On March 12, 2021, Judge Denise Casper of the District of Massachusetts granted a motion to dismiss a claim under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, as well as Section 20(a) of the Exchange Act, against a robot vacuum cleaner (“RVC”) manufacturer (the “Company”) and certain of its executives.  In re iRobot Corporation Securities Litigation, No. 19-cv-12536-DJC (D. Mass. Mar. 12, 2021). Plaintiffs alleged that defendants made materially false and misleading statements regarding the Company's ability to compete within the RVC market.  The Court granted defendants' motion to dismiss plaintiffs' consolidated class action complaint (the “CAC”), holding that plaintiffs failed to sufficiently plead material misstatements and scienter.

According to the CAC, the Company misrepresented the extent of competition within the RVC market that diminished the financial success of the Company's “flagship” major robot vacuum cleaner known as the “Roomba.”  The Roomba was the first RVC “to succeed commercially.”  As new RVC manufacturers entered the market, however, plaintiffs alleged that defendants “consistently and misleadingly reassured the market that the new competition did not threaten Roomba's market share advantage.”  Specifically, plaintiffs alleged that defendants made thirty-nine materially false or misleading statements across four categories during the putative class period:  (1) statements relating to consumer demand; (2) statements regarding market share; (3) statements concerning competition; and (4) statements about corporate optimism or opinion.

As an initial matter, the Court held that plaintiffs failed to adequately plead that defendants' statements were false or misleading.  Noting at the outset that all of plaintiffs' claims were subject to the heightened pleading standard of the PSLRA, the Court first addressed plaintiffs' allegations that the alleged statements about consumer demand for its products were misleading because they did not include mention of “adverse competitive trends.”  The Court held that plaintiffs failed to adequately plead a material misrepresentation, noting that the statements were literally accurate and finding that plaintiffs did not show “how the lack of disclosure concerning adverse competitive trends rendered these statements about past financial performance misleading.”

The Court turned next to alleged misstatements regarding market share made by the Company in 2018 and 2019, specifically the Company's projections for 2018 and the first half of 2019.  Plaintiffs alleged that such statements were misleading because the Company's “market share had fallen an additional 10% to 77% by October 2018.”  The Court held that plaintiffs failed to show how “this purported 10% market share decline representing a snapshot of time . . . remained static through the remainder of [2018] and first half of 2019,” such that the statements were “misleading at the time made.”

Next, the Court addressed plaintiffs' allegations that the Company was aware that it was increasingly losing store shelf space, citing weekly reports created by confidential witnesses of market data that were “submitted to undisclosed persons” at the Company.  Although plaintiffs did not cite to data from the reports, they pointed to alleged statements made by the confidential witnesses that purportedly contradicted statements made by the Company, such as that “[i]n the summer of 2018 . . . store shelf space dedicated to [the Company's] products had substantially declined further.”  The Court observed, however, that “stripped of [their] conclusory adjectives,” the alleged statements made by the confidential witnesses were “entirely consistent with what [the Company] and its executives were already telling investors,” referring to the Company's 2016 Form 10-K and February 2018 earnings call in which the Company acknowledged “increased competitive pressure.”  As such, the Court found that the confidential witnesses' alleged statements were “generalized assertions and not in conflict with disclosures” made by the Company.

Lastly, the Court found that plaintiffs failed to adequately allege falsity regarding the alleged statements about corporate optimism or opinion.  The Court noted that defendants' statements in 2018 and 2019 earnings calls referring to Roomba's demand “related to market momentum” and were not actionable.  The Court observed that of the thirty-nine statements that plaintiffs alleged were misleading or false, “at least twenty-one” were “precisely the sort of corporate optimism that is incapable of objective verification and immaterial as a matter of law.”

Although the Court found that plaintiffs failed to adequately allege any misleading or false statements, the Court further held that plaintiffs separately failed to adequately allege scienter.  Plaintiffs alleged multiple theories of scienter—that defendants knew that the Company was facing increasing competition due to access to “internal information sources”; the “core operations” theory, premised on allegations that the alleged facts are so critical and apparent to a business's core operations that they may be attributed to the business and its officers; and that the confidential witnesses had specific knowledge based on their positions in relation to the Company.  The Court rejected each of plaintiffs' theories in turn.  The Court held that plaintiffs failed to allege specific facts regarding the knowledge of individual defendants beyond establishing their roles within the Company, noting “[a]n attempt to infer scienter based largely on a person's professional role within a company has previously been rejected.”  The Court further held that scienter could not be inferred because of the resignation of two defendants during the relevant time period, stating that plaintiffs failed to show how the departures were “tied to their knowledge or even participation in the alleged fraud.”  The Court similarly rejected plaintiffs' “core operations” theory, holding that simply because the Roomba was a “core product constituting up to 90% of [the Company's] revenue,” it does not “tip towards a finding for a strong inference of scienter in the absence of further allegations of Defendants' intent or recklessness.”  Finally, with respect to the alleged statements by the confidential witnesses that constituted the “crux of Plaintiff's allegation of a strong inference of scienter,” the Court held that the confidential witnesses lacked a “clear basis of knowledge to report on the inner workings of [the Company].”

Having dismissed the Section 10(b) claims, the Court similarly dismissed plaintiffs' control-person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established.

Originally Published by Masuda Funai, March 2021

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