On September 26, 2019, Justice Saliann Scarpulla of the New York State Supreme Court, County of New York, Commercial Division, dismissed a putative class action against a dental products and services company and certain of its executives and directors asserting claims under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933. In re Densply Sirona, Inc. S’holders Litig., No. 155393/2018 (Sup. Ct. N.Y. Cnty., Sept. 26, 2019). Plaintiffs alleged that defendants made material misrepresentations in a registration statement filed with the SEC in connection with a merger. The crux of plaintiffs’ allegations was that the registration statement failed to disclose material information about an alleged “anticompetitive scheme” to control supply and distribution of the company’s products. The Court held that, even though New York’s heightened pleading standard for fraud claims did not apply in the case at bar, the alleged misstatements were non-actionable statements of opinion or puffery or were not misleading when made.
At the outset, the Court rejected the company’s argument that the heightened pleading standard of CPLR 3016(b) should apply because the allegations concerned alleged fraud and misrepresentation. The Court held that while the allegations referred to false and misleading statements, the claims were for “strict liability and negligence” pursuant to the Securities Act of 1933. Therefore, relying on Second Circuit precedent addressing Rule 9(b) of the Federal Rules of Civil Procedure, the Court held that the heightened pleading standard did not apply here. Id. at 8 (citing Litwin v. Blackstone Group, L.P., 634 F.3d 706, 715 (2d Cir. 2011)).
Turning to the merits, the Court rejected plaintiffs’ argument that the registration statement contained misleading statements that market conditions were “highly competitive,” that the company competed with a variety of companies, and that its competitive position was strengthened by its distribution networks. Id. at 9. The Court held that such statements were non-actionable as “puffery” or expressions of corporate optimism, and were not rendered misleading based on allegations of the “anticompetitive scheme,” stressing that plaintiffs did not allege that defendants (as opposed to their customers) participated in the alleged scheme. Id. at 11. The Court also held that statements about growing demand in the industry were non-actionable statements of opinion, rejecting plaintiffs’ argument that the statements were misleading because the company’s practices resulted in “channel stuffing”—the practice of selling to its distributors more inventory than could be sold to consumers. Id. at 11. In addition, the Court rejected allegations that the company failed to disclose excess inventory levels and the likelihood that such alleged “stockpiling” would result in one of its primary distributors terminating a valuable exclusivity agreement. The Court held that such alleged omissions were not actionable, as there was no allegation that the distributor had notified the company of its intent to terminate the exclusivity agreement when the alleged misstatements were made, and there was no duty to disclose where “an outcome is merely speculative.” Id. at 12.
Plaintiffs also alleged defendants failed to disclose “known trends or uncertainties” and risk factors required pursuant to Items 303 and 503 of Regulation S-K. With respect to Item 303, the Court held that plaintiffs’ allegations were insufficient because they failed to establish that defendants possessed actual knowledge of the purported trend or event, and relied impermissibly on generalized and conclusory allegations that the inventory problems “were common knowledge in the industry” and that management was “aware.” Id. at 14. With respect to Item 503, the Court held that the allegations did not implicate Item 503, which is limited to “the most significant factors that make the offering speculative or risky.” Id. at 14.
This decision regarding the pleading standard for Securities Act claims contributes to the developing case law in state courts following the Supreme Court’s decision in Cyan, Inc., et al. v. Beaver County Employees Retirement Fund, 138 S. Ct 1061 (2018), which permitted class actions alleging only claims under the Securities Act of 1933 to be brought in state court.