Victor J. Ng v. Berkeley Lights, Inc.

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VICTOR J. NG, et al., Plaintiffs, v. BERKELEY LIGHTS, INC., et al., Defendants.

No. 21-CV-09497-HSG

United States District Court, N.D. California

February 20, 2024

Re Dkt. Nos. 126, 128, 129, 131, 132

ORDER GRANTING MOTIONS TO DISMISS

HAYWOOD S. GILLIAM, JR. United States District Judge.

Pending before the Court are several motions to dismiss filed by Various Defendants. Dkt. Nos. 126, 128, 129, 131, 132. Plaintiffs filed an omnibus opposition to Defendants' separately filed motions. See Dkt. No. 137. The Court finds these matters appropriate for disposition without oral argument and the matters are deemed submitted. See Civil L.R. 7-1(b). For the reasons detailed below, the Court GRANTS Defendants' motions WITH LEAVE TO AMEND.

I. BACKGROUND

In May 2022, the Court granted Michael Damelio's motion for appointment as Lead Plaintiff in this putative securities Class action. See Dkt. No. 81. Lead Plaintiff Damelio and Plaintiff Pompano Beach Police & Firefighters' Retirement System then filed a Consolidated Class Action Complaint in July 2022. Dkt. No. 89 (“CAC”). They brought this action against Defendants Berkeley Lights, Inc. (“BLI”); Certain Current and former senior BLI executives and directors;^[1] several Venture Capital firms that invested in BLI;^[2] and the underwriting firms that sponsored BLI's July 2020 Initial Public Offering (“IPO”).^[3]

According to the CAC, Defendants made false and misleading statements and omissions regarding the functionality of BLI's flagship product, a laboratory instrument called the Beacon. See, e.g., CAC at ¶¶ 1, 10. The Beacon is a proprietary platform designed to analyze and process cell data for use in developing and commercializing biotherapeutics and other cell-based products. See id. at ¶¶ 3, 33, 35. Plaintiffs contend that sales of the Beacon and BLI's other advanced automation systems constitute the majority of BLI's revenue. Id. at ¶¶ 36-39, 43-48, 68.

Plaintiffs further allege that in the IPO Registration Statement and throughout the relevant class period, Defendants highlighted the superiority of the Beacon compared to other instruments on the market. See id. at ¶¶ 1, 6, 9, 70-71, 80, 88-91; see, e.g., Dkt. No. 126-2 (Ex. 1) (BLI's IPO Registration Statement); Dkt. No. 126-13 (Ex. 12) (BLI's Q1 2021 Form 10-Q). Plaintiffs allege that BLI marketed the Beacon as faster and more precise. See, e.g., CAC at ¶¶ 4, 6, 34-35. But according to Plaintiffs, the Beacon was unreliable due to several design and manufacturing defects. See id. at ¶¶ 1, 10, 79, 83. For example, Plaintiffs assert that the Beacon suffered from breakdowns, high error rates, and data integrity issues that prevented customers from using the technology at scale. Id. at ¶ 10. According to Plaintiffs, numerous customers had complained about such issues but Defendants failed to disclose this. Id. at ¶¶ 10, 83, 134. Additionally, Plaintiffs contend that Defendants misrepresented BLI's past financial growth and future growth potential. See id. at ¶¶ 1, 7, 10, 72, 75, 77-78, 81, 83-117. Specifically, Defendants allegedly touted a total addressable market (“TAM”) of $23 billion. Id. However, Plaintiffs contend that the actual market for BLI's products was just a fraction of this $23 billion due to the Beacon's performance issues and relatively high cost. See id. at ¶ 83.

BLI sold approximately 9.35 million shares of common stock for $22 per share during the IPO. See id. at ¶¶ 8, 40. A few months later, the company conducted a secondary offering (“SPO”) in which the Individual Defendants and Venture Capital Defendants sold their shares at $86 per share. See id. at ¶¶ 42, 69, 76. Plaintiffs contend that the flaws in BLI's business model and flagship product began emerging after both the IPO and SPO. See id. at ¶ 120. For example, in May 2021, BLI released its first quarter results, and had sold fewer Beacons than it did the prior quarter. Id. at ¶ 121. The company also introduced a subscription model, which Plaintiffs contend would ultimately lead to fewer products being sold. Id. at ¶¶ 122-26. BLI continued to miss its quarterly projections, and its stock price subsequently fell. Id. at ¶¶ 127-30, 131.

In September 2021, short-seller Scorpion Capital released a report in which it revealed the alleged failures of BLI's business model and the Beacon. See id. at ¶¶ 2, 12, 136-38; see also Dkt. No. 89-1 (Ex. A) (“Scorpion Report”). The report was based on interviews with former employees, industry scientists, and several of BLI's largest customers who allegedly stated that they were “tricked” or “misled” into buying the Beacon. CAC at ¶¶ 136-38. The report concluded that only a small number of biotech companies could afford the BLI instruments, and that customer complaints would further hamper the company's growth potential. Id. at ¶ 138. Following the Scorpion Report, BLI's stock price dropped to $23.53 over the course of two days, and below the IPO-offering price by the end of the following week. See id. at ¶¶ 139, 145. The stock price fell further in January 2022 following BLI's announcement that its total revenue for 2021 was expected to fall far short of projections and that the company was replacing its CEO. See id. at ¶¶ 148-52.

Based on these allegations, Plaintiffs bring causes of action on behalf of a putative class under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”); Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”); and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5. See id. at ¶¶ 245-304. Defendants have moved to dismiss the CAC in its entirety. See Dkt. Nos. 126, 128, 129, 131, 132.

II. LEGAL STANDARD

A. Rule 12(b)(6) Standard

Federal Rule of Civil Procedure 8(a) requires that a complaint contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). A defendant may move to dismiss a complaint for failing to state a claim upon which relief can be granted under Federal Rule of Civil Procedure 12(b)(6). “Dismissal under Rule 12(b)(6) is appropriate only where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory.” Mendiondo v. Centinela Hosp. Med. Ctr., 521 F.3d 1097, 1104 (9th Cir. 2008). To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In reviewing the plausibility of a complaint, courts “accept factual allegations in the complaint as true and construe the pleadings in the light most favorable to the nonmoving party.” Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). Nonetheless, Courts do not “accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008).

B. Heightened Pleading Standard

Section 10(b) of the Securities Exchange Act of 1934 provides that it is unlawful “[t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered . . . any manipulative or deceptive device or contrivance . . . . ” 15 U.S.C. § 78j(b). Under this section, the SEC promulgated Rule 10b-5, which makes it unlawful, among other things, “[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” 17 C.F.R. § 240.10b-5(b). To prevail on a claim for violations of either Section 10(b) or Rule 10b-5, a plaintiff must prove six elements: “(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.” Stoneridge Inv. Partners, LLC v. Scientific -Atlanta, Inc., 552 U.S. 148, 157 (2008).

At the pleading stage, a complaint alleging claims under Section 10(b) and Rule 10b-5 must not only meet the requirements of Federal Rule of Civil Procedure 8, but also satisfy the heightened pleading requirements of both Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). In re Rigel Pharm., Inc. Sec. Litig., 697 F.3d 869, 876 (9th Cir. 2012). Under Rule 9(b), claims alleging fraud are subject to a heightened pleading requirement, which requires that a party “state with particularity the circumstances constituting fraud or mistake.” Fed.R.Civ.P. 9(b). Additionally, all private securities fraud complaints are subject to the “more exacting pleading requirements” of the PSLRA, which require that the complaint plead with particularity both falsity and scienter. Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009).

III. REQUEST FOR JUDICIAL NOTICE

Defendants ask the Court to take judicial notice of 36 exhibits. Dkt. No. 127. Defendants argue that the exhibits are appropriately considered under the doctrines of judicial notice and incorporation by reference. Plaintiffs object to Defendants' request as to at least 33 of the 36 documents. See generally Dkt. No. 137 at 67-72.^[4]

A. Legal Standard

“Generally district courts may not consider material outside the pleadings when assessing the sufficiency of a complaint under Rule 12(...