Macomb Cnty. Employees' Ret. Sys. v. Align Tech., Inc.

39 F.4th 1092

MACOMB COUNTY EMPLOYEES' RETIREMENT SYSTEM, Lead Plaintiff, Plaintiff-Appellant,andCity of Roseville Employees' Retirement System, individually and on behalf of all others similarly situated, Plaintiff,

v.ALIGN TECHNOLOGY, INC.; Joseph M. Hogan; John F. Morici; Julie Tay, Defendants-Appellees.

No. 21-15823

United States Court of Appeals, Ninth Circuit.

Argued and Submitted March 10, 2022 San Francisco, California

Filed July 7, 2022

Javier Bleichmar (argued), Bleichmar Fonti & Auld LLP, New York, New York, for Plaintiffs-Appellants.

Shay Dvoretzky (argued) and Peter A. Bruland, Skadden Arps Slate Meagher & Flom LLP, Washington, D.C.; Peter B. Morrison, Virginia F. Milstead, and Mayra Aguilera, Skadden Arps Slate Meagher & Flom LLP, Los Angeles, California; for Defendants-Appellees.

Before: J. Clifford Wallace, Sidney R. Thomas, and M. Margaret McKeown, Circuit Judges.

McKEOWN, Circuit Judge:

Securities actions often ask courts to distinguish between corporate braggadocio and genuinely false or misleading statements. This is one of those cases. In reviewing the dismissal of this class action, we consider whether corporate executives misrepresented their company's prospects in China to such an extent that their statements were actionable under our securities laws. After a careful review of the record, we conclude that the district court did not err in determining that all twelve challenged statements were non-actionable.

BACKGROUND

For the better part of twenty years, Align Technology, Inc. ("Align")—a medical device manufacturer that is best known for selling clear, plastic "Invisalign" braces—enjoyed skyrocketing growth. At the beginning of 2002, the company had served roughly 44,000 customers, but by 2019 that number had grown to 7 million. During much of that period, the growth was driven primarily by international sales, especially in China: Between 2013 and 2017, shipments of Invisalign cases to China increased by an average of 88 percent each year, and then by another 91 percent in 2018. Indeed, every quarter in 2017 and 2018, Align's year-over-year revenue growth rate in China hovered between 70 percent and 100 percent.

But then the trouble began. At the start of 2019, Align's Chinese growth rate dipped slightly, apparently due to increased competitive pressure and diminished consumer demand, and in the second quarter of that year the rate fell to between 20 and 30 percent. As news of this fall reverberated across the market, Align's stock dropped by roughly 27 percent, from $275.16 per share on July 24, 2019, to $200.90 per share on July 25, 2019, erasing approximately $5.4 billion in shareholder value.

A year later, Macomb County Employees' Retirement System ("Macomb"), a Michigan-based pension plan, filed suit against Align (and several of its senior executives) on behalf of itself and all others that acquired Align common stock between April 25, 2019, and July 24, 2019 (the "Class Period"), and were damaged thereby. Macomb alleged that several Align senior executives had "misrepresent[ed]" Align's growth in China throughout the second quarter of 2019, claiming strong numbers despite knowing (or recklessly disregarding) that the growth rate in China had slowed significantly. According to Macomb, Align executives made twelve statements during the Class Period that are actionable under Sections 10(b), 20(a), and 20A, as well as Rule 10b-5, of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. ("Exchange Act" or "Act").

The district court dismissed the action with leave to amend, holding that the majority of the challenged statements constituted non-actionable puffery and the rest were not false or misleading. Instead of amending the complaint, Macomb requested a final judgment, so the district court dismissed the action with prejudice. Macomb appealed.

ANALYSIS

We review de novo a district court's dismissal for failure to state a claim, "tak[ing] all allegations of material fact as true and constru[ing] them in the light most favorable to the nonmoving party." In re Quality Sys., Inc. Sec. Litig. (Quality Systems ), 865 F.3d 1130, 1140 (9th Cir. 2017).

Section 10(b) of the Act prohibits using "any manipulative or deceptive device" that contravenes "such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to this section, Rule 10b-5 prohibits making "any untrue statement of a material fact" or omitting "a material fact necessary" to make a statement "not misleading." 17 C.F.R. § 240.10b-5(b) ; see also In re Cutera Sec. Litig. , 610 F.3d 1103, 1108 (9th Cir. 2010). To recover damages for violations of Section 10(b) and Rule 10b-5, as Macomb is seeking to do, "a plaintiff must prove (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Halliburton Co. v. Erica P. John Fund, Inc. , 573 U.S. 258, 267, 134 S.Ct. 2398, 189 L.Ed.2d 339 (2014) (internal citations and quotation marks omitted). Only the first two elements are at issue here.

A complaint alleging a violation of Section 10(b) of the Exchange Act must meet both the heightened pleading requirements for fraud claims under Fed. R. Civ. P. 9(b), which requires that the complaint "state with particularity the circumstances constituting fraud," and the "[e]xacting pleading requirements" of the Private Securities Litigation Reform Act ("PSLRA"). Tellabs, Inc. v. Makor Issues & Rights, Ltd. (Tellabs ), 551 U.S. 308, 313, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The PSLRA requires plaintiffs to state with particularity the facts constituting the alleged violation. Id. These "heightened pleading requirements for securities fraud cases ... present no small hurdle for the securities fraud plaintiff." Schueneman v. Arena Pharms., Inc. , 840 F.3d 698, 705 (9th Cir. 2016) (citation omitted).

I. UNSUPPORTED PREMISE

As a threshold matter, Align asks this court to affirm the district court on the narrow ground that Macomb's complaint is based on an unsupported premise. Macomb's complaint rests on the premise that Align's rate of growth had, in fact, "significantly declined" by the time Align's executives were touting the company's growth in China in May and June of 2019. But, according to Align, it is possible that the rate of growth only started to decline "significantly" during the Class Period (which lasts until July 24, 2019). Because, Align continues, Macomb has not alleged sufficient facts to make plausible the inference that the rate of growth had begun to decline "significantly" by the time the Align executives made the challenged statements, the statements cannot be considered false at the time they were made, and therefore they are not actionable. See In re Rigel Pharms., Inc. Sec. Litig. , 697 F.3d 869, 876 (9th Cir. 2012) (holding that for statements to be actionable under the PSLRA, they must have been "false or misleading at the time they were made"). We reject this argument as unsupported.

It is settled precedent that the passage of just a short period of time between executives' rosy statements about their company's prospects and a downturn in those prospects is "circumstantial evidence" that the challenged statements "were false when made." Fecht v. Price Co. , 70 F.3d 1078, 1083 (9th Cir. 1995). In Fecht , for instance, the passage of two-and-a-half months was a sufficient "shortness of time" to be considered "circumstantial evidence that the challenged statements were false when made." Id. Here, just three months passed between the first challenged statement and the revelation of Align's downturn in China.

In addition, Fecht demands that we accord such circumstantial evidence "more weight" where there is no "intervening catastrophic event" that might suggest a later, abrupt downturn, such that the executives' earlier statements may not, in fact, have been false. Id. at 1083–84. Here, as in Fecht , there was no such catastrophic event.

Macomb has provided additional evidence to support the inference that Align's growth rate was declining substantially at the time of the challenged statements. Multiple reports from former employees support the inference that Align's growth in China had slowed materially when the challenged statements were made in late April, May, and June 2019. For instance, one analyst's report described "clear, early indications as of April 1, 2019 that Align's growth in China had slowed ... and that data was available to executives to monitor." Viewed alongside the short period of time between the challenged statements and the downturn in Align's prospects in China, Macomb has alleged sufficient evidence to support the inference that Align's growth in China had slowed materially when the challenged statements were made in late April, May, and June 2019. Macomb's complaint does not rest on an unsupported premise.¹

II. PUFFERY

Turning to the challenged statements, we hold that the district court correctly found that six were non-actionable "puffery." Corporate "puffing" involves "expressing an opinion" that is not "capable of objective verification."

Retail Wholesale & Dep't Store Union Local 338 Ret. Fund v. Hewlett-Packard Co. , 845 F.3d 1268, 1275 (9th Cir. 2017) (quoting Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc. , 774 F.3d 598, 606 (9th Cir. 2014) ). These "vague statements of optimism like ‘good,’ ‘well-regarded,’ or other feel good monikers, are not actionable because professional investors, and most amateur investors as well, know how to devalue the optimism of corporate executives." Police Ret. Sys. of St. Louis v. Intuitive Surgical, Inc. (Intuitive Surgical ), 759 F.3d 1051, 1060 (9th Cir. 2014) (internal quotation marks omitted) (quoting In re Cutera Sec. Litig. , 610 F.3d at 1111 ).

The six challenged statements that the district court determined to be...