On March 2, 2018, Judge Charles R. Breyer of the United States District Court for the Northern District of California granted defendants’ request for reconsideration of a motion to dismiss a putative class action brought against Volkswagen Aktiengesellschaf (“VW AG”), Volkswagen Group of America, Inc. (“VWGoA”), Volkswagen Group of America Finance, LLC (“VWGoAF”), and former executives of VW AG and VWGoA. In re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, MDL No. 2672 CRB (JSC) (N.D. Cal. Mar. 2, 2018). Plaintiff had alleged that defendants failed to disclose Volkswagen’s use of “defeat device” software to mask emissions in the company’s diesel engines, in violation of Section 10(b) of the Securities Exchange Act of 1934. In its previous July 19, 2017 order, the Court dismissed certain claims but found that plaintiff could rely on a presumption of reliance under Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972), because plaintiff primarily alleged omissions as opposed to misstatements. Defendants asked the Court to reconsider that ruling in light of the Second Circuit’s November 2017 decision in Waggoner v. Barclays PLC, 875 F.3d 79 (2d Cir. Nov. 6, 2017)—which held that the Affiliated Ute presumption does not apply when the only omission alleged is the omission of the truth that an affirmative misstatement misrepresented. The Court did so, agreed with Waggoner, and dismissed plaintiff’s remaining claims for failure to adequately plead reliance.
The Court found persuasive the reasoning in Waggoner, as well as several district court cases pre-dating Waggoner, that the Affiliated Ute analysis should turn not on how many misrepresentations or omissions are alleged, or on whether the claims are labeled omissions or misrepresentations, but rather on whether the rationale of Affiliated Ute—to provide a presumption of reliance where reliance is impossible to prove because positive statements were not made—applies. Slip op. at 7. The Court noted that the Ninth Circuit had not offered detailed guidance on how to assess whether a complaint “primarily alleges omissions,” but had nevertheless emphasized the need to maintain a distinction between omission claims and misrepresentation claims. Id. at 8. Applying the reasoning in Waggoner, the Court concluded that plaintiff’s claims—specifically, regarding R&D and regulatory-risk statements in the bond offering memoranda—did not implicate the purpose of Affiliated Ute (“avoiding the need to prove a speculative negative”) and, in fact, the omission alleged was of the truth that affirmative statements had allegedly misrepresented. Id. at 9. These included statements such as “Volkswagen’s top priority for research and development in [recent years has been] to develop engines and drivetrain concepts to reduce emissions,” and “Volkswagen’s vehicles must comply with increasingly stringent requirements concerning emissions.” Id. at 3.
The Court separately addressed plaintiff’s alternative reliance arguments. The Court rejected plaintiff’s invocation of the fraud-on-the-market presumption of reliance under Basic Inc. v. Levinson, 485 U.S. 224 (1988). Noting that this presumption could only be applied where securities trade in an efficient market, the Court held that plaintiff’s purchase of its bonds in an initial offering precluded application of the fraud-on-the-market doctrine because the complaint asserted “limited detail on how prices were set” and “whether the offering prices were subject to change based upon market information disseminated prior to the offerings,” and therefore failed to adequately allege that the initial offering was in an efficient market. Id. at 11–12. Though it granted leave to amend to add allegations supporting market efficiency, the Court noted that a number of courts had declined to apply Basic to cases involving initial offerings, and that plaintiff “faces a heavy burden to plausibly allege that there was an efficient market for newly issued VWGoAF bonds.” Id. at 12.
The Court also rejected plaintiff’s argument of direct reliance based on language allegedly contained in the offering memorandum stating that, by accepting the memorandum, the investor “relied on the information contained in this document.” The Court found that the actual language in the offering memorandum differed in critical ways—for example, one clause stated “you should rely on the information contained in this Offering Memorandum” (using the word “should” rather than stating that the investor did rely), and another acknowledged that investors “have relied only on the information contained in this document” (using the word “only,” which the Court interpreted simply as disclaiming reliance on information outside the document). Id. at 12–14. The Court found that these clauses alone did not plausibly support a claim of direct reliance, but granted leave to amend, if plaintiff could do so “in good faith,” to add allegations that one or more of its agents actually read and relied on the statements at issue. Id. at 16.
This decision highlights the more limited scope of the Affiliated Ute presumption following the Second Circuit’s decision in Waggoner, particularly where alleged omissions also relate to affirmative misstatements.