Police Retire. Sys of St Louis v. Intuitive Surgical, Inc.
2014 U.S. App. LEXIS 13530
| 9th Cir. | 2014Background
- Intuitive Surgical, maker of da Vinci robotic surgical systems, faced declining system placements and revenues in 2008 after rapid growth through 2007; share price fell sharply during the alleged Class Period (Feb 1, 2008–Jan 7, 2009).
- Police Retirement System of St. Louis (PRS) brought a securities class action under §10(b)/Rule 10b-5 and §20(a) alleging Intuitive and six executives made false or misleading statements that artificially inflated stock price.
- PRS alleged defendants had access to proprietary, software-generated usage/sales reports showing weakening demand, but publicly issued forward-looking growth projections and optimistic statements while failing to disclose adverse trends (market saturation, credit crunch, shifting procedure mix).
- PRS relied on witness statements, alleged insider sales and spikes in executive compensation to support scienter and claimed omissions in the 2007 Form 10-K were misleading.
- District court dismissed the second amended complaint with prejudice for failure to satisfy Rule 9(b), the PSLRA heightened pleading standards, and lack of material misstatement and scienter; Ninth Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were challenged statements actionable misrepresentations? | Statements about growth/revenues and omissions about known negative trends misled investors. | Most statements were forward-looking or generic optimism and not materially misleading. | Court: No; statements were forward-looking or puffery and 2007 report not misleading. |
| Does PSLRA safe-harbor protect the analyst-call projections? | Warnings were inadequate and projections masked present problems. | Projections were identified as forward-looking and accompanied by cautionary language, invoking safe harbor. | Court: Safe harbor applies; cautionary language sufficient; statements exempt. |
| Are optimistic statements "puffery" or factual misstatements? | Some optimism was specific enough to be verifiable and material. | Statements were vague, subjective corporate optimism (puffery) investors discount. | Court: Puffery; not actionable. |
| Did plaintiff plead scienter with particularity? | Core-operations access, witness accounts, and insider sales support a strong inference of intent/recklessness. | Allegations are vague, lack linkage to specific reports or individualized knowledge, and trading claims lack context. | Court: No; plaintiff failed to plead a strong, cogent inference of scienter. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (construe scienter inference holistically; plaintiff must plead a cogent and compelling inference)
- Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (Ninth Circuit PSLRA/9(b) pleading rules; insider trading and core-operations limits)
- In re Cutera Securities Litigation, 610 F.3d 1103 (safe-harbor/cautionary language analysis for forward-looking statements)
- Basic Inc. v. Levinson, 485 U.S. 224 (materiality standard: disclosure would have altered the ‘total mix’ of information)
- Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (elements of securities fraud and reliance/loss causation context)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (definition of scienter: intent to deceive, manipulate, or defraud)
- S. Ferry LP, No. 2 v. Killinger, 542 F.3d 776 (core-operations theory and when it can support scienter)
- Zucco (additional precedential guidance), 552 F.3d 981 (circumstances where access to reports is insufficient)
- In re Daou Sys., Inc., 411 F.3d 1006 (necessity of linking management involvement to specific false statements)
- Lipton v. Pathogenesis Corp., 284 F.3d 1027 (need for particularized allegations about report contents to plead scienter)