83 F.4th 514
6th Cir.
2023
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Background

  • ServiceMaster (parent of Terminix) faced a localized Formosan “super termite” crisis centered in Mobile, Alabama, producing large customer claims and arbitration awards during 2018–2019.
  • Terminix’s business (≈87% of ServiceMaster revenue) depends on annual service contracts that obligate treatment and repairs for termite damage; the Fund alleges Terminix undertreated properties and used steep price hikes to induce cancellations.
  • The Fund (Teamsters Local 237 Welfare Fund) sued for securities fraud, alleging ServiceMaster, CEO Varty, and CFO DiLucente made misrepresentations/omissions that understated termite-claim liabilities, concealed risk, and falsely touted growth/retention during Feb 26–Nov 4, 2019.
  • ServiceMaster disclosed $4 million of increased termite-claim expense in two earlier quarterly reports and, on Oct. 22, 2019, disclosed a much larger hit (including a $10 million termite impact) and lowered FY guidance; stock dropped ~40%.
  • The Amended Complaint relied heavily on four confidential witnesses alleging internal discussion of the Alabama problem, pricing strategy to force cancellations, and heavy arbitration losses; district court found two potentially actionable omissions/statements but dismissed for failure to plead a strong inference of scienter under the PSLRA.
  • Sixth Circuit affirmed, holding the complaint failed to allege scienter cogently enough—plaintiff’s inferences were no more compelling than nonculpable explanations (e.g., mitigation efforts and ongoing remediation).

Issues

Issue Plaintiff's Argument Defendant's Argument Held
Whether ServiceMaster’s SEC disclosures and statements omitted material adverse termite-liability trends Omitted upward trend in termite-claim accruals and mischaracterized pricing as market-driven, concealing liability Disclosures acknowledged claims and accruals; later disclosure corrected scope once known; statements were general and not objectively false Some statements plausibly actionable, but not decisive on appeal—scienter was dispositive
Whether plaintiffs pleaded a strong inference of scienter under the PSLRA CW testimony, internal meeting attendance, litigation/arbitration volume, pricing strategy and executive departures show knowledge or recklessness Allegations are consistent with nonfraudulent explanations (reasonable mitigation, ongoing remediation, uncertainty about scope); CW allegations lack detail No—court held inference of scienter was not at least as compelling as innocent inference; dismissal affirmed
Whether DiLucente’s explanation that pricing gains were market‑driven was knowingly misleading Pricing in Mobile was extreme and strategically intended to push customers off contracts, so his market‑wide explanation was false Analyst question concerned national trends; answer was about nationwide pricing and not necessarily referring to Mobile anomalies No strong scienter; statement ambiguous in context and insufficient to plead intent to deceive
Whether Rule 10b‑5(a)/(c) scheme‑liability adequately pled (separate from omissions) Alleged scheme to push off customers, understate accruals, and delay/arbitration strategy constituted scheme Scheme claim relies on same factual predicate as omissions and fails for same scienter deficiency No—scienter failure for omissions/control claims dooms scheme claim as pled

Key Cases Cited

  • Tellabs, Inc. v. Makor Issues &nbsP;Rights, Ltd., 551 U.S. 308 (2007) (PSLRA requires a cogent, compelling inference of scienter at least as strong as any innocent inference)
  • Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (Rule 10b‑5 prohibits untrue statements or omissions of material fact)
  • Stoneridge Inv. Partners, LLC v. Sci‑Atlanta, Inc., 552 U.S. 148 (2008) (elements of §10(b) claim and limits on reliance theory)
  • In re Omnicare, Inc. Sec. Litig., 769 F.3d 455 (6th Cir. 2014) (corporate scienter imputed from agents who prepared/approved statements)
  • Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001) (en banc) (Helwig factors for scienter analysis)
  • Doshi v. Gen. Cable Corp., 823 F.3d 1032 (6th Cir. 2016) (scienter requires inference at least as compelling as nonfraudulent explanations)
  • City of Taylor Gen. Emps. Ret. Sys. v. Astec Indus., Inc., 29 F.4th 802 (6th Cir. 2022) (contrast where internal reports contradicted executives’ public statements supports scienter)
  • Frank v. Dana Corp., 646 F.3d 954 (6th Cir. 2011) (recklessness defined as extreme departure from ordinary care)
  • Konkol v. Diebold, Inc., 590 F.3d 390 (6th Cir. 2009) (government investigation alone does not establish scienter)
  • Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981 (9th Cir. 2009) (resignation/timing allegations alone insufficient to establish scienter)
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