665 F.Supp.3d 255
E.D.N.Y.2023Background
- Dentsply Intl. merged with Sirona on Feb. 29, 2016 to form Dentsply Sirona; Sirona’s largest U.S. distributor, Patterson, was bound by exclusive distribution agreements with annual minimum purchase requirements.
- Patterson amassed large excess inventories (hundreds of millions) while end‑user demand weakened; Patterson announced it would not renew exclusivity in Nov. 2016 and began destocking through 2018.
- Plaintiff alleges distributors (Patterson, Schein, Benco) engaged in an anticompetitive boycott to block dental buying groups, and that Dentsply Sirona was aware of, acquiesced in, and benefitted from that conspiracy.
- Plaintiff asserts securities claims (Exchange Act §§10(b), 20(a); Securities Act §§11, 12(a)(2), 15) alleging misstatements/omissions in SEC filings and investor statements about demand, growth drivers, pricing, and goodwill; also alleges Item 303 violations (failure to disclose known trends/uncertainties).
- The SEC investigated and, in Dec. 2020, issued a consent Cease‑and‑Desist Order finding Dentsply Sirona failed to disclose trends/uncertainties about Patterson inventory in 2016 (no admission of liability).
- Defendants moved to dismiss; the court denied the motion in large part, allowing claims to proceed (certain alleged statements found nonactionable but overall dismissal denied).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Use of SEC consent order in complaint | Loreley & facts permit citing SEC Order to support allegations | Lipsky bars relying on consent decrees; strike references | Court: refusal to strike; SEC Order may be pleaded when supported by other non‑conclusory facts |
| Pleading standard for Securities Act claims (Rule 9(b)) | Claims primarily rest on misrepresentations that sound in fraud; Rule 9(b) applies | Securities Act claims do not require fraud‑level particularity | Court: Securities Act claims that “sound in fraud” are governed by Rule 9(b) (Rombach) |
| Statute of limitations accrual (Exchange Act and Securities Act) | Limitations start when plaintiff discovered facts to plead misreps, scienter, and loss causation (for §10(b)) | For Securities Act, accrual only requires discovery of untrue statement/omission earlier date; Defendants say suit is untimely | Court: applied Merck to both Acts; §10(b) accrues when plaintiff could plead misrep, scienter, loss causation; §11/12 accrues on discovery of the untrue statement/omission; dismissal as untimely denied |
| Actionability of statements about demand/sales growth (excess inventory theory) | Statements attributing growth to strong end‑user demand were misleading because sales were driven by minimum purchases to Patterson | Statements were truthful historical data or puffery, not actionable | Court: such statements can be actionable; pleaded facts (inventory reports, later impairments, SEC findings) suffice to avoid dismissal |
| Actionability re distributors’ alleged conspiracy and competition statements | Omissions about benefitting from distributors’ anticompetitive conduct rendered growth/competition statements misleading | Statements about competitive market were generic and not tied to distributors; defendants lacked duty to disclose third‑party misconduct | Court: allegations that defendants were aware of and benefitted from distributor scheme plausibly render competition/growth statements misleading; survives dismissal at pleading stage |
| Goodwill/opinion statements & Omnicare standard | Goodwill estimates were unreasonable because based on inflated sales to Patterson and undisclosed trends; opinion actionable under Omnicare (basis omitted) | Accounting judgments and hindsight disagreement not actionable | Court: plaintiff sufficiently alleged omitted facts (inventory, demand) undermining basis for goodwill opinions — Omnicare third‑theory pleaded |
| Item 303 disclosure obligations | Failure to disclose known trends/uncertainties (Patterson destocking, excess inventory) violated Item 303 | Either no known trend, or immaterial/boilerplate warnings sufficed | Court: Item 303 claim survives for excess‑inventory theory (known as early as Aug. 2015); conspiracy‑based Item 303 claim is actionable only from Aug. 2017 when the conspiracy’s cessation was revealed |
| Scienter and loss causation | Allegations of internal reports, board presentations, SEC findings, executive resignations, and large impairments support strong inference of scienter and causation | Defendants argue inference is insufficient and other inferences plausible | Court: taken holistically, allegations give rise to a strong and cogent inference of scienter; loss causation pleaded via subsequent impairment disclosures and stock drops |
| Control‑person liability (§20/§15) | Officer and director defendants had control and signed filings; culpable participation pleaded | Titles alone insufficient | Court: pleading (signatures, access, role) is sufficient at this stage to plead control liability |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading‑standard: plausibility)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading‑standard: plausibility)
- Merck & Co. v. Reynolds, 559 U.S. 633 (statute‑of‑limitations accrual standard)
- City of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir.) (limitations accrual with investigation standard)
- Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160 (2d Cir.) (use of SEC findings in pleadings when supported)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir.) (fraud particularity; recklessness)
- Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308 (scienter inference must be cogent and at least as compelling as nonfraudulent inference)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 575 U.S. 175 (opinion‑statement liability; reasonable basis for opinions)
- Litwin v. Blackstone Grp., L.P., 634 F.3d 706 (2d Cir.) (bases for misrepresentation/omission claims)
- Stratte‑McClure v. Morgan Stanley, 776 F.3d 94 (2d Cir.) (Item 303 disclosure obligations)