News
May 11, 2017

The Ninth Circuit Extends the Supreme Court’s Holding in Omnicare to Section 10(b) Claims

Advisory

On May 5, 2017, the Court of Appeals for the Ninth Circuit decided City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology Inc., the first Ninth Circuit decision to extend the standard for pleading falsity of opinion statements set forth in the United States Supreme Court's landmark decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund beyond Section 11 claims.1 In affirming the district court's dismissal of the case, the Ninth Circuit joined the Second Circuit in finding that the pleading standard articulated in Omnicare, which addressed only Section 11 claims, applies equally to Section 10(b) and Rule 10b-5 claims.

In 2015, the Supreme Court issued its decision in Omnicare addressing the standard for pleading falsity of opinion statements under Section 11 of the Securities Act of 1933.2 The Supreme Court held that opinions presented in registration statements can be subject to liability under Section 11 of the Securities Act of 1933 where "the speaker did not hold the belief that she professed" and the belief was objectively false.3 The Supreme Court also held that there can be Section 11 liability under an omission theory where the registration statement omits material "facts going to the basis for the issuer's opinion . . . whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context."4 The Omnicare decision, however, did not address the standard for claims under Section 10(b) of the Securities Exchange Act of 1934. In City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc., et al., No. 14-16814 (9th Cir. May 5, 2017), the Ninth Circuit became the second circuit court to weigh in on the issue and to conclude that the Supreme Court's holding in Omnicare is equally applicable to false opinion claims under the Securities Exchange Act.

Case Background

Plaintiff-Appellant City of Dearborn Heights Act 345 Police & Fire Retirement System is a pension fund that represents investors who purchased stock in Align Technology, Inc. (Align), a medical device company, during the proposed class period. Plaintiff alleged that defendants Align and its CEO and CFO violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making materially false and misleading statements about Align's goodwill valuation of its acquired subsidiary, Cadent Holdings, Inc., in Align's press releases and public filings.

In August 2014, the Northern District of California dismissed plaintiff's second amended complaint with prejudice for failure to plead falsity and scienter with particularity.5 With respect to falsity, the district court determined that statements regarding goodwill are inherently subjective and involve management's opinion regarding fair value, and that plaintiff had to plead "particularized facts establishing that defendants did not believe in their statements concerning goodwill at the time they made them."6 The district court held that plaintiff's claims failed because rather than alleging the actual assumptions that defendants relied upon in conducting their goodwill analysis, plaintiff proffered its own calculations that purportedly showed there were no sets of assumptions that would have supported defendants' conclusions.7

The Ninth Circuit Decision

The Ninth Circuit affirmed the district court's dismissal, relying on Omnicare and concluding that the Omnicare holding is not limited to Section 11 claims and applies equally to Section 10(b) and Rule 10b-5 claims.8 The Ninth Circuit observed that only one other circuit, the Second Circuit, considered this issue in Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016), and that it had likewise determined that Omnicare applies to Section 10(b) claims.9

Applying the Omnicare pleading standard to plaintiff's material misrepresentation theory, the Ninth Circuit concluded that none of the allegations supported an inference of subjective falsity, agreeing with the district court that plaintiff's failure to allege the actual assumptions defendants relied upon in conducting their goodwill analysis was fatal to its theory of liability.10 The Ninth Circuit dismissed plaintiff's remaining omissions theory claims as similarly meritless.11

Implications

In Align Technology, the Ninth Circuit joins the Second Circuit in extending the Omnicare holding to Section 10(b) and Rule 10b-5 claims, creating a favorable trend for defendants in securities fraud cases.

  1. For additional background on Omnicare, see the following Advisory by Arnold & Porter Kaye Scholer LLP: Supreme Court Clarifies Liability for Statements of Opinion under Section 11 of the Securities Act (Mar. 26, 2015).

  2. Omnicare, Inc. v. Laborers Dist. Council Constr. Ind. Pension Fund, 135 S.Ct. 1318 (2015).

  3. Omnicare, Inc., 135 S.Ct. at 1327.

  4. Id. at 1332

  5. City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech. Inc., 65 F. Supp. 3d 840 (N.D. Cal. 2014).

  6. Id. at 850-51.

  7. Id. at 852.

  8. City of Dearborn Heights at *7.

  9. City of Dearborn Heights, 2017 WL 1753276, at *7.

  10. Id. at *8-9.

  11. Id. at *9-10.

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