportunity for us;” (iii) the Company saw “tremendous growth in APAC, in China in particular;” (iv) the Company again saw “tremendous growth” in China; (v) the “dynamics” and “appetite for growth” in China had been “really great” for the Company; and (vi) China was “a market that’s growing significantly for us.” The Court found that “[t]hese six statements plainly fit beneath the umbrella of puffery,” as “[a]ll use vague, generically positive terms” that are not “objectively verifiable” and that none “present the kind of precise information on which investors rely.” The Court also rejected plaintiff’s argument that the district court erred in failing to consider the context in which the six statements were made, noting that the Company’s sales were still growing in China at the time the challenged statements were made, just at a diminished rate.
As to the remaining six challenged statements, the Court upheld the district court’s finding that they “did not create a false impression of [the Company’s] growth in China and so were not actionable.” The Court found that three of the statements “regarding [the Company’s] average sales price in China, the relative complexity of the [dental] cases [handled there], the ‘cycle time,’ China’s ‘massive population,’ China’s growing middle class,” and other issues were uncontradicted in the complaint and therefore not actionable. The Court further held that the fourth statement at issue was an accurate representation of the Company’s past growth and would not have given a reasonable investor a misleading impression as to the Company’s growth at the time the statement was made. The Court similarly held that the fifth statement was an “optimistic prediction” that a competitor’s entry into the market would not have a “dramatic effect” on the Company’s growth and was therefore not clearly untrue or misleading. According to the Court, the sixth statement contained in the Company’s May 2, 2019 Form 10-Q was a general caveat to the Company’s projections as to demand increases, and although plaintiff abandoned its claim as to that statement on appeal, the Court nevertheless noted that the statement was not actionable because it “present[ed] no concrete assertions that could render it actually false or trigger a duty to disclose additional information.”
Having found that the challenged statements were non-actionable, the Court declined to address scienter or control-person liability and rejected plaintiff’s argument that “because [the Company] touted ‘positive facts about China,’ the company had ‘a duty to disclose negative facts in order to make the statements not misleading.’” The Court stated that there is no affirmative duty to disclose “any and all material information” under the securities laws.