Austin Williams v. Globus Medical Inc
869 F.3d 235
3rd Cir.2017Background
- Globus Medical, a public medical-device company, used both in-house sales reps and independent distributors; Vortex Spine was an exclusive distributor for parts of Louisiana and Mississippi under an agreement that expired Dec. 31, 2013 and was extended through April 2014.
- Plaintiffs allege Globus decided around the agreement’s expiration to terminate Vortex, prepared an in-house rep to cover Vortex’s territory, and proposed unfavorable terms to Vortex in April 2014 (which Vortex rejected).
- Globus issued revenue guidance of $480–486 million and EPS $0.90–0.92 on Feb. 26 and reiterated it in mid-April 2014; its 2013 10-K and 1Q 2014 10-Q included risk disclosures warning loss of distributors could hurt sales.
- On Aug. 5, 2014 Globus revised full-year net sales guidance down to $460–465 million and said the decision not to renew a significant distributor negatively impacted sales; the stock fell ~18% the next day.
- Plaintiffs filed a securities-fraud class action alleging violations of §10(b), Rule 10b-5, and §20(a), claiming omissions and misleading forward-looking projections; the district court dismissed under Rule 12(b)(6) and PSLRA pleading standards; the Third Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to disclose termination in 10-K/10-Q risk warnings | Omission of the decision to terminate Vortex made risk disclosures misleading because the risk had in fact materialized | No duty to disclose where risk (adverse effect on sales) had not yet materialized; general warnings were adequate | No duty to disclose; risk had not materialized at filing, so disclosures not misleading |
| Falsity of Feb./Apr. forward-looking revenue projections | Projections failed to account for Vortex loss and thus were false when made; later downward revision shows prior statements were misleading | Projections not pleaded false with particularity; plaintiffs rely on hindsight and lack contemporaneous facts showing Vortex revenue was included | Projections not pleaded false under PSLRA; plaintiffs’ allegations are hindsight and lack specific contemporaneous facts |
| PSLRA safe-harbor / scienter | Company knew prior distributor turnover risks and therefore knowingly misled investors about projections | Statements are forward-looking and protected unless plaintiffs plead facts giving rise to a strong inference of actual knowledge of falsity | Safe-harbor applies; plaintiffs failed to plead a strong inference of scienter |
| §20(a) control-person liability | Officers should be liable as control persons if §10(b) violation established | §20(a) is derivative of §10(b); no underlying violation, so no control-person liability | Dismissed—§20(a) claims fail because §10(b) claims fail |
Key Cases Cited
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (Sup. Ct.) (disclosure required to avoid misleading statements; silence actionable only when duty to disclose exists)
- Basic Inc. v. Levinson, 485 U.S. 224 (Sup. Ct.) (no general affirmative duty to disclose absent a recognized exception)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (Sup. Ct.) (scienter inference must be cogent and at least as compelling as nonfraudulent inference)
- Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir.) (PSLRA pleading requirements and falsity standards explained)
- City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159 (3d Cir.) (PSLRA exacting pleading standards for forward-looking statements)
- In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir.) (liability for forward-looking statements cannot be based on subsequent events; plaintiffs must plead inadequate data or unsound methodology)
- Oran v. Stafford, 226 F.3d 275 (3d Cir.) (duty to disclose arises only in limited circumstances: insider trading, statutory duty, or prior misleading disclosure)
- In re NAHC, Inc. Sec. Litig., 306 F.3d 1314 (11th Cir.) (liability cannot rest on hindsight; falsehood must exist when statement made)
- Berson v. Applied Signal Tech., Inc., 527 F.3d 982 (9th Cir.) (discusses when general backlog/risk warnings may be misleading if risk already materialized)
- In re Harman Int’l Indus., Inc. Sec. Litig., 791 F.3d 90 (D.C. Cir.) (company’s hypothetical risk warnings may be misleading where risk has already materialized)
- Avaya, Inc. v. [Institutional Investors Grp.], 564 F.3d 242 (3d Cir.) (discusses PSLRA safe-harbor, scienter, and pleading specificity for forward-looking statements)