On September 9, 2020, Judge Lucy H. Koh 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 securities class action against a medical device company (the "Company") and certain of its executive officers under Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. SEC Investment Mgmt. AB, et al. v. Align Technology, Inc., et al., No. 18-cv-06720-LHK (N.D. Cal. Sept. 9, 2020). Plaintiff alleged that the Company made false or misleading statements regarding its strategies to curb competition in the market. Plaintiff also asserted an insider trading claim against the Company's CEO. The Court largely granted defendants' motion to dismiss, holding that plaintiff failed to adequately plead falsity for all but one alleged misrepresentation and, for the insider trading claim, that the trading activities of plaintiff and the CEO were not "contemporaneous."
The Company, which designs, manufactures and markets medical devices for orthodontics and dentistry, held a number of patents on its devices. As the patents expired and the Company began to face competitive pressures, plaintiff alleged that the Company "secretly implemented" a significant discount program (the "Discount Program") for its products. Plaintiff alleged that defendants were aware of but failed to disclose the negative impact the aggressive discounts had on the Company's average sales price ("ASP"), a key metric for investors, and that defendants made several misrepresentations regarding the Company's competition and the negative impact of the discounts. A previous complaint had been dismissed without prejudice.
The Court addressed six alleged misrepresentations made in connection with the Discount Program. The Court first held that a statement regarding expectations for higher ASPs in a future quarter was forward-looking and protected by the PSLRA's safe harbor because it was accompanied with meaningful cautionary language regarding risks with respect to competition and decreased ASPs. Next, the Court held that four statements relating to competition were not misleading just because they did not explicitly reference the Discount Program. The Court explained that the complaint impermissibly "cherry-pick[ed] portions of [d]efendants' statements and ignor[ed] other portions." Because all five of these alleged misstatements had been dismissed in the Court's previous order, these claims were dismissed with prejudice. However, the Court sustained plaintiff's claim based on a statement by the CEO that the Company was "not adjusting the business around right now" as a result of increased competition. The Court held that plaintiff plausibly alleged that this was misleading because, at the time, the Company was preparing to implement the Discount Program.
Finally, the Court dismissed an insider trading claim against the CEO. Section 20A creates a private cause of action for insider trading, and it requires a plaintiff to plead a predicate violation of the securities laws and that trading activity of plaintiffs and defendants occurred "contemporaneously." Although the Ninth Circuit has not adopted a bright line test for determining when trading activity is contemporaneous, it has explained that the requirement "ensures that only private parties who have traded with someone who had an unfair advantage will be able to maintain insider trading claims." As to plaintiff's trades before the CEO's trades, the Court held that it was "impossible that [p]laintiff traded with [the CEO defendant] for those sales." Meanwhile, other trades by plaintiff that occurred closer in time to the CEO defendant's trades were at prices below defendant CEO's selling price, which meant that it was "impossible that those trades occurred with defendant at an unfair advantage." Lastly, plaintiff's remaining purchases, which were at higher prices than the CEO defendant's sale prices, occurred over two weeks after the CEO's sales and thus were "all too distant in time" to be contemporaneous with the CEO's trades.
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.