City of Dearborn Heights Act 345 Police & Fire Retirement System v. Align Technology, Inc.
2017 U.S. App. LEXIS 8005
| 9th Cir. | 2017Background
- Align acquired Cadent in 2011 for $187.6 million and allocated $76.9 million of goodwill to Cadent’s SCCS (scanner/CAD/CAM) unit.
- Plaintiff (a class of Align investors) alleges Cadent engaged in 2010 "channel stuffing," inflating revenues that Align used in goodwill valuation and projections (20% sales growth, 50% margins).
- Align performed annual goodwill testing in Q4 2011 and found no impairment; it did not perform interim tests in Q1–Q2 2012. In October 2012 Align disclosed an interim test and later recorded successive goodwill impairments totaling the SCCS goodwill.
- Plaintiff sued under Section 10(b)/Rule 10b-5 (Count I) and Section 20(a) control-person liability (Count II), alleging seven statements were false or misleading about goodwill and impairment testing.
- The district court dismissed the Second Amended Complaint with prejudice for failure to plead falsity and scienter; the Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Standard for pleading falsity of opinion statements | Omnicare's standards should not change Ninth Circuit law; falsity can be pleaded by showing "no reasonable basis" for belief | Omnicare requires (1) subjective disbelief + objective untruth for misrepresentation theory, (2) untrue supporting fact for embedded-fact theory, or (3) specific omitted facts about the basis of the opinion for omissions theory | Apply Omnicare to Section 10(b)/Rule 10b-5; hold Omnicare’s three-pronged approach governs and overrule prior Ninth Circuit rule to extent it allowed "no reasonable basis" under misrepresentation theory |
| Whether plaintiff pleaded falsity of the seven statements | SCCS goodwill and related financial statements were objectively and subjectively false because Align relied on inflated Cadent revenues and ignored negative indicators | Statements were opinions/valuations; plaintiff failed to allege defendants’ actual assumptions or that defendants subjectively disbelieved their statements; alleged facts were consistent with reasonable business judgments and some mitigating/positive facts | Plaintiff failed to plead falsity under any Omnicare prong (no allegations of subjective disbelief, no showing supporting facts were untrue, and no particularized omitted-basis facts) |
| Whether plaintiff pleaded scienter (intent or deliberate recklessness) | Alleged core-operations access to info, channel stuffing knowledge, timing/magnitude of write-downs, insider sales, and CFO resignation support strong inference of scienter | Allegations are non-specific: informants did not show defendants saw data room, GAAP violations alone don’t show scienter, insider sales/timing inconsistent with insider trading, resignations not suspicious | Holistic review: inference of nonculpable explanation (bad business judgment) is more compelling; scienter not pleaded with particularity |
| Control-person liability under Section 20(a) | Prescott and Arola as CEO/CFO exercised control and thus are liable if primary violation pleaded | Control liability requires primary violation; primary claim failed so control claim cannot stand | Dismiss Section 20(a) because no adequately pleaded primary violation |
Key Cases Cited
- Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015) (supreme-court framework for when opinion statements are actionable under securities law)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir.) (2009) (pleading standards for securities fraud reviewed de novo; scienter and falsity pleading requirements)
- Reese v. Malone, 747 F.3d 557 (9th Cir.) (2014) (prior Ninth Circuit standard on pleading falsity of opinions—"no reasonable basis"—addressed and contrasted with Omnicare)
- Rubke v. Capitol Bancorp, Ltd., 551 F.3d 1156 (9th Cir.) (2009) (Section 11 opinion-pleading decision requiring objective and subjective falsity)
- Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir.) (2011) (goodwill valuations treated as opinion statements)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (requirement that pleaded scienter give rise to a strong inference at least as compelling as nonculpable inference)