United States: Northern District Of California Denies In Part Motion To Dismiss Securities Act Claims Against A Medical Technology Company, Finding That Plaintiff Adequately Alleged Material Misstatement

On October 18, 2019, Judge Edward J. Davila of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative class action asserting claims under Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act") and Item 303 of Regulation S-K against a medical technology company (the "Company") and certain of its executives and directors, venture capital firms, and underwriters.  In re Restoration Robotics, Inc. Securities Litigation, No. 18-cv-03712 (N.D. Cal. Oct. 18, 2019).  Plaintiff alleged that defendants made materially misleading statements and omissions concerning the Company's marketing function, hair transplant technology, product sales and revenue in offering documents in connection with the Company's initial public offering ("IPO").  The Court granted in part and denied in part defendants' motion to dismiss, and granted plaintiff leave to amend to cure the complaint's deficiencies.

The Company develops and markets a hair restoration robotic device and system to assist doctors with "follicular unit extraction surgery," which it sold to physicians internationally through third-party distributors and domestically using a marketing team of sales and clinical trial managers.  The Company earned most of its revenue from sales of the device, the medical procedures it was used to perform, and post-warranty servicing of the device.

Plaintiff alleged in the consolidated amended complaint that the IPO offering documents contained ten materially false and misleading statements, falling within three categories:  (i) statements concerning the Company's marketing function; (ii) statements concerning the quality and design of the robotic system; and (iii) statements concerning the system's "installed base."  Plaintiff cited alleged statements from three confidential witnesses who worked at the Company in marketing teams.

As to the first category of alleged misstatements, concerning the Company's marketing function, defendants argued these were non-actionable statements of corporate optimism and "puffery."  The Court agreed.  The Company allegedly represented that it "provide[d] [physicians with] comprehensive clinical training, practice-based marketing support, as well as patient leads."  The Court found this too generic and vague to state a claim.  The Court similarly found the statement about the Company's "goals . . . to expand the commercialization" of the system, and intention to increase the system's profitability, to be aspirational and forward-looking and thus non-actionable.  Differentiating other cases, the Court observed that these statements "were not made in response to investors['] [direct questions]" but rather were made in the offering documents and merely "generally discussed" the Company's marketing strategy.  With respect to other statements concerning defendants' belief in increasing profitability, the Court noted that the offering materials used "cautionary phrases [that were] repeated throughout" and "honest[ly] disclos[ed]" the Company's lack of commercial success so far.

As to the second category of alleged misstatements—eight statements regarding the Company's relationship with physicians and the quality and design of its robotic system—the Court found that plaintiff failed to plead falsity in all but two instances.  Regarding statements about the Company's strong relationships with customers and coaching provided to physicians, the Court noted that plaintiff admitted that defendants provided clinical training and marketing support to customers, and accordingly found that plaintiff's argument "crumble[d] into an efficacy, but not a falsity, argument" to the extent they took "issue with the methods used" rather than whether or not such services were provided.  The Court similarly rejected plaintiff's arguments that defendants "provided inadequate marketing support because they failed to deliver 'patient leads' as promised," finding that defendants "made no representations as to the quality or quantity of leads" and had warned throughout the offering documents that their "marketing strategy may fail because existing management and personnel 'may not be adequate to support'" future growth.  Regarding statements concerning the ability of physicians to perform hair restoration procedures with less staff when using the robotic system, and other specific statements about what the system allows, the Court again found that plaintiff failed to plead falsity because even under plaintiff's allegations the statements were technically correct.  As for the challenged statement concerning the Company' belief that procedure-based revenue failed to grow proportionally with the increase in installed base sales, the Court observed that plaintiff failed to adequately plead why this statement was actionable, given that defendants "were explicit in that they could not predict success and, in fact, predicted loss of funds."  The Court further noted that this statement was merely, in context, an opinion about a number of non-exhaustive reasons why procedure-based fees were not tracking unit sales and that the Company did not claim that the decline in stock price was due purely to limited use of the system.

The Court did find actionable alleged misrepresentations concerning the robotic device's "targeted precision and a cleanly scored incision" and the Company's "aggregate installed base growth of approximately 34% from December 31, 2015, or 174 to 233 systems."  The Court found that plaintiff had sufficiently alleged adequate facts to infer that the first statement was inaccurate, based principally on alleged statements from a confidential witness.  As to the other alleged statement, plaintiff argued that defendants misrepresented the number of systems that were actually "installed" rather than simply "sold," and the Court agreed that the statement could be misleading to a reasonable investor. 

Finally, the Court dismissed plaintiff's Item 303 claims.  As a threshold matter, the Court rejected defendants' argument that Item 303 is not actionable under Section 11 in light of the Ninth Circuit's decision in In re NVIDIA Corp. Sec. Litig., 768 F.3d 1046 (9th Cir. 2014) that Item 303 does not create a duty to disclose for the purposes of Section 10(b) and Rule 10b-5 of the Exchange Act of 1934.  The Court stated that the NVIDIA Court was explicit in noting that its prior case law indicating that Section 11 imposes liability if a registrant omits to state a material fact required to be stated in the registration statement is still good law.  However, the Court found that plaintiff had failed to plead facts showing that defendants "failed to disclose known trends and uncertainties" with respect to warehousing by foreign third-party resellers or alleged trends that its physicians were "abandoning" the system and that there was uncertainty "related to physicians stalling purchases" of the device.  The Court found that plaintiff did not adequately plead recurring examples of warehousing, failed to plead that a material impact from any such warehousing trend was "reasonably likely to occur" at the time of the IPO, failed to allege sufficient facts showing that at the time of the IPO­–rather than afterward–physicians were stalling purchases, and failed to adequately allege that defendants were aware of any such purported trends.

For these reasons, the Court found that plaintiff had adequately pled claims under Sections 11 and 15 of the Securities Act against defendants based on just two alleged misstatements, but dismissed all other claims with leave to replead (except as to the statement concerning the ability to perform the procedure with less staff, which it dismissed with prejudice).  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions